Two years ago I wrote about Common Pitfalls for Web3 Founders. As far as I know, this was the single most widely shared essay I’ve written for early-stage crypto founders.
Two years later, most things in that essay still apply. But having worked with over 100 more founders at Alliance, during a very different stage of the market cycle, I learned many new lessons as to why crypto startups succeed or fail.
These lessons can be distilled into 4 key points.
Acquisition is easy. Retention is hard.
Relatively speaking, acquisition is easy because it’s directly correlated with how much time and money (and tokens) you throw at it. The more resources you spend on acquiring users, the more users you will get. And usually you can track exactly where they come from, so you can double down on acquisition strategies that work.
But just because users come, doesn’t mean they will stay. And by now everyone should know this from all the failed liquidity mining programs and retroactive airdrops our industry has done since DeFi Summer.
One time I talked to a founder who was worried about their lack of user growth and blamed it on their marketing department. I asked a simple question, do you measure retention? Or Net Promoter Score? Or a PMF survey? The founder said he didn’t. A week later he came back with the numbers I asked about, and it was immediately clear that the problem wasn’t his marketing, but rather his users didn’t stay. To put it bluntly, his product sucked.
It turns out that many startups are in the same boat and don’t even realize that their product sucks. As a result they waste time on the wrong things.
Track your PMF quantitatively and qualitatively. Measure the aforementioned metrics, and certainly trust your gut feeling by talking extensively to users. Being aware of the problem is a good first step.
If you fail 5 years from now, it will likely not be because you suck at user acquisition. It will be because you suck at user retention. The YC mantra “Build something 100 people love, not something 1 million people kind of like” means exactly this.
It doesn’t take a ton of money and people to find product-market fit.
Conversely, over-raising and over-hiring, before any signs of product-market-fit, is one of the most common reasons why crypto startups fail.
Despite the bear market, our industry is flush with abundant venture capital and many VCs are extremely insensitive to valuation. Many startups raise 8-figure seed rounds not because they should, but because they can.
The result of having too much money in the bank is that founders spend all day thinking about how to spend the money, how to hire more people, how to manage these people after hiring them, and how to align everyone’s vision across a bloated organization, instead of focusing on the only thing that matters: product-market-fit.
When your team expands, you feel good. It feeds your ego. But team size is a complete vanity metric. Product-market-fit is usually not a problem that you can solve by simply throwing more people at it. It’s usually just a couple of people that really move the needle for the organization, and they do so by running quick experiments sequentially rather than concurrently.
The only exception in crypto I can think of is if you are building a cutting-edge distributed system such as a layer one blockchain. But even then, Solana, which had the least amount of money and people in the last bear market compared to other “ETH killers”, outshined every single one of their competitors.
When you feel overwhelmed by the number of problems in your organization, the optimal solution is not to hire more, but to do less. Prioritize, focus, ignore. Consider scaling up only when you start seeing signs of users truly loving your product.
It can take 6–24 months before you figure out something that works.
It takes time to build real domain expertise in crypto and, ultimately, deep understanding of your users. This is because crypto is so counterintuitive.
Build applications that can’t be stopped by an API or cloud provider? Move slow and don’t break anything? Send over $10,000 without getting an obnoxious call from your bank asking you why? Provide liquidity using the same algorithms as professional market-makers?
I’m sure founders new to crypto have heard of these things before, but to fully appreciate the nuances requires immersing yourself as an active user of existing products and obsessively talking to users. If you build a DeFi protocol or an NFT marketplace and have never got rugged or know someone who got rugged, I’m sorry, you won’t be successful anytime soon, because that means you simply haven’t immersed yourself in crypto deep enough.
I’ve lost count of new crypto founders with an amazing Web2 or TradFi background who tend to project their existing experience onto crypto, and more concretely, to map existing Web2 or TradFi products to crypto. Just because a product exists in Web2 or TradFi doesn’t mean it solves a real pain point in crypto. It’s not a coincidence that the top crypto products were built by crypto-natives: Ethereum, Metamask, Uniswap, Opensea, you name it. Thinking from first principles is massively underrated.
It takes time to understand crypto deeply, but once you do, you have an unfair advantage over your competitors. Unfortunately, many founders will give up before reaching that critical juncture, which leads to the next point…
Survive long enough to get lucky.
It’s remarkable how similar every bear market is. Founders and investors agonize over the same three things. “We still don’t have a killer app.” “Market is small.” “Regulations will kill crypto.” Then they quit crypto.
First, let’s address these. Because everyone I know that pivoted away from crypto during the last bear market regretted it
“We still don’t have a killer app” usually comes from people who have never been to developing countries. If you spend more than just a few hours outside the G7, the probability of you encountering someone who has used BTC as an uncensorable store of wealth or USDT as an inflation hedge, is asymptotically one.
“Market is small.” The reason why the market feels small today is almost definitional: the market is not the 8 billion humans on the planet but rather the small fraction of them who have a crypto wallet. The massive frictions associated with installing a wallet is what creates the artificial boundary between the crypto-market and the rest. But everyone in this space is betting on the continuation of the same trend that persisted over the last 14 years: volatile but monotonic increase of daily active wallets.
“Regulations will kill crypto.” This is precisely why it’s time to double down. Powerful technologies like crypto, AI, and the internet stir fear among the powers that be. The US may seek to extinguish crypto, but other jurisdictions like Dubai and Hong Kong are unabashedly embracing it. Crypto will thrive with or without the hostile jurisdictions.
Finally, allow me to recount the tale of Opensea. During the last bear market, Opensea had at least three competitors. These four marketplaces showcased little differentiation in their product offerings, and none had significant traction. However, the bear market was so brutal that all three competitors succumbed, leaving OS as the sole survivor. The rest is history. OS persisted and emerged as the sole contender at the dawn of the NFT bull market in early 2021, swiftly securing a dominant position and ascending to the status of a unicorn.
Parting thoughts
In case it’s not clear yet, every single one of these four lessons is related to the product:
- Not realizing your product sucks
- Over-scaling before you have a product people love
- Not understanding your users deep enough
- Pivoting at the worst possible time
Indeed, this has become cliche, but product is the single most important thing to worry about. And until you have a product people love, it’s too early to obsess over everything else, be it token economics, hiring, marketing, or community management.
Appendix: Tactical Advice
If you are curious about tactical things outside product however, read on. These are the topics that come up over and over again during office hours at Alliance.
It’s important to remember that there’s no one absolute best way to build crypto startups, but statistically, these are the things that work.
Sales, Growth & Marketing
- Steer clear of external marketing agencies. Based on insights shared by founders who have used such services, success stories are hard to come by. Opt for in-house marketing efforts instead. Leverage your investors to amplify your message and connect you with the media.
- If your product targets businesses or developers, content marketing is by far the most scalable way to build your top of funnel in crypto.
- If your product targets consumers, tokens are the most scalable user acquisition strategy. But you can use this weapon once. So before using it, try the things that don’t scale.
- Crypto conferences can be a good channel for user acquisition for business or developer products. They are a waste of time for consumer products.
- Getting featured on major podcasts and conferences can be challenging as they often seek established names. Early-stage startups are not established names by definition. Instead, focus on writing high-quality content to gain recognition.
- The goal of big marketing pushes like fundraising announcements is not to attract potential users, but to attract potential hires. Prospective employees conduct due diligence and come across such announcements.
- Twitter is a lagging indicator, not a leading indicator, of your success. As such, don’t obsess over it.
Hiring
- Tapping into your personal network is by far the most effective way to recruit talents, especially in the early stages when your brand may not be strong enough to attract external candidates. Make a list of the best people you know and pitch your startup to them. Encourage everyone on your team to utilize their personal networks for recruitment as well.
- Your community, such as Discord, Telegram, Twitter, or newsletters is the second best channel. Inquire if anyone or their connections are interested in working with you.
- Only after having exhausted personal networks and community connections should you consider utilizing crypto-specific recruiters or recruiting platforms like Alist, Triplebyte, and coding schools.
- Consider hiring experienced Web2 engineers and training them for Web3 roles, as experienced Web3 engineers may be hard to come by.
Community Management
- An engaged community is not what leads to a great product. An engaged community is the result of a great product.
- Telegram for businesses and developers. Discord for consumers.
- If you are a consumer product, instead of optimizing for engagement and positivity in your community, treat your community primarily as users. Seek feedback, beta-test, address pain points, update progress and roadmap, and educate them on product usage.
- In the early days, one of the founders should be the community manager.
Token Economics
- Token incentives should be viewed as a go-to-market strategy. But without a product that people love, token incentives are wasteful because users will simply dump the token and churn.
- Launching token incentives too early can hinder your understanding of true product-market fit. You don’t know if users come for the product or the financial incentives.
- Tokens are a double-edged sword for your community and employees. In a bull market price appreciation can boost excitement and engagement. In a bear market, price depreciation can lead to a decline in morale. This is no different from publicly traded companies.
- Don’t time the market, but if anything, launch your token in the bear market. You want your tokens to go up over time and the way to do that is to start low.
- You will never get the token design right on the first attempt, and you will inevitably pivot after seeing things in action.
- As a corollary, avoid over-engineering. Avoid a multi-year time horizon. Avoid lavish incentives. Use tokens simply, intermittently, and sparingly.
- While you should take inspiration from leading products in your particular vertical, you should design your token from first principles, according to the unique needs of your product. Every product is different, so every token should be designed differently. Remember, tokens are a go-to-market strategy, so whether or not a go-to-market strategy makes sense depends on the particular product.
- I remain skeptical about hiring external token consultants. If you are going to hire one, you should at the very least create the initial draft, and use them merely as an independent source of feedback. Token design is not rocket science, no one understands your users better than you do and therefore no one other than you knows what the best design should be.
- Engage exchanges for listings as early as possible. They all have different requirements and their requirements evolve a lot over time. Their requirements often directly impact your token design.
- Engage experienced legal professionals as early as possible. Understand that launching a token involves navigating securities laws and other relevant regulations. The best way to find the good lawyers is by asking your peers and investors for recommendations.
- If you look for industry benchmarks when it comes to allocation and vesting, see this blog post by Alliance alumni Robin.
