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Hackernoon logoUnraveling The Budget Of A Crypto Startup: Behind The Secrecy by@golubev

Unraveling The Budget Of A Crypto Startup: Behind The Secrecy

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@golubevGolubev_Od_UA (project manager), EU structural funds, ICO/STO/IEO, NGO & venture, marketing projects

In project management, there are several key success criteria for the possible implementation of any project: from building a plant, developing a software product, opening a new supermarket to something else. They are timebudget and quality.

That is, it is possible to name a successful project that was completed within the established period, the cost of its implementation did not exceed the budget, and the result of the project meets the quality and conditions agreed in advance.

At a glance, project management is obliged to managing these three main components. An important place among them is the budget (which affects the other indicators in the same way as they do for it), because any investor evaluates the project primarily on financial indicators: how much is spent on the project and how much is earned as a result at the end. In addition, most important — how the money were spent!

To manage effectively the project budget, you need to clearly understand and determine what it is. There are many definitions, but we will focus on the more widespread. Therefore, the project budget is an investment that, in order to achieve the desired result, is distributed over timeline and is tied to the stages and sub-stages of a particular project. Or, to be more precise, the project budget is a clear cost plan necessary for its execution.

The budget of the project always includes the costs for the procurement of materials, payroll, third-party services, administrative expenses and other expenses related to the scope of the project and its implementation. As a rule, the budget is formed in the context of the project stages — work sites, the implementation of which is controlled by the project team. The main parameters affecting the project budget are the duration of the work, the number of participants and the equipment used, and specific requirements for the result. However, as the practice of venture investment shows, start up teams mainly with great difficulty understand such a tool as a budget. The main problem of managing the project budget for them and not only is the distribution of responsibilities and delegation of authority. These problems negatively affect the effective management of the project budget.

If you look at the budgets of startup projects that go to the ICO/IEO/STO or crowdfunding — it’s basically always a big secret, covered in black ink. The amount of the desired fundraising are announced for the project, at the same time, in 99% in whitepapers there is not any word about how the money be spent on the investment, at best, we will see the Fund Allocation diagram — for undefined priorities as a percentage, without clear reasoning and justification of the amounts claimed in the form of expenses.

In addition, there is no question that in whitepaper there must be a result of documenting the scope of work and the timing of the project. Documenting the project budget is a special case of project cost planning and budget development, as everything depends on the declared goals in the project, methods of problem solutions, and the scope of the economic implementation of the project.

Constantly in the ICO/IEO/STO, one forgets that your startup is a classic project that can be called a project if you work in it the priorities indicated at the beginning of the article, where the budget is assigned a dominant position.

Statistics tell us that the issue of managing the resources of an enterprise or a project is a headache of many startups and, as it is not strange, already experienced commercial organizations as well. According to the report of Panorama Consulting solutions (a consulting firm specializing in project support, including the IT industry), only 36% of the projects managed to meet the planned budget.

At the same time, statistics show that in 64% of cases, projects and companies failed to manage to be within the declared budgets, most often these were cases of its unplanned excesses.

Further, the report shows even more interesting reasons for such excesses and not getting into the frame of the planned budget. According to experts, this is:

• Unanticipated technical and organizational issues (45% of cases)
• Unrealistic budgets (43% of cases)
• Additional technology requirements and claims needed for the project implementation (41% of cases)
• Underestimated project staffing (35% of cases)
• Expanded scope and additional costs (31% of cases)

This information can be trusted, in principle; such errors are peculiar not only to IT projects, but in general to any kind of project from a wide range of economic activities.

In addition to this problem, I would still point out the manic hysteria surrounding Hard Cap and Soft Cap of the projects going to ICO/IEO/STO. It is the rampant performance of hard and soft cap that breaks the huge value of the budget itself, as the main core of a successful presentation of the project, and its implementation.

How do the founders and project teams set specific financial goals for the fundraising? Basically — ‘’nothing at all’’. This ‘’nothing at all’’ — is the secret of the Madrid court. At best, teams are discussing the amount of necessary investment superficially.

Logically, long before the ICO/IEO/STO procedure in principle, the team and the founders are developing the idea; they should make a business plan, try to think about the development strategy, and so on. As a result, specific tasks must be created that need to be solved in order to obtain the desired result.

Implementation of decisions requires money, and for collecting these funds, the alternative raising is conducted if they do not want to take a credit, attract venture funds, and so on. As a result, the project team should have a clear idea of how much money they need to run the project and develop the project product.

All these phenomena like soft and hard caps sometimes just turning into a comedy. If we will proceed from the declared logic, then the setting of basic characteristics and ideas for the realization of the project product is a soft cap, and the development and production of a product with a full range of planned characteristics is a hard cap.

Sorry, but it works like this — we will develop an aircraft with one wing (it is soft), and with two wings it is hard. And with three wings?

Then Soft Cap is the amount that is necessary to run those components of the project, without the implementation of which, according to the developer, is a potential failure. Hard Cap is the amount that is needed to implement all the possible ideas and intentions of the developer. Then what is the product behind the project soft — hard caps?

If it can be unfinished (soft cap) and full packed (hard cap). Anarchy with the concept of the end — product of the project as a result of the implementation of the same project — it hits the product itself and the definition of what is the end — product, respectively, this also jeopardizes the unprecedented priority of the crypto/blockchain project’s founders — like the budget.

In 95% of the cases in the projects the logic is the following: we want something, it is such a big and super modern, we have such a technology here, give us some money, and we maybe give you something, and finally — we will show you Big Fish, and if you give us more money — TOTHEMOON !!!

Perhaps, all the same is possible in venture projects, where there is a certain sense in establishing a minimum and maximum of fundraising, but the core will be — if we can see and read in whitepapers the rationale budget justifications for such soft and hard caps. In fact, never seen such budget justifications at all.

In principle, today there is no clear regulation and standard for ICO and, accordingly, the standard for the preparation of project documentation. The founders may not indicate at all how they intend to spend the funds, this is their right, since no one obliges.

However, the regulators are already beginning to identify this problem in the whitepapers as a significant shortcoming and potential risk for ICO projects. In September 2017, the Financial Conduct Authority in UK (FCA) issued a warning on the risks associated with the ICO fundraising. In particular, they indicated a weak level of WP, high risks, and unclear project documentation.

This significantly reduces the level of investor confidence in ICO/IEO/STO and the evaluation of rating agencies. Regardless of how soft and hard caps are presented to investors, their designation imposes on the team some obligations and restrictions, which are mostly forgotten in the part of the budget transparency of the project.

If there is a gap between the indicators of a soft and hard cap, then most likely it means that the founders and the project team:

• By any methods they want to collect at least some money
• Have no idea how much money is required to implement the project. Consequently, they have no business plan and development strategies. No any budget!
• In this case it is not a startup project — but the scam hype!

It should be understood that if they declare $1 million to create the product of the project, but at the same time they do not refuse $1 billion, then nobody seriously is thinking about the product and the budget for its implementation.

Hence, the misunderstanding in many venture projects of the importance of presenting a detailed budget. The budget is the most important part of the project. It is not always necessary to describe in detail the existing problem, not all investors will be meticulously interested in the methods and technological processes that you applying, but the budget interests a lot of them.

The effective way to plan is to start from the activities envisaged and then move to budget them, through a three-step system of budget monitoring.
It is vital that projects start to consider financial issues from the beginning.

Even though an estimation of the funds potentially available can be an important factor in defining the scope of the project, experience has shown however that saving time on proper budgeting almost always results in tensions with the program management.

Finance staff needs to be aware of such practices and develop an application, assessment, and monitoring procedures that keep them to a minimum. The more effective way to plan is to start from the activities envisaged and then move to budget them.

And there is a three-step process that should provide the right level of accuracy:

  • Resource Planning
  • Cost Estimation
  • Cost Budgeting

These steps form the basis for cost control once the project is operational.

Resource Planning consists of:

  • identification of the objectives and sub-objectives of the project;
  • defining the work packages and determining how the project objectives will be achieved, by whom and what physical resources (people, equipment, material, etc) will be needed;
  • defining a time plan with milestones;
  • identifying the additional tasks required for the effective cooperation of the partnership followed by allocation of the resources to the partners who will incur these costs.

Cost Estimating consists of:

  • developing an approximation of the costs of the resources needed to complete the project activities. Whereas some costs are reasonably easy to calculate (e.g. cost of staff ), others are more difficult to estimate at the start (for instance when they are based on a preparatory work / research to be carried out as part of the same project) and is better to define a realistic maximum price for the activity;
  • aggregating the “bottom-up” estimate costs of individual activities to get the total estimated amount.

Cost Budgeting consists of:

  • re-organising the information gathered so far (main activities, the estimated start and end dates, the approximate resources (budget) required) into the main categories of expenditure according to the structure of the budget template — the budget headings, lines and sub-lines;
  • scheduling the project and allocating resources per individual activities and partners. The schedule includes planned start and end expected finish dates for the components of the project to which costs have been allocated.

Different venture funds and private investors make different requirements for budgeting and can ask additional questions to which the team should be prepared in advance.

Therefore, if the project team has the main goal — to implement the project with the help of collected funds, it is worth paying attention to an example of a budget that will satisfy most organizations and with little changes can be used for public.

The classical budget consists of three main areas:
• Salary
• The main direct costs
• Indirect costs

When planning a budget, it is useful not to forget about “Goals and Tasks” and “Methods” to develop a suitable plan. It is necessary to take into account all the details on what you will spend money (resources), as well as the main factors that affect the costs.

Before you begin to distribute money by budget line items, carefully review the tax laws and the specifics of financial statements that are acceptable in the jurisdiction of conducting your fundraising or the location of the main office of the project, so as not to be in a situation where half of the revenue you receive will go to unforeseen taxes and payments. Here it is worth working with your lawyer and accountant.

Here is an indicative list of the minimum items of budget costs and the required resources:

• Human resources: staff workers, experts involved, consultants, contracts with other organizations
• Wages: salary, cost of contract services, taxes, insurance, take into account the inflation
• Administrative costs — office: payment of rent (purchase), communal payments, insurance
• Administrative costs — Other costs: expenses for office operations, consumables — office supplies, rent of vehicles, other unforeseen expenses
• Travel and transport costs: the price of tickets for airplane, train, etc., per diem, the price of accommodation in hotels, take into account the inflation level (after all, the team will carry out marketing and PR programs for events that need to be present)
• Equipment and infrastructure costs: the price of a unit of necessary equipment for the implementation of the project, the price of consumables, insurance and guarantees, other expenses
• Other costs: marketing, PR and advertising company, community building costs, legal support for the project and office, costs for compliance monitoring, costs for possible printing products, other unforeseen costs

All of the above items of expenditure are included in direct costs. As for the indirect — we refer to the indirect “costs that are difficult to relate to any particular activity or project, but, nevertheless, necessary for the normal functioning of the organization and the successful performance of its tasks”.

Also, as a rule, specific organizations determine their own level of overhead costs as a percentage of the total wage fund or from all direct costs — this should not be forgotten. Well, it’s important not to forget about contingency as well. There are two types — for unforeseen circumstances and managerial reserves. The size of the contingencies is extremely individual for each project and organization. Many factors — and the maturity of risk management, and the quality of assessments and forecasts, and the level of project managers and teams, as well as the allowable for each particular venture fund the percentage of contingency in the budget. They are also very practical when their goal is not to “wash out” of the project all the revenues and cash at the end of the period.

From the point of view of documentation, the total budget planning for the project is as follows:

  • Estimates of the costs received on the basis of the Project harmonograms - that giving us an understanding of the detailed cost of the project for operations and work packages
  • The project budget, which includes the budget of costs, project financing requirements and contingencies
  • When working on a budget, it is necessary to be guided by the standards of PMBOK and ISO21500. This is of course in ideal. However, the perspectives for the ICO/IEO/STO will be significant if the teams using it will strive to improve the quality of the material presented to investors (venture, non accredited, accredited). The secrets and non-transparency of the budget planning process will not give the potential for increasing interest in such an alternative investment instruments as the ICO/IEO/STO.

Sergiy Golubyev (Сергей Голубев)

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