As the world of decentralized finance (DeFi) continues to evolve and expand, attracting investor interest has become crucial for DeFi startups looking to secure funding. One of the key elements that potential investors will scrutinize during your pitch is your financials; similar to companies in the traditional sector. Preparing your financials effectively maybe the key differentiator in convincing investors of your project's viability and potential for success. In this article, we will explore the steps you should take to ensure your financials are pitch-ready.
Comprehensive Financial Projections
Start by creating comprehensive financial projections that cover multiple scenarios. DeFi is a rapidly changing landscape, and investors need to know that you've considered various possibilities. Include income statements, balance sheets, and cash flow projections for the short, medium, and long term. Highlight key assumptions and variables that could impact your financial performance.
As a thumb rule, customising financials for three scenarios is always a great option.
One where all things go to plan, one "in the middle" scenario where you'd hit some milestones and miss some and the last being where you miss most milestones. It's important to understand what would happen under each of these.
Highlight Revenue Streams
Clearly define your revenue streams and outline how you plan to generate income. Whether it's through transaction fees, subscription fees or other mechanisms, investors want to understand where your revenue will come from. Be realistic in your revenue projections and provide a breakdown of income sources.
It's also a good idea to have a general stream called "Other income" where any R&D tax breaks OR grant sources can be pooled. Always go conservative on this estimate as it depends on external factors working in your favour. E.g. If you expect 50k in grant income or R&D tax credit, project it as 30k in your financials which allows you the leeway in case rules or conditions change.
Opex and costing
Detail your cost structure, including operational, marketing, development, and any other expenses. Investors will want to see that you've thought through your spending and have a plan for managing costs as your project scales. Highlight cost-saving strategies and efficiency improvements if you've a clear view on this.
One of the things we've observed is investors wanting a clearly laid our HR or hiring plan. With people costs being one of highest company expenses, it's imperative that you drill down to the extent possible on what type of hire are needed and when. Whether you expect them to be full time or contract basis.
We usually use formulas to create cost lines for Employers NIC and Pensions (calculated roughly at 13% of gross salary and 5% of gross salaries respectively). This is not the exact calculation of course but provides a good estimation for employer costs which are additional to salaries.
In the same vein, when considering contractor expenses, we would include a 10% handling fee, under the assumption that foreign payroll providers or HR agents will be engaged to manage employee compliance in the country where they work.
Acknowledge the risks inherent in the DeFi space and how you plan to mitigate them. Investors are well aware of the volatility and security challenges associated with DeFi, so demonstrating a clear understanding of these risks and your strategies for addressing them will build confidence.
Here we'd always encourage clients to lay out a well planned treasury management strategy to balance your exposure between digital and fiat asset types.
Include key financial metrics that investors commonly look for, such as return on investment (ROI), customer acquisition cost (CAC), customer lifetime value (CLV), churn and growth rate. These metrics provide insight into the estimated health and performance of your DeFi project. You may need to delve into competitor financials to get a realistic understanding of how these are performing within a specific industry sub-type. Such as DeFi SAAS companies.
It's imperative to know whether pure DeFi metrics such as market capitalisation, transaction volumes and Total Value Locked (TVL) would be relevant for your product type. You may need a blend of metrics across both to convey an effective picture.
Scalability and Growth Strategy
Demonstrate how your DeFi project plans to scale and capture a larger market share. Investors want to see a solid growth strategy that includes user acquisition, partnerships, and expansion into new markets or products. Highlight your unique value proposition and competitive advantage. This is not strictly financial, but needs to be considered when you create your forecasts and cash flow analysis for the future.
Preparing your DeFi company financials for an investor pitch is a critical step in attracting funding and building investor trust. By working on an adequate set of financials, you can increase your chances of securing investment. Remember that transparency, realism, and a clear growth strategy are key to convincing investors of your DeFi project's potential for success in this exciting and rapidly evolving industry. At the same time, it's important to acknowledge that financials are only a part of your whole pitch, so keep it simple and easy to understand for a reader.
We can help you in your journey to prepare your financials for investor pitches. We understand the stress and concern it can cause founders in a challenging market such as we have currently. We offer starter prices for a early stage companies so it's always worth a check to see what we can do for you specifically.
Reach out to us via our Contact page to speak more.
Notes and references
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