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How can crypto projects extend their runways using crypto?

Updated: Apr 22

The No.1 Reason for Crypto Startup Failures


In my 6 years time sourcing, interviewing and working with crypto startups, I have seen hundreds of raises but even more failures. Some projects overhired; some projects didn’t hire the right person to lead their sales process and some couldn’t find markets for their products. But the underlying thread linking all crypto startups failures is that they ran out of money before they could make enough money to become self-sustaining.


Tech startup data analytics platform CB Insights also shows this reason to be the no.1 cause for startup failures.

Finding product market fit and generating profit in crypto is hard. It is even harder when projects have to go through highly volatile macro and funding cycles that put you at the mercy of external conditions you do not control. When the market is cold, as it is now, many projects cannot even raise down rounds or are facing shutdown.


Yet unlike other institutions, such as universities, that tackle their funding uncertainty by setting up endowment funds to generate returns on idle cash to cover operating expenses and then some, crypto startups barely took notice of the crucial value additive role treasury management can play in their financial and business ambitions.


Cash/Treasury Management: Ensuring Long Term Viability


What is cash/treasury management? Let's define it. It is the process of selecting appropriate investment assets and utilizing idle capital to generate returns that help with expenditures and fund developments. For crypto projects, a well thought out cash/treasury management implementation can help ensure long term viability.


To smooth out funding volatility, market downturns and to become self-sustaining, projects should aim to utilize their idle cash in a way that:


  1. fund operating expenses

  2. fund token emissions

  3. fund product development process


If you lead a crypto startup or are a part of a crypto ecosystem but the team hasn’t created a treasury/cash management plan yet, then it’s time to start thinking about it. Get in touch. I am happy to help.


How exactly should a project go about doing this? Fortunately unlike the 2017-2018 cycle, there are many yield generation avenue available to crypto projects today depending on the asset type, liquidity requirements and risk preference. I will share my 6 years of experience with crypto startups. Let’s dig in.


Operating Cash vs Strategic Cash


The first thing project founders or DAO leaders must do is forecasting their cash needs for the next two years for running of the team and ensuring everyone has the necessary equipment or office space to do his/her job. Let's call this Operating Cash. The balance should be set aside as your Strategic Cash.



Operating cash should cover your salary obligations, office expenses and other liabilities you have that can arise for 18 - 24months. While Strategic Cash is the extra idle cash that can be used to generate returns for treasury management purpose. To make thing more concrete, let’s consider an example.


Example 1

Imagine you have $10mil cash and a payroll of $700k per year for 5 team members with other operating expenses (WeWork passes, laptop allowance, CRM subscriptions etc) running at $10k a year. Your 2 year barebone minimum expenditure (assuming you are running lean and mean with no extra headcount) is $1.42mil. Let’s be conservative and add in a 20% buffer on top. This means you need to set aside at least $1.7mil cash to fund your operations. That leaves $8.3mil for your strategic cash pile. If you can generate 7% on that, you have close to $10mil after two year. That’s most of your operating expense covered. You are mostly self-sustaining.



Example 2

However, some crypto projects tend to overhire before they find product market fit with overstaffed marketing, HR and engineering departments that expands team headcounts to 20+. This would 4x your annual burn rate. Of course if this is needed to grow the business then so be it. However you probably should be thinking about fund raising plans and milestones sooner rather than later. In this case, the annual burn would be $2.8mil instead of $700k and you would only have $4.4mil in your strategic pile. At 7% a year, this would generate 440k a year or only about 11% of your annual burn.



Better be financially savvy and staying mean and lean!


As you can see the outlook at end of year 2 differ drastically for these two startups. One has plenty of cash to pivot or expand to take advantage of market opportunities at end of year 2 while the other one faces extinction in a year half. It will be forced to cut headcount and/or raise at whatever valuation market condition will allow at the time.


Treasury Portfolio Considerations

To construct a portfolio of assets that suffices the required yield on assets, we need to consider the following:


  1. opportunities available both onchain and offchain for the type of assets you hold

  2. matching risk/reward preference and liquidity needs of your project/DAO with liquidity profile of the assets

  3. legal implications of the investment from a project/DAO perspective (see bZx DAO class action lawsuit for more background)


I will leave the legal discussion for another time and focus on the first two in this article.


Asset Types and Available Investments

Depending on the asset holding breakdown of a project/DAO, the available yield generating opportunities vary greatly. Below I have compiled the most common assets types and their corresponding asset opportunities in both traditional finance (TradiFi) and decentralized finance (DeFi).


Note: if your treasury holding is mostly in your own tokens, you may find it difficult to generate yield. For a few liquid tokens, you can use option vault to generate returns. Otherwise diversifying into more liquid assets such as USDT or ETH may be the first order of priority.


However just because there are these available investible products it doesn’t mean they meet the liquidity/withdrawal, fee structure and risk/return requirements of your particular situation. Remember there is no free lunch, only trade-offs.


For example, due to the ambiguity of existing legal and regulatory regimes, there is uncertainty regarding what instruments and legal setup is allowed and doable for projects based in different jurisdictions. It’s not hard to imagine that most projects wouldn’t be able access to US Treasuries or private credit through their own local traditional finance channel. Although there are onchain alternatives that will allow you to do so. Accessing Blackrock's iShares Short Treasury Bond ETF through a traditional broker would cost you an annual fee of 0.15% or less but accessing it through onchain platforms will cost you 30% more at 0.20% per year. Not only that, you may be exposed to additional jurisdictional, legal and counterparty risks that you wouldn't have if you could use a traditional broker in the US or UK. Of course, it may still be your best and only option but you should know the trade-offs and risks.


Risks and Returns

Below I have included illustrative examples returns for USD stablecoins and ETH based investible assets not including fees.

Please note the actual return may differ even within the same asset class depending on the product. For example, for USDC based private credit opportunities, US Amazon vendor receivables financing product has a different risk/return profile than a Nigerian consumer buy-now-pay-later loan.


The risks associated with some of these assets are very idiosyncratic. For example, when considering a private credit opportunity through USDC you need to consider jurisdictional risks, counter party risks, credit risks, stablecoin depegging risks etc. A full breakdown of these asset classes from a risk perspective is beyond the scope of this article.


Though a quick way to gauge whether a DeFi investment opportunity should at least warrant your time and attention to do research on is to find assets in traditional finance that offer similar a return number and compare the risks of the two products.


Since the risks involved in many of these on-chain products, including smart contract, market, liquidity, credit, and counterparty risks, may not be quite as well-understood as they are in TradFi, you should really understand their individual risks.


Of course this is an arduous task. If you want to discuss any of these assets and their particular risk/reward profiles, feel free to check out my conversations with DeFi/Private Credit founders, articles about LSD ETH yields and challenges facing private credit. Otherwise please feel free to drop me a message.


Summary

Running out of money is the single biggest reason for crypto startup failures and project shutdowns. Being able to generate enough returns on idle cash to fund product development and extend runway is crucial to a project’s long term viability in addition to creating revenue streams.


We can better understand and plan how financial resources are to be allocated and utilized by separating Operating Cash from Strategic Cash. There are a variety of products available for yield generation through both onchain DeFi and offchain TradiFi channels depending on the asset in question.


Given the regulatory ambiguity, most teams won’t have access to TradiFi products. Fortunately, there are onchain alternatives. Understanding each product’s risks is key in making sensible allocation decisions. Of course this is a time consuming and complex task. Feel free to browse through my research writings and conversation with many of the credit protocol founders to get a better idea of the nuances of each protocol as well as their products. Alternatively drop me a message to see how I can help.


Treasury management through DeFi asset management channels is a trend I am keeping a close eye on. I will invite legal experts to share their insights regarding compliant legal setups for project/DAO to interact with onchain and offchain entities. Follow and subscribe to this newsletter to make sure you don’t miss out.


Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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