Decentralized autonomous organizations, as currently structured, are not a solution to fill the perceived gap in available capital within NFL, NBA, NHL or MLB ownership. Franchise ownership restrictions and the cost of entry within those closed leagues prevent fan-backed collectives from assuming a seat at the table. But a collective of crypto, blockchain, web 3.0, private equity and racing industry insiders believes motorsports are uniquely suited to leverage the instrument and are launching a motorsports entertainment-focused DAO to prove the thesis. The venture, called MotorDAO—made up of Phoenicia, Kubelt, Near Protocol, Superdao, KlimaDAO and Mentha Partners—will formally be announced later today, and plans to finance race teams, drivers and other forms of racing entertainment.
JWS’ Take: One reason motorsports are suited to take advantage of DAO financing is a lower cost of entry. Sportico pegs the least valuable NBA team (the New Orleans Pelicans) at $1.51 billion and the least valuable NFL team (the Cincinnati Bengals) at $2.4 billion. While Phoenicia CEO and former NASCAR team owner Chris Lencheski admires the DAOs attempting to buy a big four sports team, he says it is highly unlikely any one of them could raise enough money to buy a meaningful stake at that valuation (particularly with the league limits on limited partners in an ownership group). But with $2 million to $20 million, he said, “You can go buy or assist in obtaining a seat for a young driver [in a racing series], acquire a team at certain levels or purchase the commercial rights for a young driver.”
Another reason is the structural differences between motorsports and the big four leagues. NFL, NBA, NHL and MLB “owners in essence buy 1/30th of the league. So, procedurally, the leagues want an individual person to have a certain amount of equity and a certain amount of liquidity [in the franchise],” Lencheski explained. “But racing is by nature decentralized. [Drivers and teams] operate globally. There are multiple series and the individual or team [determines the events they want to participate in].” As a result, there are no specific “league” rules preventing a DAO from investing in either.
MotorDAO has a chance to become the first pro-sports-focused DAO to actually “accept a token, provide governance and bring real utility to [an NFT].” Lencheski believes the first mover advantage will enable it to “gain a significant chunk of the initial market if done correctly.”
While that may be true, it is reasonable to wonder if Phoenicia and Kubelt (the entities who put up the funds to set up MotorDAO) would be better off pursuing the more traditional private-equity route for capital. Voting governance token holders may have different priorities than those operating MotorDAO. It should be noted that MotorDAO could still take raise above the initial token sale, which is expected to occur within two to four weeks, at a later date.
Lencheski said the group considered PE financing but ultimately decided “the tremendous amount of liquidity in blockchain and crypto on a global basis, the lack of tangible utility [in NFTs] and the inability [for fans to participate in] stick and ball sports, given ownership rules,” gave it a better opportunity to raise the money needed.
There would also seem to be less risk involved with raising funds from a DAO community, since the investors’ motivation is not supposed to be financially driven. DAO investors are buying the opportunity to have a meaningful relationship with the DAO community, to influence some decisions and enjoy their passion with like-minded individuals. It is an opportunity for people who like racing to take a more active role.
No guarantees are being made as it relates to returns. It should be noted there are team owners currently in the racing business, across all major series, who never generate a meaningful annual return but still choose to race every year.
That does not mean there isn’t potential for token holders to earn from the investment. MotorDAO intends to return any gains achieved above the budget back to the DAO treasury. The DAO members will then have a chance to decide what to do with that money.
Adrian Maurer (co-founder, Kubelt) believes the DAO membership model can give the group an advantage from an economic standpoint, too. “Through the development of NFT-powered IP with the community and partners, we can develop a platform that can drive recurring revenues for the DAO [community] that we can reinvest in a bunch of different areas [of racing].”
MotorDAO members are not assuming the responsibility typically associated with racing. “If the DAO as a collective were [filed] as a limited liability partnership, it would be exposed to the liabilities of operating a motorsports team–for instance the cost of crashes and other financial related risks,” Maurer said. In this case, it is the MotorDAO team and its operating partners assuming the risk.
While participatory, MotorDAO is not an open-source democracy. Phoenicia can use the funds raised as it sees fit within the sport. “We’re responsible for laying out the opportunities [the community will vote on] and then executing on them,” Lencheski said.
Potential investment opportunities include everything from presenting a young driver to Formula 3 to owning a race team. The only mandate: 85 cents of every dollar raised must be disposed of in some format of racing. “Think of it as a mezzanine financing strategy that is going to do two things: access the commercial rights of an individual team or driver, or access those commercial rights and ask the team taking the funds for a 6% or more return on the investment,” Lencheski said.
The former race team owner said he has spoken to both teams and with one or two major governing bodies about the DAO’s plan, and has yet to receive any real pushback.
There is a belief that the emergence of a DAO in motorsports can help the sport to attract younger, digital banking-first fans, a generation that has not grown up in the garage. “The crypto or blockchain consumer that is going to come to this DAO will be global and different from the individual that would even be [usually] watching racing,” Lencheski said.