Blockchain-Based Financial Services: Group Company Financial Model

Background

A client from the US approached us to provide Financial Modeling and consulting services for their Blockchain business use case. With the business still in the startup phase, they needed a detailed blockchain financial model to identify how much investment they needed for the successful development and launch of the business. Moreover, another critical challenge for our financial experts was identifying the right balance between costs and price to achieve a stable and profitable business model. 

After carefully analyzing the client’s business and conducting in-depth market research, we developed a comprehensive financial model that incorporated all aspects of their business operations. This included assessing their sales volume for different types of Blockchain-based services, such as Blockchain NFT Marketplace or Blockchain Fintech use case, as well as projecting possible price fluctuations based on current market trends. 

In addition, we also provided detailed insights into the potential impact of blockchain tokenomics (crypto tokenomics) on the overall performance and growth potential of the business. Overall, our team’s expertise and tailored financial modeling approach helped this Blockchain business to successfully navigate the early stages of its development, giving them valuable insights into how they can maximize profitability and expand their reach within the growing blockchain services industry.

Along with the financial modeling services, the client also required financial advisory services to help them determine the right equity structure to offer to the investors and to determine the return the company would be able to generate.

Problem

There were several complications in this blockchain services industry project. As a starting point, this company had three separate entities with completely different revenue models. This meant that they needed three financial models and then consolidated them into one Group Company. 

Another difficulty was the company’s aim to launch its own token. They plan to use this token in their Blockchain Fintech use case services on the blockchain network. For this, we had to compute the coin price forecast (token’s value). We also had to integrate this Pre-sale crypto coin into the revenue model as a payment solution. Moreover, the client also required us to formulate the crypto tokenomics and sale structure to determine how much capital they would raise from the sale of the token. 

With reference to the model structure, the critical point was to prepare the model in a way that is completely dynamic. This feature enables the client to only update the inputs and get the corresponding results automatically. Our financial experts place this feature at the center of all of its solutions. However, this was essentially important for this project because it was one of the purposes of the model to utilize this functionality and test different inputs/assumptions to reach the most feasible solution. 

Deliverables

• 5-year forecasted financial model for each of the company’s units:
  • A Blockchain NFT Marketplace
  • A Blockchain-based Financial Service App; (Locations: USA, Columbia, Argentina, Panama) 
  • A Crypto Exchange – Financial Assets Exchange Company
• 5-year forecasts for the Company’s token, along with the Initial Coin Offering Sale schedule
  • Coin Price Forecast involved
• Consolidated Financials of the Parent Company
• Financial Analysis of all company unit’s individually and for the group company
• Company Valuation of each Company to determine each unit’s individual and collective worth
• Evaluation of total investment required by the group company to finance the subsidiaries/units.
• Equity Table based on the Company’s Equity Plan. 
• Evaluate how much return the investors can expect with the equity they receive for their investment

Solution

Market Research and Market Validation

Background research is a basic part of starting the financial analysis. It is important to know the general working of a business before getting into the specifics. Hence, the first step is always to research what kind of revenue and cost structure a business can have. Knowing all the options helps in preparing the best possible solution with reference to the client’s needs and market opportunities available.

As we said before, this project required extra work. This company was a Group Company consisting of 3 separate units with completely different service offerings. Moreover, there was no data available to start the forecasting process because the company had not begun its operations yet. Whenever dealing with a situation like this where there is no data to start things off, the next step after the initial research about the businesses is market validation.

In the Market Validation process, we carry out overall research specific to the service or business in question. Hence we also determined the Total Addressable Market, Service Available Market, and Service Obtainable Market numbers. 

In the case of this project, we had to expand our research scope to 4 countries where the client was aiming to initially focus their services. Along with potential customers, we also identified the latest transaction volumes in these countries, considering we had to prepare a revenue model for a Financial Services unit as well. The growth rates play a very important role in forecasting methods as it helps in extrapolating the available data to evaluate future numbers. Hence, we studied the latest industry reports to extract not only the total industry revenue but also the growth rates expected for the future.

Input Assumptions

To formulate a dynamic financial model, the input sheet plays a critical role. The input sheet should have all the required input tables that are required to drive all the calculations of a complete financial model. To prepare financial statements for 3 units along with the statements for the Group Company, we divided the input sheet into 4 portions. And we filled each portion with the input tables with information about: 

Important Dates

Company Start Date, Operations Start Date, and Other milestone dates. We applied logic to cells to compute values only if a certain date has passed or we reached a milestone. This makes the model’s time frame dynamic. 

Funding Assumptions

Includes capital investments and Debt Financing.

Revenue and Cost Assumptions

This includes all the driving factors in the computation of revenue and costs. The most important factors are obviously the direct price and costs involved in the provision of services.

These assumptions were the most time-consuming in this project as all 3 units had multiple services along with multiple categories/tiers within those services. When dealing with so many inputs, it is important to have proper tables for better understanding and ease of use. 

We spent more time on this stage because these tables form the base of the revenue model and, consequently, the financial model.

Startup Expenses/One-Time Expenses

The platform development phase includes the costs of developing the blockchain structure for the company. These costs are part of the startup expenses. Blockchain technology requires specialized resources in this field. This means that while the platform development costs form the startup expenses when the operations start, a portion of these costs converts into recurring costs for maintenance and upgradation of the platform. These costs become part of operational expenses.  

Operational Expenses

Operational expenses can be of multiple types, with some occurring monthly and others at regular intervals. Hence, inputs for amounts, their periodic nature, their starting time, and the department they belong to must be in the assumptions table for these expenses.

Payroll Expense

A payroll account requires tracking of the number of employees, the department they belong to, their employment period, their salary and benefits amount, and the annual increment percentage. 

Capital Expenditure

This includes all the fixed assets, their asset life, and their buying month. For the project in question, most of these fixed assets were related to the technology bought for the platform/network development.

It is important to mention that some of the costs were shared by all of the units of the company, while other costs were individual to the units. In the assumptions table for each unit, we divided the shared costs equally among the subsidiaries. The Group Company or Parent company had majorly administrative costs only.

Tokenomics and Token Distribution Strategy

The company aimed to launch its own Token on its network as a part of the payment system for the services. For this, we first prepared the Tokenomics structure in coordination with the client. We determined the numbers for the Total Supply, Pre-Sale and Private-Sale segmentation among teams and stakeholders. Also, we set aside a percentage for Initial Coin Offering. 

Moreover, we also determined a complete Distribution Strategy with the date of launch of each phase and the number of tokens. It is important to mention here that this structure was also dynamic by keeping the driving factors like dates, initial price, and segmentation as inputs. This helped the client play around with the numbers until they reached the best possible solution for the business. This exercise also resulted in the calculation of capital raised through the distribution.  

Token Price Forecast

Before moving to the revenue model preparation, we created a model for token price forecasting to estimate the average monthly price of the token for 5 years. Moreover, we applied the same method to forecast the price of a partner company’s token. We then used these prices in the revenue model as some of the services had their payments in these tokens.

Financial Modeling

Once the complete input structure was ready, we created a complete Financial Model for all of the subsidiaries along with Group Company.

• Revenue Analysis: Revenue and Cost of Sales calculations based on each subsidiaries business model
• Supporting Schedule: Loan, Depreciation, Payroll and Operational Expenses schedule
• Financial Statements: We prepared Income Statement, Cash Flow, and Balance Sheet for all three companies
• Financial Analysis: This included Ratio Analysis, Breakeven, and Project Evaluation (using Discounted Cash Flow Method) for each company

• Dashboard: We visualized Individual company Trends and Group Company Trends for easy and quick analysis.

• Numbers at a Glance: With a financial model of this large scale, it is important to summarize the main/critical outputs separately. This helps the higher management see the results without going into the details.

Equity Plan

When going into an investor round it is essential to have a clear picture of how you plan to utilize the investment. Moreover, the investors need to know how much return they will be able to achieve through their investment and in what time period.

The client provided us with their Equity Distribution Plan and we calculated Pre-Money and Post-Money Valuation of the company. We also provided them with an Equity Table consisting of common share distribution and equity share of each investor. Again, keeping up with our working strategy, we made a dynamic table that was adjustable according to the inputs.

Concluding Remarks

This project was amongst the first few of our Blockchain projects, hence it required a lot of research. The Group company scenario made it a bit more complicated. But our analysts took the challenge head on. As with any complex project, our strategy was to get a complete understanding of the business model and client’s requirements. We divided the big parts into smaller, simpler parts. At the end, the final product was fully dynamic and the client was satisfied with the results.