Kishan Shah on Bear Market Survival in Web3

[00:00:00] Umar: Welcome to The Accountant Quits brought to you by Request Finance, an all in one platform for crypto organizations and freelancers to easily manage and track their invoices, salaries, and expenses in a compliant way. On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.

[00:00:23] Umar: My name’s Umar, your host, and even if some might prefer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need, that will be relevant for the accounting industry as a whole.

[00:00:37] Umar: Welcome to episode 33. Crypto is subject to high volatility and even large market cap protocols are not immune to over 75% pricing drops.

[00:00:47] Umar: The majority of a web3 project or DAO’s treasury is typically held in their native governance token and turbulent market conditions amplifies the need for good treasury management. One that does not jeopardize the viability of the project and reassures the community on its financial health.

[00:01:06] Umar: To discuss, operating in a bear market, including survival growing, hiring, and treasury management, I have the pleasure to be speaking to Kishan Shah, a former growth equity investor at Goldman Sachs and CFO at venture capital backed and publicly traded tech companies, now helping web3 companies grow faster and manage their treasury.

[00:01:27] Umar: In this episode today, you will learn how should web3 projects view the bear market, how to hire a CFO with minimal web3 experience, what is capital allocation and why is it important? What are best practices on financial reporting? What is treasury management and why does it matter? And lastly, how is web3 tooling different than web2.

[00:01:49] Umar: Kishan, welcome to the show and thanks for making the time to be here with us.

[00:01:54] Kishan: Thanks for having me here, Umar.

[00:01:56] Umar: To start, can you tell us a bit more about your personal background, how you first became interested with blockchain and what was so compelling for you to join web3?

[00:02:06] Kishan: Yeah. So my background, five years on the tradfi side, private tech investor, then six years as a COO/CFO. And then the last few years at a large technology company. All the while investing in cryptocurrencies personally, but I didn’t see that there was an opportunity to go and build a business. And for me as a business builder, I got super excited during DeFi summer, where you see projects like Uniswap or DYDX that are doing hundreds of millions of dollars of revenue a year and doing it with tens of employees and new primitives that emerge, especially in the NFT category.

[00:02:47] Kishan: Where next generation of commerce and financial services that doesn’t exist outside of this world of the internet and is now going IRL got me super excited. Also my wife is general counsel at Gitcoin, so our life is one big crypto Twitter feed IRL. So this is what we spend our nights and weekends talking about all the time.

[00:03:09] Umar: The title of the episode today is bear market survival in web3. Can you talk us through the crypto market today and how should web3 projects think about their financing strategy?

[00:03:23] Kishan: So let’s set some context and set the stage in terms of where we are. Tradfi land would say the definition of a bear market is a 20% drop in asset prices.

[00:03:36] Kishan: And if you were to just look at Ethereum, there has been 17 drops that are 20% plus in the last 18 months. Yet Ethereum is still 6x since the January 2021 price of $125. So what does that mean? On chain metrics like TVL, total value locked is down 66%. DEX volumes are down two thirds. Borrow value volumes are down 75%, stablecoins supply is down 17% and DeFi tokens are down 90%. And out of the 19,000 or so cryptocurrencies, 90% of them are down 90% plus.

[00:04:14] Kishan: But private market VC fundraising is still humming. So there’s a great tool called Dove Metrics that PR publishes that shows year to date in 2022, $29 billion has been invested by VCs versus $31 billion in all of 2021. So when folks read about a16Z or Paradigm or Haun or Sequoia or Bain capital raising these multi-billion dollar crypto funds, and you ask, is this getting deployed?

[00:04:44] Kishan: And are funds in business. So the answer is yes. So projects are able to survive. The great projects are able to get funded. And I think when I speak with founders and operators and contributors in this space, there is one central mismatch that should be highlighted. A venture capital fund has a 10 year fund life cycle.

[00:05:05] Kishan: A token investing schedule is two to four years. And companies, unfortunately raise 18 months of cash. However, if you’re going to be able to realize an acyclical bet in this industry, you either have to take the advice of someone like Muneeb from Stacks. It’ll say raise 36 months and be able to go through any sort of token volatility cycle, or there’s fear that you, your project may not actually have the cash to go realize its ultimate vision.

[00:05:34] Kishan: So, what I see now is the cycle of the last two years of hype and delight has turned into how do we build projects that are useful and productive. And speculative demand, which has gone away versus real demand, which will come back in the next few years. And you could just simply look 14 to 17 and then 18 to 21.

[00:05:57] Kishan: The token pricing cycles are generally three years. So being able to build the infrastructure to handle additional increases in demand, even if a bear market lasts for two years is important. Now, when projects mention that they raise 18 months of runway, I wanted to double click on that and actually understand why that’s the case.

[00:06:16] Kishan: So I looked at Carta and Carta actually shows there’s a meeting with 550 days between a seed and an A or an A and a B. But continuing to raise those 36 months to handle that project volatility is important and assume that even if a project had raised at a larger valuation, what’s going to matter is ultimately how fast they can grow to compound into their last stage valuation.

[00:06:41] Kishan: Now, the common refrain I’ll hear from folks is we’re still early. And I wanted to set context to that. So you can simply go on Deep DAO and you’ll see that today there is about 8 billion of total DAO treasury volume from roughly 4 million governance token holders. And I assume that a governance token holder wallet, projects will hold multiple wallets.

[00:07:07] Kishan: So the number of DAO contributors is probably a few hundred thousand and to set the stage of we’re still early. The total addressable market of total knowledge workers in the world is about a billion people. So a billion people roughly use a computer and generate productivity, which is how they make their livelihood.

[00:07:28] Kishan: And if you were to think about the TAM being just a billion workers, and there’s a few hundred thousand people that are actually in DAOs today, we’re still very, very early, but it’s important to understand what that means.

[00:07:43] Umar: Next I wanna speak about how should web3 projects think about hiring a CFO?

[00:07:49] Umar: The CFO is one of the underappreciated role in crypto I would say. You’ve been working to transition from web2 to web3. You also wrote an article about this titled The Crypto CFO, and I will paraphrase what you said that the crypto CFO must bring the best parts of traditional finance, but build enough mental plasticity to, to reinvent a new paradigm.

[00:08:10] Umar: And I love this. How should DAO founders think about hiring a Head of Finance or a CFO role and what kind of skill sets should they look to bring on board when that person has minimal web3 exposure?

[00:08:23] Kishan: So my framework in any large decision comes down to philosophy, strategy and tactics. So from a philosophy perspective, when hiring a CFO, what do you want?

[00:08:36] Kishan: For me personally, it’s head in the clouds, feet on the ground. So being able to dream big and think about that 10 year vision of ultimately what a founder is looking to build, but being able to have the footwork to go and actually make that happen financially is important. And I think the traditional buckets of talent that would come from SaaS or eCommerce or FinTech, these are actually proven business models.

[00:09:05] Kishan: One could argue they’re coin operated where dollars in dollars out optimized efficiency and optimized growth, which then equates into profitability. That’s how private market fundraising has worked over the last 10 years. But with new primitives, like DeFi or NFTs, where platforms are still emerging.

[00:09:22] Kishan: Being able to strategically model from first principles and having bespoke modeling paths where one could do scenario analysis or volatility planning or multi-product launches, or even delays is incredibly important. And I’ll take from a philosophy perspective. SBF had a great thread on this, where he asked, what do you look for in candidates?

[00:09:47] Kishan: And it wasn’t where someone went to school. It wasn’t where they worked. It was their ability to see through messiness, right? Because any sort of earlier stage company is going to be messy. And the job of the financial business partner to the founders is to be able to see through that messiness and be able to operate a growing and profitable project within that.

[00:10:09] Kishan: So let’s go into strategy. In the article I had mentioned, there are three key functions, business, health, growth, and treasury management. On the business health side, those are traditional FP&A, budgeting, forecasting cash flow, planning, liquidity. So all of the things you’ve seen of dollars in dollars out and being able to provide a series of models, analysis, frameworks, dashboards that enable a project to understand where they are, but where they want to go.

[00:10:37] Kishan: Now on the growth side, I think this is critically important because it’s been categorized as effectively fundraising for a long time. And now what I’m starting to see is fundraising is going to be more of a relationship management art, and being able to handle a long sales cycle and build relationships, especially as the criteria for larger stage growth rounds changes is critically important.

[00:11:00] Kishan: But in terms of having a Head of Finance or CFO, it’s gonna be all about product acceleration, right? So let’s say there’s an existing product that’s out in the market. How can you realize a vision faster? How can you allow the engineering organization to ship quicker? How can hires be onboarded and ramped more quickly?

[00:11:20] Kishan: And then on the treasury management side, what’s funny about this industry is how interrelated the balance sheet and the income statement are. So if a company is natively receiving revenue in crypto and the token prices go down 20, 50%, ultimately you’re going to have a hit right on the P&L. And that’s going to dictate how fast you can hire and how fast you can grow, which is then going to change how many products you can release or how many customers you can support.

[00:11:46] Kishan: So thinking about, look, if there was the best time to focus on treasury management was yesterday, the next best time is today. So there’s a variety of tools that can help with that. And I think just in terms of tactics, so the beauty of this industry is that anyone can contribute. So having someone who spent six months, one year, two years, five years, whatever the number is, days, nights, weekends playing with products, investing money, unfortunately, losing money these days, but reading all of the manuals and the documentation and the white papers and being able to not just be part of the community, but have that fundamental obsession into why this industry exists, why it’s important, how it’s different.

[00:12:35] Kishan: And sometimes I think the phrase of falling down the rabbit hole, where it’s great to fall down the rabbit hole, but now to be obsessed around what’s being built and ultimately optimized is critically important. And lastly, I would say shifting thinking on web3 where traditional measures like number of employees and headcount, those could be vanity metrics in this industry.

[00:13:01] Kishan: A DeFi protocol can operate with tens of employees and hundreds of millions of dollars. An NFT pfp collection could have hundreds of millions of dollars of revenue and just a handful of employees. So I think it’s critically important to just think from first principles when operating the finance side.

[00:13:19] Umar: For the ever growing community of founders and contributors in web3, could you elaborate on capital allocation and what would you prescribe to these founders and contributors?

[00:13:33] Kishan: So there is a great book or I think it was Warren buffet or Bill Ackman was asked, what’s the one book you recommended. It was this book called The Outsiders.

[00:13:41] Kishan: And the central realization from this book was that the CEOs who spent time on capital allocation have achieved the best, right? So first off, what is capital allocation? It’s the process of maximizing shareholder returns through deciding which operating initiatives to fund. So what projects do you build?

[00:13:59] Kishan: How do you build them? How much do they cost? What features do you build? What public goods do you build? What community do you build? But on the web3 side, I was listening to a podcast on Blockworks with Jason Yanowitz and Olaf Carson-Wee from polychain and Olaf had a great view on this, where he was asked about the role of DAOs and capital allocation.

[00:14:27] Kishan: And he said, DAOs only need to get one thing, right. Which is capital allocation and the governance around that capital allocation. So his view was DAOs are best in terms of understanding what to invest in and why. And then there are sub DAOs that are able to go and build the products that need to be built.

[00:14:45] Kishan: And I think just in terms of decision making frameworks, and being able to get to the best ideas, having the power of the community is incredibly important and just being able to move fast. So for the folks that are investment DAOs, capital allocation is the key goal of those DAOs where they’re able to decide on which projects to invest in, what themes to focus time on, and then ultimately the proposal and governance process associated with that.

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[00:17:06] Umar: Next, I want to touch on financial reporting for DAOs. So even if wallets and treasury of DAOs are publicly verifiable on the blockchain by the community, I will quote what you said in, in your article that “Visibility is not transparency”

[00:17:22] Umar: So for DAOs to properly communicate their onchain financial position in a timely manner, what are some of the key metrics that DAO should be reporting? And are there any tools that stand out today to facilitate the financial reporting of DAOs?

[00:17:36] Kishan: So the maximum that I live by here is standardization is not the enemy of decentralization.

[00:17:43] Kishan: Standardization is incredibly important, especially for all the amazing engineering talent and community building talent we have in this industry where time should not be spent on thinking about revenue and GL accounts and how to optimize any sort of these financial metrics. It should be on building the best community, building the best products for that community and ultimately growing this industry.

[00:18:08] Kishan: So the framework that I use, let’s call the crawl walk run, right. V0, V1 V2.

[00:18:14] Kishan: V0 is just simply, what are these statements? Why are they important? Why are they needed? And I wrote a post on Financial Reporting 101, you could apply it to web3. You could apply it to DAOs. And there’s a template for folks to fork because I think public goods are incredibly important and there’s sometimes no need to reinvent the wheel here.

[00:18:34] Kishan: Then there’s V1 walk, right? Which would be, have a standard set of three financial statements, income statement, balance sheet, cash flow. And Kevin Ngo, and even the folks over at Llama have done a really nice job of introducing a token flow statement. So being able to understand receipts and disbursements of tokens and how they interact with the three financial statements.

[00:18:56] Kishan: And then I think for the majority of projects that are pre-revenue or are now looking to accelerate, it goes into the run side. It becomes much more business planning and being able to accelerate top line. So whether it is things like runway scenario planning and being able to model out different paths on cash or liquidity management or revenue acceleration or cost optimization, or even things that are weekly reviews on operating metrics that help you guide and form better decisions.

[00:19:32] Kishan: There’s just a path towards getting there, but one cannot run before they crawl and walk.

[00:19:37] Umar: And to everyone listening, I’ve included a link in the shownotes of all the articles that Kishan wrote. So for example, the DAO financial reporting model and templates that Kishan has just mentioned, everything is out there and I highly recommend you to check it out.

[00:19:51] Umar: Next I wanna speak a bit about treasury management and why does it matter? It’s a subject I have an acute interest in, but extreme ignorance of how it’s being done in practice and the current practices around treasury management for DAOs today.

[00:20:05] Umar: Let’s start simple. What is treasury management and why is it important for DAOs?

[00:20:10] Kishan: Short definition – it’s optimizing the balance sheet to realize business goals and realize an overall vision. So, and that will not happen if there’s not sufficient liquidity to go and do that. So what’s interesting about web3, when revenue is being natively taken in tokens, and folks have seen this with the volatility ranging from 70% to 90% of tokens, there is no public comparable for this.

[00:20:38] Kishan: So I was listening to a, a large public company, which does $25 billion of revenue, and they had a $100 million currency headwind. And that was something that they were not able to forecast for. And I realized like, oh, if you were to go into web3 land, like that would be a day. So being able to lay out just a basic end to end process, where if a project is getting crypto native revenue, how does that translate into expenses?

[00:21:06] Kishan: Or they may have raised funds in the form of a native token or had an air drop. Ultimately, they have to make a decision around. Do they want to hold that token? Do they want to swap it? And I think the most important piece here is every project and organization is going to have a different set of goals.

[00:21:27] Kishan: So some will want to play offense. And the offense side I’ve seen everything from setting up an ecosystem fund and being able to have a strategic compliment to a product offering where being able to attract the best builders on their platform and being able to optimize for that. And I’ve seen other folks that effectively wanna run a hedge fund and wanna focus on absolute returns or relative returns.

[00:21:53] Kishan: And that’s fine. It just depends on what the projects needs are. And then I’ve seen others that are more focused on downside protection. And diversification to ultimately focus on a going concern and it’ll be different for every project, but ultimately it just matters in terms of getting community support as well because projects won’t be able to go through all the necessary steps without that. So I’ve written a post that has a template on what should be used in terms of those goals. And then also thinking about all of the key points of when writing a proposal, what to cover and how that can fit into broader treasury goals, investment in deal points, security, which is incredibly important.

[00:22:37] Kishan: And of course communication, because having one individual sets of conversations versus having a one to many dynamic is incredibly important here.

[00:22:47] Umar: Now, web3 tooling is something I’ve been interested with a lot lately. I’ve been trying to look at the different accounting tools for web3. I would say at the moment DAOs use a mix and match of web2 tooling and web3 tooling. How would you say that web3 tooling is different than web2 today? And are there some, most important web3 tools that a DAO should use.

[00:23:12] Kishan: Yeah. So first I think about the types of products and the quality of products in this space, and I’m incredibly impressed.

[00:23:21] Kishan: And my sense is that product development cycles in this industry are faster than even web2 because of composability. So features pop up very quickly. New vendors pop up very quickly, and the collection of founders that are building these products and communities that are supporting these products are highly engaged and it’s important to be active with feedback, especially from the entire accounting community that have used everything from a large ERP down to a self-service application to handle accounting processes.

[00:23:53] Kishan: So my view on this is being able to automate what is able to be automated is important, but the cost of what I would like to call refinancing technical debt, where you solve one problem, there’s a better tool. And then you constantly change that process and may not ultimately move the needle in the direction you want to is important because it’ll just come down to number of hours in the day and hours in the week.

[00:24:19] Kishan: So on the accounting side from a pure play perspective, I’ve seen folks like Cryptio or emerging players, like Coinbooks or Multis. And then the integration side, whether it’s a Bitwave, that’ll go into QuickBooks or NetSuite. The limitations are there, so it’s funny the two decimal point is an incredibly important piece here where not being able to handle that or managing that is tricky.

[00:24:42] Kishan: And then also of course, transaction velocity, right? It’s not uncommon for some projects that have thousands of transactions in a given period. So being able to handle that. And then of course like the categorization and accrual accounting side, Kevin Ngo had a great post on this different accounting information systems and DAO resource platforms where being able to go from Etherscan and categorize the transaction, but also taking financial standard from cash reporting to accrual reporting is important.

[00:25:12] Kishan: On the expenses and payable side, whether it’s payroll from Utopia or AP from Request Finance, great products. Tax I’ve seen Zenledger, Taxbit, Koinly, and then the wallet side in vaults. So Gnosis Safe, right being a standard.

[00:25:26] Kishan: But the vault side I think what’s incredibly important is how many different features and use cases you can have in one product where it’s not just reporting, but it’s actually optimization. So folks like Enzyme where you can auto compound rewards and harvest yield natively by aggregating different DeFi tools. That’s helpful.

[00:25:46] Kishan: Just being able to have this all in one place and not have to go across different DeFi applications, because it actually leverages the point of the industry, which is interoperability and advanced primitive. So if folks are looking to measure or manage their treasury better, be able to maximize rewards to contributors, KPI options from Uma or covered calls from Hedgey.

[00:26:08] Kishan: So I think sometimes any sort of derivatives can be concerning, but here, if you’re trying to optimize for performance and actually have a strategy that’s able to take advantage of that it’s worth looking into. And finally, with all the innovation in the industry, let’s just go back to basics. A project is always gonna have to have a balancing balance sheet.

[00:26:28] Kishan: It’s always gonna have to file taxes with the appropriate authorities. So while being a degen may be revered, ultimately all of the standards that are normal in accounting, that folks went and got a CPA for won’t be thrown out the window completely. So it’s important to be mindful of that.

[00:26:45] Umar: Beautiful accounting is accounting at the end of the day, we need debit to equal credit. We’re soon coming to the end of the podcast Kishan.

[00:26:52] Umar: As closing thoughts, the title of the episode today is bear market survival in web3. I want to ask you, what are you looking forward in this bear market for the coming months?

[00:27:04] Kishan: It is very, very easy to leave in this industry where there was a report that I saw from Ft partners, where 60% of all crypto wallets were opened in the last two quarters and total crypto wallets of a hundred million on a TAM of billions. Again, when folks say it’s still early, I wanna set context to that. Don’t leave.

[00:27:33] Umar: And there is a last question, which I usually ask to my guest is, do you have a favorite quote or Maxim that you live by.

[00:27:40] Kishan: There’s 2 actually. The first is a path opens to those who are honest. So always, always, always remember that. And the last piece is just being insanely proud of what you do.

[00:27:52] Umar: I like both of them. Kishan thanks a lot for coming today. If people want to learn more about your work and if people want to reach out to you, how should they do so.

[00:28:03] Kishan: I welcome everyone to reach out to me on Twitter. So my Twitter handle is Kishandao.

[00:28:10] Umar: Perfect. I will include that in the show notes of the episode.

[00:28:13] Umar: It’s been really fun conversation today Kishan and we’ll keep in touch and we’ll speak very soon.

[00:28:19] Kishan: Sounds great Umar. Thanks for having me.

[00:28:21] Umar: I would like to thank everyone for listening to this episode, you will find all the links of the episode, show notes and transcript on the website of The Accountant Quits at theaccountantquits.com.

[00:28:32] Umar: Please note that this content is for general information purposes only, and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them.

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