Managing Crypto Start-Up Funds (In A Bear Market)
Prepared by Euan Wilson
Posted August 3, 2021
It’s no secret that:
A bear market in crypto causes price declines, reduced trading activity, more reserved investment and less confidence in the space.
It’s easy to see the impact on your portfolio…
…but what happens to the funding of a crypto start-up, protocol or business when a crypto bear market hits?
And what steps can you take to protect yourself, or even thrive as a business in a crypto bear market?
(We also recently produced a report on how you can build a DeFi team and what’s changed in the last 12 months, which you can read here).
We worked with a variety of Blockchain & Crypto companies through the 2018 bear market, and saw a lot of talented people struggle to replicate the success they’d had through the bull market.
We really wanted to know how companies are going to learn from other’s mistakes and operate differently this time round.
So, we went to market and spoke with companies like Panther Protocol, Bumper, Standard Protocol, Liquality, Faculty Group, CoinBurp, Teller Finance, Euler XYZ & Maple Finance to extract valuable information you won’t find anywhere else.
They have some pretty fascinating ways of managing funds in a bear market.
Companies consulted for our research
Some factor in bear markets from the start, others like to go big in a bull market and then reassess once a bear market comes along.
Today you’ll find out how companies of varying sizes and maturity plan to manage their funds in a bear market.
Let’s get right into it:
The currency of your treasury indicates your overall strategy
We asked all of the companies included in our research what currency they raised their capital in, and what currency they keep their treasury in (crypto, stablecoins or fiat).
There was one solid insight we got from this question:
No two companies have the same strategy.
Some raised in stablecoins and stayed in stablecoins, some have a 50/50 split between stablecoins and eth, others have a mixture of crypto, fiat and stablecoins.
In the ICO days, a lot of companies raised in eth and stayed in eth, which proved to be a costly decision for many.
Ryan Berkun, Founder & CEO at Teller Finance said that their treasury is mainly in fiat and some eth, but others told us they chose to have their treasury made up of only stablecoins.
Treasury holding options
There was one thing that stood out, though:
We noticed that the amount of crypto being held in a treasury correlates closely with the risks willing to be taken by the company.
And this is where it gets interesting:
Jonathan DeCarteret, CEO at Bumper explained how the 2018 bear market influenced them to closely manage their treasury:
“I think we learned the hard way in crypto (we started in 2017) that you have to give real careful consideration to the treasury management. We were caught a little bit in that first business in the sense that the market was going down a little, and the treasury was going down with it. We thankfully realised it in time, but you need to be active in the management of your treasury – you can’t just hold it in the way it comes in.
We have our treasury spread across a portfolio with varying risks and yields.”
Learning from other people’s mistakes is a theme which came up often in or research.
Philipp Zimmerer, Strategy at Faculty Group spoke to us on why their treasury is split 50/50 between crypto and stablecoins:
“Another factor that plays into this is that DeFi exists, so being in stablecoins does not mean you are idle. DeFi allows you to get really good returns on your stablecoins compared to traditional finance and traditional investments. Being in stablecoins is not that much of an opportunity cost as it was in previous years.”
Philipp raises a good point about stablecoins being the best of both worlds in a sense – you get flexibility, security and really good returns.
There was a whole range of answers to this question, and quite literally no two answers have been the same.
The currencies that your treasury is in really comes down to how bold you want to be.
But does a company strategy change with the market?
Your business strategy doesn’t have to adapt to the bear market
A company strategy will naturally evolve and shift over time, but should you have a distinguished strategy for a bull or bear market?
It’s very difficult to predict how long a bear market will last, but it’s clear to us that where we are right now is very different to 2018. It’s easy to see that the quality of projects being funded are of a much higher standard.
Peter Wood, CEO at CoinBurp shared a similar belief:
“The difference is that the quality of projects are a lot stronger and there is a lot more due diligence that happens with fundraising. The companies that raise capital now have a much stronger footing and there is a lot more regulation around to keep investments safe. I would say it seems to be harder to raise money now.”
There seems to be two different schools of thought on this challenge: stick to your business plan no matter what and design it to work in a bull or bear market, or reduce spend in a bear market, but go hard at it in a bull market.
Michael Bentley, CEO at Euler XYZ gave us a short insight into the approach his team takes:
“Our baseline strategy is for a bear market and our philosophy has always been that we work as if we’re in a bear market. Although, one problem we’ve had is finding the right people; the market just seems to be sucking up good people.”
A pragmatic approach like this allows a company to be hyper focused on performing under any conditions; this kind of resilience communicates to employees, investors and competitors that you’re here to stay and you’re here to build an amazing product.
This being said:
Your overall strategy may not deviate too much, but the way you raise can shift dramatically depending on the market.
Ramadan Ameen, Head of Operations & Finance at Panther Protocol explained how their approach to raising changed with the market:
“We were aware the market was going to change, we were aware our team was strong, and we were aware that the founders had a lot of credibility. As a result, we were able to leverage their credibility and not lean so heavily on Key Influencers (KOLs); they called a few friends (100+) and we were able to raise that way.
In the process of raising we’ve done a couple of things: We’re signalling that we’re here to stay and that’s our value proposition that we wanted to send out to the market. We’ve varied the unlock on our round so that people can’t dump our tokens and need to be committed long-term. As projects step into this bull/bear market, they shouldn’t stop raising, but they need to be raising in a way that is responsible to the team and pre-sale holders, and they need to signal that they’re aware of what is going on in the market and aren’t afraid to make adjustments. Their discussions need to be focused on: What is the best way we can deliver our product, how can we ensure we have a value proposition in the market, and what is the best way we can shift the conversation away from token sales trends and more on implicit value we’re delivering. Just as much as it’s about raising, it’s about branding, delivery and communication by the CEO to the presale participants, so they can talk about the project.”
This type of mindset is one we came across a lot in our research.
Rather than cutting spending on marketing (or any other department) completely, companies may choose to focus their campaigns rather than appealing to a wider audience (and spending more money).
Although, there was one clear takeaway from this question which was shared by all of our participants:
They’ll will continue to work towards building the best product they can.
And to do this, you need the best people. Which is why the next point is so important:
You shouldn’t have to tweak salaries for bull or bear markets
Let me be clear:
Plexus as a company has noticed a huge shift in the attitude towards salaries over the past 12 months.
We’ve also noticed a huge increase in demand for Rust developers, which we investigate in this article.
A lot of our clients come to us with the mindset that to build the best product, you need the best people, and to get the best people, you have to pay them well.
I think it’s safe to say that mentality has been clearly mirrored in the average salaries being offered:
And this got me thinking:
In a market with loads of activity, loads of investment and loads of projects being built, paying people more than your competitors will likely mean you hire the best of the best…
…but what happens in a bear market when things are a little slower?
Companies could easily find themselves with a huge wage bill.
And to add to that:
You may then hire more people with a similar skill level, but find yourself paying them a lot less.
So how do you navigate this situation?
Do you pay everybody with the same skill level the same? Do you pay them at what the market rate was when they joined? Do you renegotiate an employee with a higher salary in a bear market?
We discussed this dilemma at length at Plexus Towers and we couldn’t really come to an agreement on the right approach. Everybody had varying, but valid points.
So we asked our clients who had likely gone through a situation similar to this, and we a received lot of well calculated answers.
One of the most thought-provoking came from Sidney Powell, CEO at Maple Finance. He spoke to us about what impact lowering current employees salary based on the market can have:
“I would say it’s really important to maintain trust within your team – you’re going to seem very mercenary if you go and renegotiate people back down by meaningful amounts. I would say avoid those conversations if you can. That being said, if somebody who is very highly paid is underperforming, you might consider a renegotiation, or replacing such a person if you felt the inbound talent squared up pretty well.
As a first principle, I would always avoid it because I think it kills trust, and then secondly, I think if you’re going to apply wage cuts, it should really be shared across the whole team rather than singling out particular people. I think it just destroys trust and promotes resentment in a team.”
Sidney then considered a third option:
“For most protocols, you have an option where if you’re short on stablecoins, but you’re sitting on a large treasury of tokens, you could always skew a lower cash salary, and a higher token equity component.”
This wasn’t the first time this strategy was mentioned to us. Hyungsuk Kang, CTO at Standard Protocol told us that in a very specific landscape, there’s a possibility that a higher percentage of tokens would be offered that offset the stablecoin percentage
The management of funds for a crypto start-up is a topic which was discussed heavily in our office in the run up to the research portion of this article.
We’ve seen first-hand the slow but steady increase of salaries for in-demand languages like Solidity and Rust, and we really wanted to dig deep to uncover how sustainable these salaries are.
The strategy and tactics of companies in a bull vs bear market is something which really captured our interest too.
It’s difficult to say what strategy is best for the management of funds; if you want to play it safe, you’ll probably want to keep it all in stablecoins with some yield farming, but if you want to try and maximise your assets, you would probably hold some in something a little more volatile like eth.
One thing was clear though:
It doesn’t matter what type of market we’re in, companies are committed to building the best product they can.
Building the best product will allow you to secure funding easier, attract the best employees and allow you the thrive once the market picks up.
Hey! I spend my time working with DeFi Scale Ups and focus on Crypto & Web3. Connect with me directly on LinkedIn to see more content just like this.