A DAO's Guide to Surviving the Bear Market

Winter is Coming.

No one likes to think about finances until they have to. This is classically true about individuals but often equally true of organizations. A number of my former clients in investment banking found themselves in a state of panic when facing a potential sale of their company because their operating metrics and financial projections weren’t in order. It’s a humorous paradox, the exact thing that many founders and early teams deprioritized ended up being one of the primary factors when the value of their life’s work was being determined.

This mindset is generally even more prevalent in Web3, particularly amongst on-chain entities. Not only are these organizations relatively nascent, but the community driving decision-making is usually focused purely on product, often at the expense of core operational functions. Let’s be clear, early organizations should be focused primarily on product, but not entirely. A healthy mix is important, and generally speaking, DAOs have not been properly balanced to-date. 

In a bull market it’s easy to forget about financial planning. Token prices only go up and the rising tide makes everyone rich… But in a bear market things are different. Thoughtful treasury management matters. Careful strategic decision-making matters. Profitability matters. DAOs that take targeted pages out of the traditional corporate finance playbook will significantly increase their likelihood of long-term success. With all of that in mind, today’s piece is going to be focused on the key components of “value-focused” DAO financial and strategic practices, why they matter, and some examples of DAOs that have successfully began to implement them.

1) Treasury / Expense Accounting & Reporting

This is the most basic “table stakes” financial practice that protocols should be investing in today. DAOs that can properly identify and manage their spend have the ability to materially extend their runway and, over time, investors, contributors, and token holders will flock to protocols that can clearly and accurately describe where their capital is being allocated. Proper reporting also provides financial transparency to the community and serves as the foundation for forward-looking financial projections. This is a fundamental operating function that DAOs will not be able to survive without.

2) Operating KPI Tracking

While treasury and expense management functions are focused on protocol revenue and profitability, the tracking of protocol operating KPIs (“Key Performance Indicators”) is all about protocol growth. Every fee-generating organization has key levers that drive revenue. SaaS companies have sales heads with quotas that drive customers with contracts; e-commerce companies have marketing dollars that drive website visitors that convert into paying customers with average basket sizes; media companies have free and paid subscribers with some conversation ratio… you get the idea. The more an organization invests in gathering this data, (and the more time strategic folks spend analyzing it) the more informed token holders will be and the more likely they will be to make growth- and value-accretive decisions.

3) Forward-Looking Projections / Budgeting

In business (and in life) much more important than where you’ve been is where you’re headed. While the backward-looking data gathering and reporting we’ve discussed thus far is step one, using that data to project future protocol performance and expenditure is a natural and equally important step two. Short-term budgeting creates contributor and community accountability while long-term forecasting informs important strategic decision-making. Let’s be clear, financial impact is not everything… but it is one of many voices that should be in the room when debating whether or not to, for example, fund a grant, engage in token buybacks, organize a new sub-committee, alter token emissions, enter into a partnership, or evaluate M&A opportunities. Understanding how each of these decisions may affect the forward-looking projections and performance of the protocol is key.

4) Regular Strategic Review

Once expense accounting, KPI tracking, budgeting, and long-term projecting initiatives are all in place, the last piece of the puzzle is to regularly monitor performance and use the insights to proactively drive proposals and discussion. Things like regularly looking at token price trends and dynamics, comparing budgeted performance vs. actual performance, calculating specific initiative ROI, measuring valuation multiples relative to comparable protocols, benchmarking operating performance, regularly tracking potential M&A targets, and considering treasury makeup and protocol runway. These types of thoughtful, value-accretive processes and analyses can make a tremendous difference in the overall direction of protocols and will ultimately shape the on-chain landscape.

Some Examples…

While many protocols are woefully under-focused on more organized strategic and financial practices, there are a few that are beginning to implement some of them. Rook, Mango Markets, and Yearn are a few protocols that have a strong handle on their revenue, expenses, and treasury, diving into each extensively in their quarterly reports. Llama has been doing similar outsourced treasury and expense reporting for Gitcoin, and we collaborated with them to prepare an analysis on treasury runway to help inform community discussion around expenses and diversification strategies. 

Many DAOs have data dashboards (some candidly more valuable than others) though that is obviously just one piece of the puzzle. ENS has one of the better operating KPIs dashboards we have come across and Messari is currently doing something similar for Compound, pulling together a comprehensive Dune Analytics Dashboard and a quarterly State of Compound report. In general, dashboarding is an area within financial best practices that has been the least over-looked by DAOs, though very few have taken the next step to analyze this data and use it to drive strategic decision-making.

MakerDAO is one of the few on-chain entities with a fully funded Strategic Finance Unit (complete with a >$1M annual budget) and a regularly published monthly budget. 

Start-Ups See The Opportunity  

Utopia raised ~$23M in May to build payroll and expense management for DAOs, but has ambitions to expand into full-scale bookkeeping and accounting. Coinshift raised ~$18M in May to build on top of their existing product that enables mass treasury payouts, and expand into book-keeping and accounting as well. Last month Request Finance, which is built on top of the Request Network (an open network for payment requests), raised $5.5MM to expand their back-office product suite of invoicing and payroll management further into book-keeping and accounting.  

In Conclusion

If DAOs are to survive the winter, they should begin thinking about investing in these functions and initiatives yesterday. Imagine what a different state various protocols might be in today had they considered the ramifications of not diversifying their treasury last year or thoughtfully analyzed some of the more dilutive tokenomic decisions that have been made to-date. Consider how much value has been destroyed by ill-informed communities guiding protocols based on nothing more than well-written forum posts. 

It’s time to put the “Finance” back in DeFi.

About the Authors

Sam Bronstein and Jordan Stastny are co-founders of Alastor, a crypto-native strategic and financial advisory firm for the Web3 world. They were previously M&A advisors at Qatalyst Partners, where they advised leading technology companies on significant M&A transactions, including the sales of Slack, LinkedIn, Mailchimp, Qualtrics, Glassdoor, and others.