At the Buzzer: Inside Krause House's Almost Purchase of the Suns
Lessons for DAOs trying to achieve the impossible from Krause House founder, Commodore.
Changing the world is hard work.
Noted doer-of-things and coke fiend, Thomas Edison described success as 1% inspiration, 99% perspiration, and honestly, that might have been too generous to inspiration. Vision, without execution, he said, is just hallucination.
Implicit to Edison’s point is this: your idea isn’t worth what you think it is. Ideas are nice. They feel good when you have them. They are also worth zero.
Whether people understand this concept is a useful shibboleth for the type of builder they are.
Those that don’t have much experience in building technology, but have seen movies like The Social Network, tend to think that the idea is the thing.
So when novices have a great idea, and they want to start a business, they ask people to do things like sign an NDA. Those of us who have built products tend to find this amusing (and kind of annoying).
All of this is to say: with proper respect to the dreamers, it’s the doers that really matter.
While bull markets are great for dreamers, it’s only in the bear that you find out who has the fortitude to chew glass and do. And doing, it turns out, is hard in crypto.
I tend to think of building communities in crypto as a ladder of difficulty.
At the bottom of that ladder, you have communities that have organized around digital assets. NFT profile picture projects. Gaming guilds. Token traders.
One level up from that, you have people who are providing real world utility to their community. This usually involves some kind of real world asset, but often one – like in-person experiences or a property – that can be purchased by anyone with money. The challenge here comes from building a bridge between the digital, self-referential world of blockchain to the “real economy.” (Quotes provided with appropriate sarcasm)
At the top of the hierarchy are those brave few who go one step further. Not only do they have to interface with real world assets and the accompanying legal morass, they have to participate in permissioned real world assets. That means, they not only need the capital, they need to convince someone – legislators, regulators or status gatekeepers – that they deserve a seat the table.
As I’ve quoted before from Billions – the hardest asset class to own in the United States is a major sports franchise. It remains the closest thing to knighthood we have in America.
Earlier this year, I wrote a piece on Krause House DAO and their vision to become a minority owner in an NBA team. It’s an awesome vision, and one that I expect a community will bring to fruition in the next decade. But like I said before – having the vision and being able to execute on it are two different things.
That’s why I was pleasantly surprised when Commodore, one of two pseudonymous founders of Krause House, reached out to me two weeks ago. He told me that the community had recently gotten within spitting distance of becoming a minority owner of the Phoenix Suns. He has since written up that story, and it’s worth reading, if for no other reason than to see the level of hustle these founders display in texting acquaintances if they have a connection to people like Bob Iger.
And even though this was not a successful effort, there’s often better learnings in close failures than there are in successes. ConsitutionDAO, for example, demonstrated both the potential of DAOs to raise capital at lightning speeds from a community, while also revealing the legal and operational gaps that keep those communities from being able to compete.
So when I spoke to Commodore, I wanted to focus on what he had learned through this process. His lessons for the broader DAO community (lightly edited to make our message thread more parsable) follows:
Alex: Something that comes through in your description of events is the need for secrecy. Bidders join together in private, construct bids in private and even interact with sellers privately. How does that work in a community-model like DAOs that are built on transparency?
Commodore: We saw what happened with Constitution DAO’s transparent treasury balance & their aspirations of winning a bidding war. A lot of the work that spiraled out of that failure was the promise of ZK proofs solutions.
(Alex note: A ZK proof solution would allow bidders to demonstrate that they have sufficient assets without revealing the exact maximum they can bid.)
A lot of the earliest DAOs were DeFi in nature which could exist more naturally in an adversarial environment. Social DAOs are something different, they partially exist because of trust. For us, the goal of collective ownership is the ultimate.
We need to conform to the strategies that achieve that goal & stay compliant with NBA by-laws, but it’s certainly a challenge to balance.
Alex: Theoretically, one of the superpowers of DAOs should be leveraging the networks of the community. Did this change the way you guys think about building a community/recruiting members that can put you in a good place to join bids later on? Or do you think the 'open to everyone' path is still the right one to take?
Commodore: In our case, the power of the DAO’s network has been predominantly the “network of networks” value. It’s really interesting applying a DAO network to such a small list of human beings (NBA owners) that we need to connect with.
Coincidentally, my co-creator Flex & I’s personal networks have fueled a vast majority of the owner introductions.
With that being said, we’re exploring all models of introduction paths.
Alex: In your conversations, what kind of capital was needed to be taken seriously?
Commodore: A big innovation we’ve been quietly working on is the forming of Krause House Capital, which is a private equity firm created by Krause House DAO.
This gives us the ability to backstop our bids at much larger amounts. NBA by-laws require at least a 1% stake & most valuations are now north of $2b, so you have to be looking at $20m+.
But you also take 1 of 25 ownership slots & a private equity slot. To answer your question, it’s at a minimum $20m but ideally you’re well north of $100m.
Alex: The NBA has a reputation for being innovative, but this is still an international media brand so I have to imagine some degree of conservativeness. How was your association with DAOs/NFTs received (especially in a bear market)? Was this a pro (because of potential innovation/fan engagement) or a con (because of crypto’s somewhat toxic brand)?
Commodore: It’s important to get into the mind of the owner & use language that’s relevant to them.
The actual object that will sit on their cap table is a private equity fund. That fund is made up of LPs that are Jerrys (NFT holders). We’ll build experiences for all of their current & future fans, regardless if they’re LPs.
What most owners understand is that crypto can be (and should be) thought of as infrastructure. What we say to the average fan might be language like “digital pass”, but it might be backed by a custodial wallet that’s holding a NFT. We make it a point to say that we’re more than willing to start with “web2.1” if that eases their anxieties. The unfortunate reality is that the crypto bear market & FTX’s collapse have left a very sour taste to only the staunchest believers. With that said, they see the immense possibility of it — just need to be very careful & conservative in the implementation of it.
Alex: What other lessons do you think communities trying to engage with buying important real world assets and appealing to traditional owners should consider?
Commodore: I think the most important part is understanding what the first principle issues that are challenging the problem are paramount.
A lot of us in the crypto ecosystem are here because we see this incredible technology that has the opportunity to make material changes to the world. However, that can cause us to sometimes to work from a solutions-first view; rather than a problems-first view.
That is what's really powerful about Krause House's mission. We have a problem: fan ownership. A DAO is a tool. A private equity fund is a tool. Discord is a tool. When you're able to take a step back and look at each technology as a tool & apply them to our shared goal — the solution space really opens up.
So when I see DAOs step into the real world with real world assets, they can struggle with where to be flexible and where not to be — because they're applying their solution first. The other big unlock that I think many DAOs miss is the idea of delegation across all dimensions, not just governance.
Any time a majority owner / governor has control over a dimension — crypto has the tendency to throw their hands up... "it's not decentralized enough". While that principle is true, very few things in the real world work in this way. The legal system & capitalist system have developed many ways of delegated control.
By embracing this reality, we can novel solutions & experiences for our shared goal. To me, this is paramount as we build out successful use cases that we can point to others as evidence to give DAOs even more responsibility... over time.