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a16z: A guide to financial management of funds in a bear market

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Original title: "a16z: A Guide to Financial Management of Funds in a Bear Market"

Original author: Jeff Amico & Maggie Hsu & Ed Lynch & Emily Westerhold, a16z

Original compilation: Katie Koo, Odaily Planet Daily

The cryptocurrency market has seen its ups and downs. Prices have fluctuated wildly over the past year, only recently recovering from an active "winter".

Treasury (capital library, financial library) management is the way the project party manages resources to ensure that the company can continue to operate and have sufficient operating cash on hand. This may involve short-term expenses such as paying salaries and rent, or making long-term strategic investments such as acquisitions and research and development. Regardless of the spend, Treasury management is focused and focused on achieving the project's core business objectives.

Treasury management is the core function of any organization, but in view of the uncertainty of the current market conditions, it is especially important to hold the money in hand and make every move well. From DAO to traditional startups, teams are facing a market environment of high inflation, low yields, and tighter public and private market financing options. According to this "new normal", the team should put more emphasis on conservative Treasury management principles in order to survive the cold winter safely and become stronger when the next wave comes.

Here, we strongly recommend the following five points in the basic framework of Treasury management that teams follow.

1. Calculate monthly cash burn

The first step is to create a realistic financial model. That is, to track projected monthly inflows and outflows (e.g. "net burn"). Calculating the estimated monthly cost of a given project, the analysis should indicate the components that drive revenue and expenditure. For example, the spending side should list expenditures across key operating functions (engineering, business development, legal, etc.), as well as any expected non-operating outflows (financing costs, taxes, other one-time payments, etc.). In terms of revenue, the inflow of funds should also be divided into operating and non-operating categories. This will help determine their relative predictability over time.

Conservative assumptions will help ensure that projects don't get sidetracked by overestimating. This is especially true when forecasting earnings. During a bear market, revenue may fall, or growth may slow as customers cut budgets (or go out of business). Even assuming revenue is steady or contractually committed, it may be difficult to reach the predetermined amount. This kind of financial planning isn't always available for crypto projects and early-stage ventures that haven't yet made money, but factoring these possibilities into the picture can help projects realistically plan for the long-term.

DAOs differ from traditional startups in many ways, including their organizational structure and degree of decentralized control. As DAOs continue to evolve and adopt more complex operating structures, forecasting their overall financial health will be critical. This will ensure they are able to cover operating expenses, including contributions, incentive schemes, etc. It will also add transparency to the state of the DAO's operations, facilitating better decision-making.

2. Maintain operating expenses with cash

Once the burn rate has been determined, the project can begin developing an overall Treasury management plan. The core objectives are: capital preservation, liquidity and income.

The first priority is to cover near-term operating expenses. Optimizing the security and availability of funds is key before exploring opportunities to earn yield. This typically means maintaining at least 12 months (ideally 18 months) of operating expenses in a basic cash account (e.g., a bank deposit or money market account) or in the case of a DAO, in a high-quality stablecoin. This capital will earn relatively small gains but is conservatively available to repay short-term debt when it comes due.

In addition to maintaining short-term cash outlays, projects should ensure currency matching of assets and liabilities. That is, if liabilities are denominated in U.S. dollars, then the corresponding current assets should also be denominated in U.S. dollars. This is especially important for companies or DAOs that hold crypto assets but whose fees are denominated in USD. To avoid having to sell depreciating assets when the market falls, teams should ensure that they regularly convert assets into the appropriate currency to cover ongoing operating expenses. Of course, they must also ensure that any sale of assets is conducted in a manner that complies with regulatory restrictions and complies with relevant laws and taxes.

Asset diversification is fairly rare. A recent study by Chainalysis shows that 85% of DAOs store all of their assets in a single cryptographic asset (often the native governance Token ). Of those who hold stablecoins, most hold 10% or less of their reserves. While some DAOs have limited operating expenses, for those that do have substantial operations, they may be forced to sell their native tokens at a low price to cover operating expenses, or cut back on core strategic initiatives. This is not the optimal solution.

Some projects may be hesitant to sell cryptocurrencies for fiat or stablecoins for fear that this would send a "bearish signal" to the market. Projects can avoid negative outcomes by maintaining adequate cash buffers. Such as selling raw in a falling market Token , or cut strategic initiatives. Properly managing cash can ensure that projects can cover what could be long-term costs, which is crucial during a bear market when funding markets can be challenging. Planning ahead also allows the project to stay focused on core operating objectives and to know what is being lost and gained from working capital.

3. Plan for additional funds

For companies that hold cash beyond their 12-18 month operating budget, there is more proactive exploration of opportunities to increase revenue, which should be adjusted to the liquidity needs of the project. The chart below provides a high-level view of each product and when it is appropriate to include it for reference. Generally speaking, as projects move from operating cash (used to meet day-to-day needs) to strategic cash (used to pursue growth and other opportunities), products that offer higher yields are more appropriate.

Each product has different risks, yields and liquidity. Before they can be allocated, a basic plan needs to be developed.

We often share an investment plan template with traditional portfolio companies. While some of these considerations may not apply to early-stage companies, DAOs, and other projects, they are instructive in understanding how companies with larger balance sheets think about cash management.

Typically, traditional companies invest excess cash in safe assets. These products include money market instruments and investment grade fixed income securities (rated 3B or higher). Within a given portfolio, these companies typically diversify assets across different maturities, credit quality, industries and issuers. Below is SVB's allocation to mid-to-late stage companies with $100 million or less in assets.

While we have seen some companies Treasury take on additional risk in recent years, a more conservative approach is often wise. This is especially true in the current interest rate environment, where yields on many traditional credit and banking products are starting to pick up. A portfolio built around these types of assets may be a good fit for many companies.

At the same time, for the DAO that manages Treasury on the chain, various money market and fixed income products have emerged in recent years, which can be properly considered. These products include Compound , Element Finance and Goldfinch, among others. In the long run, investing in high-quality agreements such as Lido is a good choice. However, as with traditional products, it is important to consider the risk, return and liquidity profile of these options before deploying them. It is also important to assess any technical or operational risks that may arise when interacting with on-chain assets or protocols to ensure projects do not expose assets to risk of loss.

4. Strengthen operational capabilities

Once you have a strategy, it's time to implement it. For companies with more traditional Treasury management schemes, it is necessary to source banking partners and investment advisors and put in place internal processes to ensure that proper custody, reporting, valuation, control, tax and audit requirements are met.

The project does not need to be "all inclusive". Banking partners can help provide investment vehicles that align with the company's investment policy strategy. Banking partners can also recommend more sophisticated investment advisors to help maximize returns within specific risk parameters. For procedures related to investment and income accounting, be sure to consult an accounting firm or auditor.

For DAOs or companies holding cryptocurrencies, the diagram below outlines some operational priorities:

A secure wallet setup is necessary to ensure assets are always safely escrowed. This is especially important when assets are deployed to other protocols or otherwise move on-chain. Choices range from traditional custodians like Anchorage or Coinbase , to decentralized or multi-sig options like Entropy or Gnosis.

In addition to escrow, DAOs typically require funding from Token Some form of governance approval from the holder. Snapshot and Tally tools are available for voting, while Discourse and Commonwealth forums help facilitate community discussions.

DAOs can also leverage the emerging suite of on-chain analytics products to monitor the long-term state of their strategies, including Nansen , Dune, and Flipside Crypto. Compensation and operations-related tools like Opolis, Coordinape, and Utopia can also be used to manage budgets and track long-term spending.

Finally, consult with relevant companies. These firms include traditional advisors such as Silicon Valley Bank, as well as local crypto firms such as Reverie, Alastor, Gauntlet, and Llama. The team should also ensure regulatory analysis of various strategies and engage external consultants as appropriate.

5. Monitor and make necessary adjustments

Finally, teams should actively monitor their cash position and adjust strategies as needed. This requires updating spending forecasts to ensure cash is managed properly. Teams should also periodically confirm that their strategy still revolves around core principles (capital preservation, liquidity, yield). This will ensure that they do not take unnecessary risks.

Summary

Treasury management is integral to the long-term success of any project. To maximize the chances of success, both cash management and long-term capital allocation should be clearly defined and properly executed.

In current economic conditions, it is important to think critically about potential additional business expenses that may arise outside of the normal course of operations. Once a project has a conservative estimate of the capital required to maintain operations, it should set aside an available cash balance equivalent to at least 12 months (preferably 18 months) of net cash outflows. Any remaining cash reserves can then be allocated according to policy. After formulating a strategy, the performance of the assets held should be monitored, and the applicability of the strategy should be regularly evaluated to match the changing needs of the project.