What Does It Take to be a Good Crypto Founder?

I get this question a lot from founders and VCs: “what selection criteria do you use when screening teams for AllianceDAO?” So I decided to put my thoughts in writing.

But while writing this essay, I’ve realized that it’s more than just what we look for in teams who apply to our program, but rather what it takes to be a good crypto founder. The difference between “what we look for” and “what it takes” is that the former is just hypotheses, whereas the latter is based on empirical evidence.

I’m not so delusional to think I know the perfect answer to this question, but after almost 3 years and 200 startups that we have accelerated, some patterns start to emerge.

Insight

I’ll start off with an actionable alpha for prospective applicants. One of the most important questions on our application form is “​​what unique insights do you have about your users?” From what I’ve seen, having great insights is one of the key differentiators that separate the good crypto founders from the bad ones. And yet, very few applicants can give thoughtful answers to this question.

A great insight about your users is often an idea around which an entire business can be built. For example, Tensor (ALL7)’s original insight was that despite the dominance of Opensea and Magic Eden, there exists a significant user segment that’s underserved by them, and that’s the pro NFT traders. These pro traders need different tools such as floor sweeping or advanced analytics. This is not too different from the world of fungible tokens where pro traders need instruments like perps or tools like new ERC20 snipers. Tensor’s entire product vision is to serve these pro traders.

But a great insight doesn’t necessarily have to be that. It can also be an unexpected observation that makes us (the interviewers) go “wow, I haven’t thought of this before, but it makes a lot of sense.” An example of this is when the StepN (ALL7) guys told us during their interview “a lot of people pay to go to the gym not because they need a trainer or equipment but because they need real skin in the game to keep them accountable”. The truth is, we screen thousands of applications per year, and there are very few new things that we haven’t heard of. Being able to teach us something new tells us that the founder is capable of thinking independently, and didn’t just jump on the crypto bandwagon after reading some Why Web3 Matters articles by VCs on the Internet.

Sometimes a great insight is downright contrarian. When Ostium (ALL9) first met us, they pitched us “commodity RWAs”. “RWAs” as a category was barely a thing back then — no tokenized T-bill project had any real traction — let alone “commodity RWAs”. So I pushed back and said “no one in crypto cares about gold and oil. They are boomer asset classes.” Kaledora countered, “r/wallstreetbet is crazy about lean hogs and orange juice because they are so meme-able, and retail don’t have an easy way to leverage-trade them.” I didn’t know if putting commodities on-chain was going to be big, but I loved that contrarian observation.

Now, you might argue that these insights seem so inconsequential, or might even be proven flat out wrong. True, but being insightful in itself isn’t what makes the founder likely to succeed. Instead, being insightful encapsulates two critically important qualities.

First, and I’m going to quote Ilja from Tensor, “If you don’t have a contrarian take, you don’t have a startup.” It’s not just investors that must make contrarian bets. So must founders. Indeed, when was the last time a crypto startup that eventually succeeded wasn’t controversial at the outset? Remember how much people dismissed Solana? Remember the CLOB vs. AMM debate around Uniswap? Almost by definition, building a startup is discovering a secret no one else knows or very few agree with. Or else the company would likely already exist.

The second quality that being insightful encapsulates is that the founder has actually spent a long time in their domain, and having spent a long time in their domain indicates perseverance, genuine passion, or both. I’ve written about this before, but I’ve seen that newcomers to crypto often take at least 1 to 2 years to develop real insights. But why does it take so long? Well, I suspect it’s because crypto is so counterintuitive and so different from Web2 or TradFi, where most founders come from. Way too often, founders give up on crypto in less than 1 or 2 years, right before that critical juncture. And this leads to my next point.

Elite School or Elite Company?

I’m going to pull a stats nerd here. If you take the sample of all founders in crypto, there’s undoubtedly a correlation between going to elite schools or working at elite Silicon Valley companies and their future success. But if you take the sub-sample of the top 1% among them (that is the bar for getting into AllianceDAO), just eyeballing, the correlation is basically 0. When I look at the most successful companies we’ve incubated and the most successful crypto companies at large, few come from an elite background.

Now, to be clear, a correlation of 0 doesn’t mean that elite credentials predict failure. Not at all. It just means that at the highest level, it’s no longer an independent predictor of success. But why is this the case?

Some of these founders grew up being taught that you have to grow 5% week on week or else you are failing. The fact of the matter is, though, that the growth trajectory of crypto products is rarely smooth. Rather, most products, from centralized ones like Coinbase to protocols like Ethereum, grow in a staircase fashion. This is largely due to the cyclical nature of the broader market. So these founders give up too quickly, and almost always in the bear market when growth stalls.

Another reason is that many founders coming from an elite background came to crypto for the wrong reasons. They came to crypto because the influencers they follow on Twitter make extravagant claims about how Web3 is the future of the Internet at the peak of the bull market, and fall into the trap of thinking that prices going up empirically validate these claims. If you are a lower class immigrant and all you want is to make life-changing money with HarryPotterObamaSonic10Inu or send remittance to your family, these claims would sound ludicrous. Now, I actually do think Web3 will be a crucial part of the Internet, but before jumping into a startup you have to be able to reason from first principles why that’s the case, and immerse yourself into the existing crypto products in order to fully appreciate the power of crypto.

A direct consequence of an elite Web2 or TradFi veteran coming into crypto for the wrong reasons is that they tend to be enamored with skeuomorphic ideas like “decentralized Uber”. I know this word is so overused now to the point it’s becoming annoying, but clearly just because something works in Web2 or TradFi doesn’t mean it’ll work on a blockchain. When I interview applicants I often ask myself or them “what’s the novel, weird, or perhaps even controversial consumer behavior their product enables”. It doesn’t take a genius to realize that decentralization often makes UX worse, but that may be acceptable if the product enables novel behaviors that consumers have never experienced before. If it doesn’t enable new behaviors, then it’s just competing with Web2 or TradFi incumbents with a worse UX. An example of novel behaviors is that in DeFi you can use hundreds of financial products from the comfort of a single account, without having to create new accounts and to KYC for every new product.

There’s a question on our application form that I pay quite a bit of attention to: “why did you choose to work on this idea?” Solving your own problem or your friends’ problem can be a good answer. Anecdotally, this answer comes a lot from founders based in emerging markets or DeFi degens, both of whom are the opposite of what I would consider “elite”. For example, Felipe built Kravata (ALL12) because he himself needed a fiat off-ramp in Latam for remittance. Jackson built Thunder (ALL12) because he absolutely hated how hard it is to ape into new ERC20s and Friendtech keys.

The point is, if crypto truly is a secular equalizing force for the 8 billion people on the planet, then logically it must also be an equalizing force for founders building in crypto. That is, founders coming from unprivileged backgrounds should be equally likely to succeed as the elite. This is because they innately understand their users who are equally unprivileged.

For these reasons we care very little about elite credentials. And we actually walk the walk. About 2/3 of our admitted applicants did not come from a warm introduction or referral. They are complete strangers on the Internet, who put a lot of thoughts into their application and interview. Many VCs would argue that warm introductions are required because the ability to network your way into the community of VCs is your first test: if you can’t even get warm introductions, you can’t get users. I’m sympathetic to this view, but I also believe that for the unprivileged entrepreneurs around the world who are not born within 1 or 2 degrees of separation from the elite VCs, a better use of their time is to network with users than to network with VCs.

Perseverance

While elite credentials are not necessarily a good indicator of first-principle thinking, it is a decent indicator of perseverance. And many people including myself would agree that perseverance is the biggest common denominator between successful founders in any industry.

On our application form we ask applicants to describe an instance of exceptional perseverance. But to be fair, it’s very difficult to tell exactly how perseverant the founder is based on this question alone or during the interview. Occasionally though, they would tell us something surprising. One of our alumni (anonymizing his/her name for privacy reasons) told me “all my classmates from [a top university] made it big in AI. If they can do it, I can do it.” I felt the heat from him/her.

Now, many people would argue that money and fame are not good reasons to build a startup. I’m actually not sure if that’s true. But setting this debate aside, the most perseverant people I know all have a massive chip on their shoulder. They always seem to have something to prove no matter how much success they’ve already had. Many have endured early life trauma. Both Musk and Jobs notoriously were raised by an abusive father.

But it’s also plausible that perseverance matters even more in crypto than in other industries. Name another industry which goes through a complete boom and bust cycle every four years. Or another industry that the SEC Chairman makes it a personal mission to annihilate. Or another industry where all the main characters end up in jail in less than a year. I chuckle everytime I see tweets like “I aged 3 years in the last 24 hours” or “I survived the bear market of 2022.11.20.” This is not an industry for the faint of heart.

One simple but not easy way to artificially boost perseverance is to find a cofounder that you know well, ideally you’ve worked with in the past. We ask applicants about how they met their cofounders on our application form too. The point of having a cofounder is not just to complement each others’ skillset, but also to provide psychological support to each other in tough times. The catch is that working with someone you just met at a conference rarely works, it really needs to be someone you already have a trusting relationship with. So many founding teams break up in the bear market. They claim that it’s due to differences in visions, but really upon closer examination it’s due to lack of trust. If you can’t find someone you trust, you are better off going solo (and possibly leverage a founders’ community like AllianceDAO for peer support).

Integrity

Warren Buffett said it best: “I look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.” Indeed, all the main characters that went to jail in this past year had the last two but not the first. I don’t think the word “integrity” needs any further explanation.

But coincidentally, the trifecta of “integrity, intelligence, and energy” maps pretty well with all the attributes I’ve already discussed above. Insights are associated with intelligence, perseverance with energy, and unprivileged background perhaps with a bit of both.

Aside from all these, we of course also care about distribution, market size, engineering prowess, defensibility, regulatory risks, and so on. But a weakness in one of these areas isn’t necessarily a deal breaker. We often work with first-time founders who are otherwise insightful, unprivileged, perseverant, and honest, and help them grow. These qualities may require years of cultivation or even be inherent from birth, which is why they are non-negotiable. All other elements can be learned or acquired. All common mistakes can be avoided.