In early March, a group of crypto investors will launch a DAO and attempt to raise $4 billion to buy the Denver Broncos. On the surface, the DAO concept gives passionate fans a chance to own a piece of a franchise, share in its upside and have a voice in its direction. A more aligned model “is something the fans want,” said Geoffrey Woo (founder, Anti Fund Investment Fund). “There are [also] just massive inflows of ‘retail capital,’ like WallStreetBets.” Remember, it was the desire to increase liquidity for LP investors (and keep club valuations rising) that drove the NBA, NHL and MLB to all approve private equity ownership in teams over the last year.
But existing league rules aside, former Goldman Sachs partner Eric Grubman says there are a host of reasons why decentralized autonomous organizations are not the answer to fill the perceived gap in available capital. For starters, he doesn’t believe there is a gap—at least not yet. “I’m not aware of any franchise that has [sold] for what is perceived to be a discounted price because values have gotten too high.” And when the big four leagues inevitably do reach the point when valuations are too rich for even the wealthiest of individuals, “there are lots of steps [the leagues] can toggle to keep [ownership] institutional as opposed to retail [like a DAO].” There is always the option of opening up to the public markets too, which are more of a known quantity as it relates to liability than a DAO would be, since it is a new instrument.
JWS’ Take: As it stands, NFL rules require proposed ownership groups to maintain a control owner who will own at least 30% of the franchise. The league wants someone in the room, with skin in the game, voting and making decisions with its best long-term interests in mind. “Buy the Broncos” DAO original member Sean O’Brien is familiar with the league bylaws and admits there is not an investor on the line ready to pony up $1 billion. But says if the DAO is unable to gain an exception and buy 100% of the franchise (which he knows is unlikely), aligning with a wealthy individual who wants to own a control stake in an NFL franchise is an option.
Like other U.S. sports leagues, the NFL also vets minority investors in team sales transactions, a process that runs counter to the anonymous nature of cryptocurrency, Web3 and DAOs. The NFL currently limits the number of LPs an ownership group can have, too (to 25). But O’Brien argues those bylaws apply to LPs and LLCs, not to a DAO with a cooperative legal structure (the coop itself would be the buyer).
Putting those hurdles aside, there are reasons for allowing a collective of fans more concerned with winning a championship than the next earnings period to buy into franchises. Start with the premise that sports leagues need to consider new capital sources because it is getting harder to find individuals capable of writing ownership checks. Then, understand that pro teams have historically underperformed as publicly traded equities (in part because the markets value profitability, and teams often fail to generate consistent FCF on a year-to-year basis).
Krause House (a DAO community seeking to buy and operate an NBA franchise) co-founder “Flex Chapman” (like JohnWallStreet, this is not his real name) added that in addition to the financial capital a DAO brings, its community can contribute human capital and knowledge valuable to a traditional sports franchise (think: crypto and Web3 focused fan engagement and monetization).
But sports teams have become so expensive over the last decade that Grubman finds it hard to envision a DAO raising enough money from fans to buy a meaningful stake in an NFL franchise (think: $300-$400 million for just 10%).
The only way a DAO could raise that kind of money would be to find an investor who wants a $400 million stake, all the perks that come along with it and is only willing to part with $200 million plus one dollar (so they could control the DAO vote). While Grubman says that kind of structure is found “all the time in markets,” it is not ideal for a DAO, as it would leave the remainder of the community without a voice.
Chapman disagreed, saying the potential pool of investors in a pro franchise is much wider than just its season ticket holder base. “Especially in the NBA, which has 2.2 billion fans worldwide.” He believes finding enough people willing to spend on a stake in a team is more than doable.
The Krause House DAO expects to obtain a minority position in an NBA team within the next 12 months. Chapman said the community, which claims to have 6,000 fans, has been engaged in conversations with several clubs, including one about a 2-3% LP stake. As it relates to the possibility of a DAO investment, NBA spokesperson Mike Bass said, “It’s something we are looking into and haven’t yet formed a point of view.”
While DAOs would in theory increase the pool of potential stakeholders, adding one to the cap table would require a sports franchise to open up its books. U.S. law deems a company to be public, at least as it relates to financial statement disclosures, when it has more than 500 shareholders. It’s doubtful teams would be willing to subject themselves to that for the relatively nominal amount of capital a DAO is likely to bring.
If a league determined its teams needed access to public capital to keep valuations rising, Grubman thinks it would open up ownership to the public markets before it approved DAOs. There is no reason to take on the “ills of a public company without [getting] the guardrails and known protocols of the public company,” he said. “True public companies have liquidity, and there are rules as to what you have to disclose and when you have to disclose it. And if you follow those rules, you are likely to be able to properly manage liability.” The same cannot be said for a decentralized autonomous organization.
The big four leagues may eventually soften their guidelines on public ownership (the teams under the Madison Square Garden Sports umbrella and the Atlanta Braves, which trade under Liberty Media, were grandfathered in under league rules). But before they do, look for them to tap out the private markets. “If the leagues want to open up the investor pool more, then they can just make it easier than it currently is, and Arctos and Dyal will get bigger, and more entrants will jump in,” Grubman said. Allowing franchises to pledge certain monies or rights would also increase the supply of capital.
Public ownership does not necessarily mean individual teams listing on an exchange, though. A league in its entirety could be listed (think: F1) or a segment of league revenues, like all of the media rights, could be spun off (think: the old MSGN stock).
For the record, Grubman was pointed in saying that thus far, a dramatic capital shortfall problem has not manifested itself, and that franchises are still sought after in all the leagues. “The smartest people always [have a] contingency plan, but they usually don’t try to fix something that isn’t broken. That does not mean waiting until something breaks, but it does mean that the use of additional tools ought to be a process that achieves important goals, and not simply a reflex.” He went on to compliment the actions of the NBA and other leagues in their initial implementation of rules permitting institutional ownership of LP interests.