Max Torres from Taco3 Ventures on Web3 Fundraising

[00:00:00] Max Torres: When you're comparing web3 to web2, just keep in mind that not every single web3 company has a token or needs a token, and so ultimately, the same concepts that apply in web2 need to be ported over to web3.

[00:00:12] Max Torres: However, you know, in web3, because you are now dealing with crypto networks, you're dealing in a role that's more interoperable.

[00:00:19] Max Torres: You're dealing in a role that has both decentralized and centralized players.

[00:00:23] Max Torres: You're dealing with community versus just having your private partners, which would be the investors and family and friends and everything.

[00:00:30] Max Torres: And so these are some of the nuances of including the token in the mix.

[00:00:34] Max Torres: But for the most part, if you are a finance person helping out with some of these founders, you really need to

[00:00:39] Max Torres: always put on that hat of how can this be sustainable? 

[00:00:42] Umar: Max, what is a token warrant or token side letter, and how is it used for token fundraising? 

[00:00:48] Max Torres: When we're talking about the token side letter, what that means is like if you in the future launch a token,

[00:00:54] Max Torres: we wanna have some of that economic upside.

[00:00:56] Max Torres: In other words, we wanna have an allocation of that token.

[00:00:59] Max Torres: And so ultimately, what that token warrant does, is just protects investors if the team ends up launching a token so they can get that upside from that token. 

[00:01:09] Umar: Welcome to The Accountant Quits podcast, where we help accounting and finance professionals learn how to manage a business using crypto.

[00:01:17] Umar: Max Torres is the Managing Partner at Taco3 Ventures, supporting early stage crypto startups and founders with their fundraising, token economics, treasury management, and Go-to Market strategy.

[00:01:30] Umar: Previously Max was the Head of Finance at 0x Labs where he helped raise $85million across series A and series B and built their long-term financial model.

[00:01:41] Umar: In this episode with Max, we'll unpack what fundraising readiness really means in web3, the difference between a SAFE with a token side letter and a SAFT,

[00:01:51] Umar: how founders should prepare and close their raise, when launchpads make sense, the core pillars of token economics and much more.

[00:02:03] Umar: Lastly, if you're new to this channel, make sure to like this video and subscribe. It really helps the channel grow and spread our message to more finance professionals.

[00:02:12] Umar: Now enjoy my conversation with Max. 

[00:02:19] Umar: Max, welcome to the show and thanks for making the time to be here. 

[00:02:24] Max Torres: Thank you, Umar. Appreciate it. 

[00:02:26] Umar: So to start, can you share a little bit more about your background and experience working in web3 and how those six years has shaped your view on fundraising? 

[00:02:36] Max Torres: Sure. I just wanna get started by saying that I actually grew up Menlo Park and for those of you that know, Menlo Park is the heart of Silicon Valley.

[00:02:44] Max Torres: And so growing up here tech was a deep part of who I was. I loved building computers and everything, but just fast forward a little bit.

[00:02:53] Max Torres: Graduated from University of San Francisco and went straight into doing what is called financial planning analysis. So basically doing the forecasting and budgeting for different companies.

[00:03:01] Max Torres: So you can think of doing like the long range planning three to five years, and then that's more of like the strategic side. Then moving down to doing the annual budgeting and then having like monthly forecast check-ins.

[00:03:13] Max Torres: Also just to state, basically FP&A also serves as kind of like the in-between finance and also the business. And so you can think of this as like a finance business partner type of role. So that's what I did for about eight years. Started off at TIBCO Software then went off to a hardware ASICs company called eSilicon in San Jose.

[00:03:33] Max Torres: Then went to Riverbed, which is primarily actually an in between hardware and software. And so got to see the different P&Ls that exist in the balance sheets that existed across different tech fields.

[00:03:42] Max Torres: After about eight years of doing this I just decided that I wanted to figure out what was like the next step, I would find very meaningful.

[00:03:49] Max Torres: And so what I did in 2018 was in a good way, quit my corporate job and bought a one-way flight to travel the world for a year. And ended up going through Europe and then I just ended up in the Middle East. So when I was in the Middle East, I realized I saw that some of my friends' bank accounts were getting frozen, and I'm like, whoa, that's weird.

[00:04:09] Max Torres: Like, how can you all of a sudden like freeze a bank account? And then I witnessed like funds going missing and everything and I'm like you know what? I'm talking about like in the startup ecosystem that I was helping out, I, there was some funds that went missing. I was like, what is this?

[00:04:23] Max Torres: And so I wanted to focus on something that would really change up the way that finance works. And so as I was doing my research, to me that came across as crypto networks.

[00:04:33] Max Torres: That was going through like the seeing how Ethereum worked and how smart contracts work and how you can make things programmable.

[00:04:40] Max Torres: And I wanted to be a part of this. And I continued traveling. This was a little over 12 months after, after doing this trip and I found a team in Poland that is called ZeroEx Foundation, that was working on the layer one. And so this was my introduction into crypto. Was there for about three months full time, but then I went more into an advisory position.

[00:05:01] Max Torres: I went to Berlin and met someone who became my co-founder for a DeFi startup. Really I was a rookie back then and we launched something that only lasted for about five months.

[00:05:12] Max Torres: After that 0x actually recruited me and so I joined the 0x team as their first finance person, full-time finance person.

[00:05:19] Max Torres: And so at 0x in addition to doing the fundraising it was really just getting deeply immersed in the world of web3. The difference in GoTo markets and web3 also finding PMF, we were in a really sweet spot that we just we had tremendous talent, tremendous network.

[00:05:38] Max Torres: We had great traction , when the 0x API launched. And so this all led to actually doing the fundraising. And so that's when the $50 million fundraise came with Pantera as a lead. Fast forward a little bit.

[00:05:50] Max Torres: We also raised another $70 million with a Greylock partner as a lead.

[00:05:55] Max Torres: And so this was like the immersion in both on what needs to be done well in order for you to successfully fundraise.

[00:06:03] Max Torres: And then also what is that process of fundraising like? Over the next three years, I've just been primarily focused on doing angel investments as well as advisory and been helping founders in the pre-seed and seed stages to close out the rounds.

[00:06:17] Max Torres: But once again, there's a lot of groundwork that comes into play. And clearly that's what I would say is a team effort of solving problems. 

[00:06:25] Umar: So you mentioned 0x. Just very quickly, for people who are not familiar with what 0x does, could you share briefly what they do? 

[00:06:34] Max Torres: Yeah, sure. So 0x started as a swap protocol, and ultimately you can think of when we talk about decentralized exchanges, you need a fundamentally something to swap things.

[00:06:44] Max Torres: So from pool to pool. And then what 0x has become now is more of a liquidity aggregator. So looking at different DEXs and finding you the best price for the swap. And so ultimately what they are today it's a price aggregator for doing swaps in crypto. 

[00:07:02] Umar: Very cool. Thanks for sharing.

[00:07:03] Umar: Now, the meat of the episode today is around fundraising. So to start, I want to ask you if you compare fundraising in web2 versus web3, what are some of the differences that founders need to understand even before they start to think about pitch decks, their token economics design, which is of course not applicable to all web3 projects.

[00:07:26] Umar: So what does fundraising readiness actually mean in web3? 

[00:07:31] Max Torres: Yeah, so I think to call it out like the key difference between web3 and web2 is the existence of a token and just to give a quick, high level overview, it is an economic part of basically your business or what you're building.

[00:07:45] Max Torres: And so when you're comparing web3 to web2, just keep in mind that not every single web3 company has a token or needs a token. And I typically don't like to make that specific difference of web3 versus web2 because from a finance standpoint, everything that you're doing needs to be sustainable.

[00:08:03] Max Torres: And so ultimately, the same concepts that apply in web2 need to be ported over to web3. However in web3, I guess what is, what needs to be called out is because you are now dealing with crypto networks, you're dealing in a role that's more interoperable. You're dealing in a role that has both decentralized and centralized players.

[00:08:22] Max Torres: You're dealing with community versus also just having your private partners, which would be the investors and family and friends and everything. And so these are some of the nuances of including the token in the mix, but for the most part, if you are a finance person working for one, helping out some of these founders, you really need to always put on that hat of how can this be sustainable?

[00:08:43] Max Torres: And it's really just going through the motions, especially in the early stages of problem solving. In other words, the problem, the solution and so on and then from the finance perspective, ensuring that the economics work and so ultimately it's, the economics don't need to work right away, but you can help founders develop that plan that leads to economic sustainability in the future.

[00:09:06] Umar: So the next part I want to go through the different fundraising options. So equity versus token and over the past few years there are two documents that have really become the backbone of fundraising for web3 companies, which is the SAFE in conjunction with the token side letter where the investors, they would receive future equity and a contractual right to purchase tokens later and the  SAFT, which is purely just a token based investment agreement.

[00:09:34] Umar: So with the SAFE and the token side letter, the token allocation would be proportional to the investors' equity allocation. It doesn't replace equity. It's basically just a complimentary right that sits alongside it.

[00:09:48] Umar: So can you walk us through how a token side letter actually works in practice and how it ties into a SAFE and then contrast it with how SAFT agreements are being used today. 

[00:09:59] Max Torres: Yeah, sure. I think in a nutshell. Basically the SAFE, there's a lot of information out there, I think that came up through the Y Combinator program.

[00:10:07] Max Torres: And so ultimately, the SAFE actually has equity as the last letter and that is purely for the purposes of doing your pre-seed round or family and friends, to be able to raise capital on future equity basically. 

[00:10:21] Max Torres: And then what the SAFT is, it's very similar, not word for word.

[00:10:27] Max Torres: There's also, I think a lot of content on the specifics of the  SAFT, but it's also to help you with the  pre-seed with the early stages of fundraising in order to raise on a token and so now you have the SAFE that's for equity raising and then you have the  SAFT, which is for token raising.

[00:10:41] Max Torres: Now, on the other hand what has happened is a lot of founders that have raised with the SAFE ended up launching a token and so ultimately, when we're talking about the token side letter, what that means is like if you in the future launch a token, we wanna have some of that economic upside.

[00:10:58] Max Torres: In other words, we wanna have an allocation of that token and so ultimately what that token warrant does is just protects investors if the team ends up launching a token so they can get that upside from that token.

[00:11:11] Umar: So, Liquifi the company that's been acquired by Coinbase this year, the token vesting platform, they've got a lot of good articles on their website and they have this great breakdown that compares three different methods web3 teams use to manage prorata rights of the token supply, which are company allocation method, the fully diluted supply method and the conversion rate method.

[00:11:33] Umar: I wanna ask you if you can, for the listeners, describe a little bit more, what these methods actually entail and how should founders choose a specific one during their fundraising negotiations? 

[00:11:45] Max Torres: Yeah, that's a good question. I just to start with fully diluted, it basically means that if you give out like 10% equity, you ultimately give also 10% of the token supply.

[00:11:54] Max Torres: Now, the allocation method, this one is an allocation of the token supply that's dedicated specifically to investors, which if you look at Liquifi articles, it's typically 10 to 20% based on historicals. And so ultimately it's saying that out of this 10 to 20%, you're gonna give out a certain percentage to your investors and you give, and through those allocations you give to investors.

[00:12:14] Max Torres: Then the other method is that if you give out equity then and if this is the conversion method there is some stipulation that they can convert that equity into tokens, and that makes sense for projects that ultimately did start an equity project, but ultimately they wanna launch a token and they wanna focus all their value accrual in the token that's where that makes sense.

[00:12:34] Max Torres: But now I guess the main nuance here is how founders choose. Ultimately it's not the founders that are able to choose. It is the lead investor that actually dictates what those terms are. And so ultimately through the fundraising process, if you only have one term sheet, you have one lead investor to negotiate with.

[00:12:53] Max Torres: It's the lead investor that kind of determines what those terms are. However, the way to arm founders with some type of ammunition to be able to better negotiate these terms that is more favorable is by having comparables and comparables is by looking at other projects that have raised funds and understand the nuances of the terms.

[00:13:12] Max Torres: And this stuff is not publicly available. So it really means that these founders need to network with other founders to be able to discern some of that information. 

[00:13:21] Max Torres: And so on the other hand, just going back to some of the conceptual basics of token economics, you don't wanna be in a situation where you give out like a huge chunk of your token supply to investors.

[00:13:32] Max Torres: And so going back to the Liquifi articles, and keep in mind that 10 to 20% is typically allocated to investors. You kinda wanna play with those parameters, right? So what I'm saying is that it's not necessarily choosing, it is dictated by the lead investor, but there is ways to negotiate your way into by looking at comparables and seeing how the market typically structures this in order to best negotiate, what those terms are, just to make sure that you're not in the spot where you're shooting yourself in the foot.

[00:13:59] Umar: Yeah. Right. Now I wanna proceed with the fundraising part about the preparation phase. There's this famous quote from Paul Graham, the Co-founder at Y Combinator, who said, raising money is the second hardest part of starting a startup and the first one obviously making something that people want.

[00:14:19] Umar: For our discussion, we are focusing on the second one being fundraising and I wanna ask you, if a web3 founder tells you, Hey, I'm getting ready to raise, what are maybe the five things you would expect them to have sorted out even before they speak to a single investor?

[00:14:37] Max Torres: Yeah. I wouldn't just label out five different things, but I would want to go back to the sustainability aspect. So web2 web3, from this standpoint, to me there's really no difference. It's going back to solving a main problem. So problem solution, like what is the way that you're gonna be going to market to be able to solve the problems that exist for different users.

[00:14:59] Max Torres: And that involves going through the PMF process, surveying folks and so ultimately it's just going through thinking of things as creating a business and going through the motions of creating that business. Also just what's really important is there needs to be extreme clarity there especially because we're talking about like the pre-seed at early stages of the company.

[00:15:21] Max Torres: There needs to be a strong team that can like showcase to investors that, hey, this is the team that really can bring this to the next level and so ultimately by being able to go through the motions of what's typically what's what you see in the pitch deck, and solve all those different components to build out a story that this is the team that can take things up to the next level.

[00:15:45] Max Torres: And you have some type of lead or rather the CEO that can sell this vision with all the different parts. I think that's like the key thing. However, in addition to that having numbers to be able to back all this up is also super important and so what I mean by numbers is like traction.

[00:16:04] Max Torres: The founder hasn't, the team hasn't launched their MVP yet, but there's ways to figure out whether there's gonna be some type of demand, and that can be done through, signups, that can be done through talking to users and so on and I guess what I'm trying to get to is way before even thinking of fundraising, these things need to happen, which is basically going through the motions of your business plan and being able to solve a real problem.

[00:16:29] Umar: Do you want to go a little bit more maybe on the token aspect of it, if the project has like a token and maybe some of the metrics they would want to gauge like an at an early stage. 

[00:16:40] Max Torres: Some of the key metrics especially on the early stage, would be like the number of users, ideally these would be the number of users that will be paying for whatever your product or platform is.

[00:16:51] Max Torres: If there is a token component, as you're getting close to fundraising readiness, that does add some level of complexity.

[00:16:57] Max Torres: You need to work through the different parts of the token economics, which I'm happy to get in further. But the part of token economics that is not discussed typically is also the liquidity aspect.

[00:17:09] Max Torres: For example, if you're gonna launch a token, ultimately you need to figure out what is the capital that you need for that purpose through your budgeting process. But also, who is gonna be doing the market making? How are you gonna bring this token into the market?

[00:17:23] Max Torres: There's different ways. There's, you work with the market maker or you can set up two-sided decks and those are more of the complexities. Then also ensuring you work through proper allocations where you do the allocations of your token project in a way that is long-term sustainable.

[00:17:40] Max Torres: And once again, I just wanna reference that the Liquifi articles are great in terms of putting together a lot of those historical numbers as to what those allocations have been. 

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[00:19:29] Umar: Alright, so you mentioned Token Economics. We can dive a little bit deeper into that topic. You've written a great article on your Substack account, that details like the project's token design, where in that article you list the five core pillars every founder needs to understand around their token supply, vesting and unlock, their float strategy, utility of the token and allocations to the team, investors and advisors.

[00:19:57] Umar: So I want to ask you if you can maybe provide like a practical takeaway on each of them, and if possible, highlight a good, bad examples of token economics for each of these core pillars.

[00:20:10] Max Torres: So ultimately, one thing about token economics is it all depends. There is no best type of token economics for project. So it, it depends and should adapt to what is being done by that project. But just to go over some of those five core pillars, number one, it's the supply.

[00:20:28] Max Torres: And so ultimately it's like determining what's the number of tokens that you have out there. A lot of folks give supply references that are like Bitcoin, just because Bitcoin's OG out there. So that's 20 million tokens. But others are like, because our token project is gonna serve a billion users, we wanna have at least a billion tokens.

[00:20:48] Max Torres: Supply really should align with the purpose of your project. Now, there's also the ability to make it a fixed token supply, inflationary or a burn mechanism. And I just wanna bring up something, an example that is Solana.

[00:21:02] Max Torres: Solana, started off with specific supply at the very beginning, but evolved over time. And so the point is that should evolve with your network adoption, right? The other part of token economics is also the allocations. And so I think the allocations are very important.

[00:21:19] Max Torres: In particular, depending on like the image that you're trying to present. Are you gonna be a centralized project? If you're gearing towards the centralized approach, then clearly your allocations are gonna be more insider focused versus community focused. If you are geared towards more of the decentralized approach, your token economics in terms of allocations would be more geared towards a community allocation versus the insider's allocation.

[00:21:45] Max Torres: Then another component of it is also low float versus high float strategy and I just wanna give a few references. What have been high float projects? Well, those are typically like the meme coins that launch, what have been low float projects. Well, that's when investors get involved and so once again, it just depends on your project.

[00:22:02] Max Torres: If and the reason why, low float is where investors get involved. And just explain a little more about what low and high float is. It's the starting allocation of your tokens that are in the market at the very beginning. And , when you have VCs involved and investors involved, typically you have what is a vesting schedule, which is another component of this.

[00:22:20] Max Torres: And that vesting schedule will determine how many tokens are in the market. If it's a low float, then that circulating supply of tokens will be particularly low in the very beginning and over time you'll be unlocking more tokens as you go through time. And so the reason why that exists is because a lot of the legal stipulations of bringing in investors at the very beginning determine that you need to unlock their tokens over time.

[00:22:44] Max Torres: And there's also regulatory reasons why that's done. For example, if you bring an investor, I think in the US those investors need at least a one year unlock period. In addition to that the other component, the other part of the pillar is the vesting schedules and how you're gonna be unlocking tokens over time.

[00:23:01] Umar: Great. So before we go through the final part of this around closing the deal, can you walk us through the actual process of fundraising and maybe what founders sometimes get wrong? 

[00:23:12] Max Torres: Sure. So assuming you've gone through the motions of you have a specific problem that you're solving, the product or platform is showcasing that there's demand and that you have a solid team that's backing this and now you're ready to do the fundraising.

[00:23:25] Max Torres: There is a playbook, keep in mind that this is all relationship space. So before you even do fundraising, the founder should be already doing tons of networking. And there's a saying that says that your network is your net worth.

[00:23:39] Max Torres: Well, that is so true. That is so true in so many things in life as well as fundraising. And highly recommend that. But in terms of actual prep work to do the fundraising. It really comes down to a, you wanna put together your pitch deck. I think that is super important. Keep in mind that your pitch deck is going to evolve.

[00:23:59] Max Torres: And having the velocity of being able to evolve that pitch deck based on feedback is super important. Also, you'll be asked for other aspects, which typically go into what is called the data room. This can be your traction. This can be like, any type of partners that you've closed, any specific promises in writing, those will help.

[00:24:18] Max Torres: But just keep in mind that from a data room standpoint, especially in the early stages, it's gonna be more based on ad hoc work. And so as you get further requests through your fundraising process, then you just update it as you go. So what's the utmost point? I do think is the pitch deck.

[00:24:34] Max Torres: On the other hand, you also wanna map out the investors that you wanna outreach to. So what this is an exercise. You can use Messari Pro or there's other tools online where you can get the latest deals that have been closed. And I would, recommend to filter your vertical within the vertical that you want to fundraise in and figure out what are the active investors that have been deploying capital? And keep in mind that some of these might be competitors that have been invested in, but it's also, it might be worth an outreach. So make your list of an investors based on fundraising data.

[00:25:06] Max Torres: And then from there figure out like who within your network you can contact for warm intro. So this goes back to having already done your motions of getting these of networking and everything. Because the pitch deck is gonna be evolving through this process as a next step what needs to be done is that you'd want to target your lowest risk investors.

[00:25:27] Max Torres: In other words, the ones that might be friends and family, or that might be angels and you wanna target them first and then work through your investor list going from the whatever you rate as lowest priority to the first priority layer later in the process. The idea also is to stack these meetings up within a timeframe of two to three weeks, and the rationale behind it is you want to create as many points of contact as possible through this fundraising process to ideally create some type of FOMO around the fundraise.

[00:26:00] Max Torres: Because you're targeting the angels and the lower tier investors first, definitely wanna get their feedback and definitely want to adopt the pitch deck as you go through the motions of it. And so ultimately, if done right and just noting that fundraising is a difficult process.

[00:26:17] Max Torres: In other words, by difficulty the chances of getting of closing if you go through this and you get to the term sheet staged and great. If not, you definitely want to reassess, what are the parts of the business plan that I have that kind of need to evolve further?

[00:26:33] Max Torres: And so all I'm saying is that this might be a success, but keep in mind that fundraising is hard. And if it does not lead to success it's really important to ask the questions as to like why investors did not decide to go into it. 

[00:26:46] Umar: Are there some platforms that come to mind that founders could use for getting these fundraising data or insights like maybe Messari Pro for example?

[00:26:57] Max Torres: Yeah. I think in terms of getting fundraising data, Messari Pro is great, but also, I think what's important as well is as you go into this fundraising process. You also wanna understand like how much equity you're gonna give up or tokens you're gonna give up. I think your best resource there is going to Carta and seeing the comparables of they have a great map of in a pre-seed stage, this is the amount of equity that this percentile gives out.

[00:27:23] Max Torres: And so from there, you can better justify like what type of equity is gonna be given out. And I am talking through the lens of the founder mostly in this conversation, but keep in mind that, as the finance person, your tactical support, like this is the best part for you to be able to do tactical support and best judge what the valuation is based on the data.

[00:27:45] Max Torres: Also, what's the equity to be given out as well as the token allocation to be given out. Now in terms of token allocations, I think the best resource out there is the Liquifi reports that specifically highlight, how much has been given out.

[00:27:58] Max Torres: And then, talking to peers is another important thing to do. Other founders that have raised. 

[00:28:03] Umar: Yeah, I agree. Now, the last part of the fundraising playbook is around closing the deal. So the founder has now spoken to a lot of different investors. They're getting a lot of interest. How should they now think about getting commitments in writing fast and having all their SAFTs, SAFEs in place?

[00:28:23] Umar: And basically what I want to ask is what mistakes you've seen founders doing around closing the deal. 

[00:28:29] Max Torres: Yeah, sure. So I wanna start off with first, what is the closing playbook. Ideally you want to have close with lead investor and however, just wanna nuance this, that in the pre-seed stage, there's some founders that have not have just decided to raise from purely from angels.

[00:28:46] Max Torres: And that's okay. But what needs to happen is that there needs to be like some type of centralized source of what the terms of the raise are, and that can be seen through the SAFE or the SAFT and as mentioned before, the SAFE typically will have a token warrant component to it. And so the idea is to make this very standard for everyone.

[00:29:04] Max Torres: And there is platforms that help you with closing this out. I forget the ones that help out with SAFT, but I know like Carta has a tool that helps you send this out to your investors, and typically that's much, much better because it's better user experience for the investor to be able to close it out.

[00:29:20] Max Torres: And that works very well, especially if you have just a bunch of participants and going back to what if you close it with specifically a lead investor, keep in mind that lead investor will be determining kind of the terms that apply to everyone. And sometimes there might be a situation where you had angels that came in at different terms. And so as a founder, you need to make a decision to whether you're gonna level out the angels with kind of the VC investor. No financial advice here, but just keep in mind that relationships matter a lot and definitely want to take care of people that have supported you in your journey of fundraising.

[00:29:56] Max Torres: So assuming the lead investor comes in there's also the part that you want to do, follow on investors, and that is just a matter of following up, to anyone that has said that they want to invest as well as a follow on and just making, ensuring that you close that out as soon as possible.

[00:30:13] Max Torres: And when I say close that out, actually send a nice letter, a nice email, send the closing documents to folks and ultimately you need to collect the cash. If you haven't collected the cash, then you have to close your route.

[00:30:25] Max Torres: Now in terms of some things that like problems that might arise from this process? I think it's just organization. And so ultimately it's what we just talked about is like the best case scenario, but it's just you wanna be organized and you wanna be as fast as possible in terms of closing these things out.

[00:30:43] Max Torres: And just keep in mind that time is of the essence and the more time you let go, the less time you have to dedicate to business priorities. And yeah, I would just say that those founders that are a bit disorganized, they'll just have a harder time to close things out.

[00:30:57] Max Torres: And there's obviously an opportunity cost with dedicating your time to just fundraising and not the business.

[00:31:04] Umar: Now I want to move on to launchpads and using launchpad as a fundraising tool.

[00:31:10] Umar: So they often marketed as fundraising tools, launchpad, but in reality some would say they're more about visibility rather than capital formation. So from your experience, how should founders think about using launchpads as part of a fundraising strategy. Do they genuinely add value? Maybe yes, in terms of community building, access to different investors, market validation.

[00:31:36] Umar: And when would you say they're just a distraction from the fundamentals that you spoke of earlier? Like product market fit and early traction? 

[00:31:47] Max Torres: Yeah, I think for launchpads there should be a thoughtful rationale behind, like why you choose launchpad. And just to be very specific, launchpads are not gonna solve your fundraising.

[00:31:58] Max Torres: In other words, if you get listed on launchpad, doesn't necessarily mean that you're gonna raise capital for your project. You still need to go through the very basic motions of your business plan, of ensuring everything's in motion, the problem, the solution, the go to market, the traction, the team.

[00:32:15] Max Torres: Like all those things need to be solid, before listing to launchpads. And so I guess the other thing is some launchpads do charge you to list on them. And just be mindful of the budget allocation to this specific purpose. And that can be done in two ways. One, it can be like an upfront cash fee, and the other one can be literally a percentage of your token supply.

[00:32:39] Max Torres: And so now moving into some of maybe the pros and the cons of launchpads, I think one of the pros is that, once as assuming that you've gone through your motions of the business plan and everything, and you've decided that a launchpad is the route you wanna go a launchpad can help you with distribution.

[00:32:58] Max Torres: And so basically, if that launchpad has a user base that it makes a lot of sense for your product or your platform, then, that might be a great choice. If the project wants to have a deep decentralization focus, they might want to choose a launchpad because it is the best way to access a new community.

[00:33:18] Max Torres: And I would say the reasons of the launchpad start to not become fundraising so much, but rather it becomes the kind of like the ideology of the project, right? Some of the cons of a launchpad is as mentioned before, it's not your, ultimate solution for fundraising.

[00:33:35] Max Torres: Also there's fees involved. Obviously everyone needs to have their own business model, and be mindful of the budget that you wanna allocate for it and the ROI that you're gonna be getting from that and then on the other hand yeah in general, like the launchpad should definitely be a part of your overall just project strategy.

[00:33:54] Max Torres: And this goes beyond obviously the financial strategy 'cause if it were just financial, like clearly I'd want to probably lock in funds from whoever would give me the most ROI. And then you have other things, whenever you build out a community, you have community management, which is in itself an interesting area with governance and all.

[00:34:13] Umar: Yeah. Now, in October of this year, Coinbase acquired Echo. Echo is an onchain capital raising platform for approximately $375million. Now, the elevator pitch behind Echo is that founders the struggle to raise capital and individual investors don't have the opportunity to invest in private token sales.

[00:34:34] Umar: So Echo solves this by allowing project to directly raise from the community, what you alluded to with launchpads. Now I wanna ask you, what are your thoughts on this acquisition and maybe a more general one on the future of fundraising for web3 founders. 

[00:34:50] Max Torres: Yeah, I think, being in crypto, if you look at the evolution of token raises, you start off with kind of the ICOs, then you went off into this, world where you have DeFi farming and anyways, there's always been some mining and everything.

[00:35:06] Max Torres: There's always been some form of raising capital right, using a token. And so ultimately, as it relates to launchpads. Like they're a great tool. They're a way to, it's a new method. It's a novel way to do capital formation. So that is pretty cool, I think. However, that should not distract teams from focusing on the fundamentals, right? It should just be that strategic lever as to what's the rationale behind using launchpad? Is it that I wanna be more decentralized and this is my method of distributing the token and also having users that use my product or platform and so on.

[00:35:40] Max Torres: And so ultimately, I'm just saying that, the fundamentals I do think matter the most. And launchpads are a great novel way of being able to raise capital, but at the end of the day, you gotta focus on what you're building and ensuring that you're solving a real problem.

[00:35:55] Umar: What do you think about Coinbase now having, obviously they're known for their exchange, but now they also have platform for oncapital formation like Echo. On token vesting like Liquifi. They also have their Layer2. What do you think that means for a player like Coinbase? 

[00:36:15] Max Torres: So, at least for Coinbase, I think they're really playing in the future of capital formation.

[00:36:19] Max Torres: And I think they're gonna, they're likely well positioned to be some of the first to offer, tokenized equity as an example right in a legal way. And if they're able to become the regulatory body in the US that can offer this novel, this new way of doing capital formation, they're clearly a first mover.

[00:36:38] Max Torres: And, this is definitely the way that things should be going. We always want to find going back to the reason why I think we're most of us are in crypto in the first place is to redo the way that finance works. And so this is redoing the way that finance works.

[00:36:53] Max Torres: And I certainly want to see how this evolves over time. And I certainly wanna see more projects utilize these launchpads and tools in order to make their financial infrastructure more efficient. And yeah, we'll see what that leads. 

[00:37:07] Umar: Great. Max. So we've been talking a lot around fundraising.

[00:37:11] Umar: Now I want to move on to your practice. Taco3 Ventures where you are advising early stage web3 projects on their token design, fundraising, like we've been talking to, their go-to-market strategies. Can you provide an overview of these services that you're providing and maybe the timeframe you would normally work with a project?

[00:37:34] Max Torres: Yeah, so at Taco3 Ventures which I've been working on for the last six years, that's primarily where I help founders that are in their early stages, specifically fill in gaps in with respect to finance and operations. These engagements are typically long term and the idea is to support founders that ultimately would not have that type of background. So some of the key areas where I've really enjoyed supporting founders is on token economics. As well as putting together the fun, like really create a nuanced fundraising playbook and helping bridge any gaps.

[00:38:09] Max Torres: Whether that's like on their network and perhaps they want to expand their network or such. But also just I think the funnest component of doing these advisories is creating something from a scrappy team and building cool stuff that is really solving problems that we just haven't really been thinking about.

[00:38:27] Umar: And would you still accompany them, let's say after the fundraising is done? Would you still be helping them to, probably at this stage now to set up like a proper finance team or with the other internal accounting operations task? 

[00:38:42] Max Torres: Yeah. And it's definitely helping set up like the functions of finance specifically.

[00:38:48] Max Torres: It is helping understand like what type of accounting is needed to meet, their jurisdictions tax authority filings and such getting that set up and then also doing the basic financial planning and ideally have helping them through the process of hiring the right type of people needed to support their project in the long run.

[00:39:07] Umar: Perfect. Now Max, for the last question for today's conversation, I wanna go through the role of the of a CFO when it comes to crypto treasury management. So as compared to the traditional CFO, not dealing with crypto, the CFO in web3, they face unique challenges that come with managing this treasury.

[00:39:26] Umar: For example, having to move yeah, treasury across multiple chains, tracking, reporting DeFi positions, risk management for investing their idle crypto assets to generate more yield. So with your years of experience managing crypto treasuries, maybe I want to ask you, what advice would you have for web3 companies looking to hire a CFO, or Controller given now these enhanced responsibilities over treasury management?

[00:39:56] Max Torres: Sure. Yeah, I think that's an interesting question, especially because it relates to introducing a token, especially for web3 startups. So in terms of hiring the CFO, it really depends on whether the token approach is gonna be your way or a non token and what that means is, if there is no token, you don't really need to have the sophisticated liquidity management of your native token and working with market makers, setting up the right type of DEX pools and everything needed to trade your token and thus you could perhaps rely on someone that has very heavy duty web2 experience that could help out.

[00:40:31] Max Torres: And I guess the next question is like, when should we bring in a CFO? Well, a full-time CFO, it's when you have closed significant funds because you definitely wanna find better ways to spend those funds that provide the most ROI and the CFO can help with that and also, you want definitely help with having your accounting, and tax side set up. However, prior to getting funding, there is some very specific things that you need to take care of, and that is like having your tax filings to the IRS. And so what does that require? That requires accounting and tax.

[00:41:05] Max Torres: And so perhaps in pre-funding prior to needing a full-time finance person, i'd definitely say to find some type of support that can handle these different things. In other words, keeping track of your books, the accounting, in other words, and actually putting together your tax filings in a way that meets the regulatory needs of wherever your jurisdiction is.

[00:41:25] Umar: I mean, for web3 startups or if there's someone listening, given that it is still a pretty early market and it's hard to find like a CFO with like crypto experience. What skills or experience would you, as a Founder, let's say, you would expect that CFO to have, even if they've never worked in a web3 environment before?

[00:41:49] Max Torres: As it relates to crypto management and when there is a token involved keep in mind that the complexity in accounting is very much related to what is called inventory management. Ultimately, from an accounting standpoint, you're tracking the ins and the out of your capital.

[00:42:04] Max Torres: And I think someone with some expertise in either cost accounting, inventory management, or those type of areas would be very helpful going into this role. On the other hand there's also liquidity management. And so someone with deep expertise in managing multiple FX is gonna be relevant when it comes to crypto because now having any crypto on the balance sheet is a multiple FX type of situation.

[00:42:31] Max Torres: And in addition to that, I think someone that has the high level ability to take all these different components, both low level and high level, and roll it up into some type of plan is important as well. And that's FP&A type of background, which I think I came from.

[00:42:46] Max Torres: So yes, I do think that finding talent and from the web2 side to bring it into the web3 is still very doable and just finding those nuances in terms of whether it's the inventory management or whether it's like multi FX management and putting that over to crypto is definitely good.

[00:43:06] Umar: Great. Thanks. Sharing, Max. Now, we've reached the end of the episode and the title for the episode today was Fundraising in Web3. As closing thoughts, has there been anything that we didn't touch on during the episode that you'd like to share with the listeners or how would you wrap up today's episode Max?

[00:43:27] Max Torres: Yeah, I think, in terms of fundraising, as a person wearing a finance hat, it's just really important to think about the sustainability of a project. And, I think that most finance folks that come to help web3 projects can ultimately provide that lens and sustainability matters.

[00:43:45] Max Torres: And I certainly wanna see more crypto projects that outlast these hype cycles. So that's what we're here for. 

[00:43:53] Umar: Now there's the last question, which I usually ask my guests before they leave Max. It's, do you have a favorite quote or like a maxim that you live by or maybe you regularly repeat to yourself?

[00:44:06] Max Torres: Yeah. Your network is your net worth? Alright. 

[00:44:10] Umar: Yeah, I completely agree. It's been true to me as well in this work that we do. Great. So if, people want to reach out to you, Max if they want to. So I saw the website is currently being revamped, but if they want to reach out to you personally, where should they do?

[00:44:27] Max Torres: My telegram is Max Torres. So at Max Torres, T-O-R-R-E-S. I think that's the best way to reach out. 

[00:44:36] Umar: Perfect, Max.. Thanks a lot for joining us today. It's been a pleasure and we'll be in touch. 

[00:44:42] Max Torres: Thanks Umar.