Good morning! (Or GM, for all those in crypto.) Ben Weiss from Fortune Crypto here, filling in for Anne Sraders and Jessica Mathews.
Crypto is still chilly, and this applies even more so to non-fungible tokens, those buzzy digital collectibles that auction houses like Christie’s were once selling for tens of millions of dollars.
In January 2022, at its height, the NFT market saw about $6 billion in monthly sales, according to CryptoSlam. However, July saw a bit less than $500 million, and, unlike the rest of crypto —Bitcoin is up almost 60% year to date—it hasn’t seen a bottom, as sales continue to slump.
This downturn doesn’t bode well for startups that raised tens of millions of dollars at the beginning of the NFT craze, and “wind-downs” are becoming more and more common as once-trendy startups are dropping like flies amid a parched funding landscape.
Last Friday, RECUR, which raked in seed funding of $5 million in March 2021 and then another $50 million at a $333 million valuation later that year, announced that it was winding down operations permanently come November.
The startup, which hosted NFTs issued by corporate brands like Hello Kitty, Paramount Pictures, and Nickelodeon, declined an interview. It didn’t respond to a request for comment regarding whether it had run out of capital but said in a statement its shutdown was due to “unforeseen challenges and significant shifts in the business landscape." Considering a typical raise can sustain a startup for 18 to 24 months, according to Michael Steinberg of Reciprocal Ventures, NFT firms that hauled in millions in 2021 and 2022—like RECUR—are likely reaching the end of their runways.
In the beginning of January, NFT Inspect, a research tool that measures the value of a digital collectible, said it was shutting down—before resurrecting itself. Then came the marketplace Formfunction. And then a slew of other startups joined the wreckage, including the Paradigm-backed Tessera and the Mark Cuban-backed Nifty’s.
“You've got a much higher bar for follow-on funding...and an even higher bar for a new investor to come into an existing company,” David Pakman, managing partner and head of venture investments at CoinFund, told me, referring to the current funding environment.
Steinberg of Reciprocal said that, more fundamentally, it’s a realization from VCs that profile pictures, outside of those from valuable NFT collections like CryptoPunks and the Bored Ape Yacht Club, are flashes in the pan.
“Building a business of creating them doesn't have a lot of persistent value, and so I think that has affected venture appetite,” he told me in an interview.
And Jonatan Luther-Bergquist, an investor at Inflection, told me that the dying off of NFT startups may have to do with mental health. “Runway, sure, that’s an aspect,” he said. “But I think companies are shutting down because of fatigue.”
I can only imagine how discouraging it is for founders—once clinking champagne glasses with VCs, speaking at length to rapt reporters, and celebrating the future of digital ownership—to admit that their current ventures just don’t have enough traction with anyone beyond the crypto crazed.
However, for the VCs I spoke with, their optimism for NFTs remains untarnished. They envision a future where NFTs aren’t just pixelated monkeys on someone’s Twitter (oops, X) profile but a means to verify intellectual property ownership, store users’ social media profiles, and, more generally, give users ownership over their own data.
For the founders who are currently flailing, let’s hope that optimism can translate to cold hard cash.
Disclosure, disclosure, disclosure…As expected, SEC officials yesterday voted to adopt new disclosure rules for hedge funds, private equity firms, and VCs—the agency’s effort at improving transparency in the private markets. While the final rules are more palatable to fund managers than what was initially proposed last year (the SEC dropped language that would have made it easier for investors to sue funds, for example), fund managers will now be required to provide their LPs with quarterly statements on performance, fees, and expenses; obtain annual audits for each of their private funds; and get a fairness or valuation opinion for a secondary transaction, among other things. The new rules will go into effect in two months. You can read the SEC’s full summary of the final rules here. —Jessica Mathews
See you tomorrow,
Ben Weiss
Twitter: @bdanweiss
Email: benjamin.weiss@fortune.com
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