Alliance DAO: 4 Reasons Crypto Startups Fail

There is no one absolute best way to build a cryptocurrency startup.

**Written by:**Qiao Wang

Compilation: Deep Tide TechFlow

Two years ago, I wrote an article about common pitfalls for Web3 founders. Two years later, most of what was in that article still applies. However, in working with Alliance's 100+ founders, I've learned many new lessons at different stages of the market cycle.

These lessons can be distilled into 4 main points.

Easy to obtain, difficult to retain

User acquisition is relatively easy. Because it is directly proportional to the time, money (and tokens) you put into it. The more resources you spend on user acquisition, the more users you will get. Often you can track exactly where they're coming from so you can double down on an effective acquisition strategy.

But just because users come doesn't mean they'll stay. Everyone should know this by now from all the liquidity mining incentives and retroactive airdrops our industry has done since DeFi Summer.

I once spoke to a founder who was concerned about their lack of user growth and blamed it on their marketing department. I asked a simple question, do you measure user retention? Or Net Promoter Score? or PMF* investigation? The founder said he didn't. A week later, he came back with the numbers I had requested, and it became clear that the problem wasn't his marketing, but that his users weren't staying. To put it bluntly, his product sucks.

(Shenchao Note: Product Market Fit refers to the best fit between the product and the market, that is, the products provided just meet the needs of the market and satisfy customers)

It turns out that many startups are in the same situation without even realizing their product sucks. Therefore, they waste their time on the wrong things.

Track your PMF quantitatively and qualitatively. Measure the above metrics and trust your instincts by talking extensively with users. Awareness of the problem is a good first step.

If you fail after 5 years, it's likely not because you're bad at acquiring users, but because you're bad at retaining them. This is what YC's slogan "build something that 100 people like, not something that 1 million people like a little bit" means.

Finding product market fit doesn't take a lot of money and manpower

Instead, overfunding and overhiring are among the most common reasons crypto startups fail before any signs of product-market fit appear.

Despite the bear market, when our industry is still full of VCs, many VCs are very insensitive to valuations. 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 account is that founders spend their days thinking about how to spend it, how to hire more people, how to manage those people after they've been hired, and how to coordinate everyone's efforts in a bloated organization. Vision instead of focusing on the only thing that matters: product market fit.

You feel great when your team grows. It feeds your ego. But team size is an utterly vanity metric. Product-market fit is usually not a problem you can solve by simply throwing more people at it. Often only a few people really push the organization forward, and they do this by running rapid experiments sequentially rather than simultaneously.

The only exception I can think of in cryptocurrencies is if you're building a cutting edge distributed system such as a layer 1 blockchain. But even so, Solana, which had the least capital and human resources in the last bear market, still surpassed all their competitors compared to other "ETH killers".

When you feel overwhelmed by the number of problems, the best solution is not to hire more people, but to do less. Prioritize, focus on what's important, and ignore the rest. Only consider scaling up when you start to see signs that users really like your product.

May take 6-24 months to find something that works

Building real expertise in the cryptocurrency space and gaining a deep understanding of your users takes time.

Building an application that cannot be stopped by an API or cloud provider? Send over $10,000 without being hassled by the bank? Provide liquidity using the same algorithm as professional market makers?

I'm sure founders new to the cryptocurrency space have heard these things before, but fully understanding the nuances requires immersing themselves in active users of existing products and obsessively talking to users. If you build a DeFi protocol or NFT marketplace and have never been hacked or know of someone who has been hacked, sorry, you won't make it any time soon, because it means you haven't learned enough about crypto yet currency.

I've lost count of how many new crypto founders with Web2 or TradFi backgrounds tend to project their existing experience onto crypto, and more specifically, existing Web2 or TradFi products onto crypto. Just because a product exists in Web2 or TradFi doesn't mean it solves a real pain point in cryptocurrency. The best crypto products are built by crypto natives: Ethereum, Metamask, Uniswap, Opensea, etc.

It takes time to gain a deep understanding of cryptocurrencies, but once you do, you have an unfair advantage over your competitors. Unfortunately, many founders give up before reaching this critical moment, which leads to the next problem...

The longer you survive, the luckier you are

Every bear market is so similar, with founders and investors struggling with the same three things. “We still don’t have a killer app.” “The market is small.” “Regulation will kill crypto.” And then they exit crypto.

First, let's address these issues. Because everyone I know who switched to other areas during the last bear market regretted it.

"We still don't have a killer app" usually comes from people who have never been to a developing country. If you spend more than a few hours outside of a G7 country, the probability of you encountering someone using BTC as an uncensorable store of wealth or USDT as an inflation hedge approaches 1.

“The market is small.” The reason why the market feels small today is almost defining: the market is not the 8 billion people on the planet, but the small fraction of people with crypto wallets. The enormous friction that comes with installing a wallet is what creates artificial boundaries between the crypto market and the rest. However, everyone in the space is betting that the same trend that has persisted for the past 14 years will continue: a fluctuating but overall increase in daily active wallets.

“Regulation will kill cryptocurrencies.” Which is exactly why now is the time to double down. Powerful technologies like cryptocurrencies, artificial intelligence, and the internet inspire fear among those in power. The US may try to kill cryptocurrencies, but other jurisdictions like Dubai and Hong Kong are unabashedly embracing it. Cryptocurrencies will thrive in hostile jurisdictions.

Finally, let me tell the Opensea story. During the last bear market, Opensea had at least three competitors. These four markets have little difference in their product offerings and have not made significant progress. However, the bear market was so brutal that all three competitors fell, leaving only OS. The rest is history. OS persevered, becoming the only contender at the dawn of the NFT bull market in early 2021, quickly gaining dominance and evolving into a unicorn.

In general, each of these four lessons is relevant to the product:

1. Not realizing that your product sucks;
2. Overextend before you have a product that people love;
3. Don’t know enough about your users;
4. Transformation at the worst possible time.

True, it has become a cliché, but the product is the most important thing. Until you have a product that people love, it's too early to focus too much on other aspects like token economics, recruiting, marketing, or community management. It's important to focus on building products that solve real problems and provide value to users. This requires a deep understanding of user needs and preferences, and a willingness to iterate and improve based on feedback. So my idea is to always put product development and user satisfaction first.

APPENDIX: STRATEGY RECOMMENDATIONS

It's important to remember that there is no one absolute best way to build a cryptocurrency startup, but the following are statistically valid.

Sales, Growth and Marketing

• Avoid using outside marketing agencies. Success stories are rare, according to insights shared by founders using such services. Instead, choose an in-house marketing job. Use your investors to amplify your message and connect you with the media.
• If your product is geared toward businesses or developers, then content marketing is by far the most scalable way to build top of the funnel in crypto.
• If your product is consumer-facing, tokens are the most scalable user acquisition strategy. But you can only use this weapon once. So try things that don't scale before using it.
• For enterprise or developer-oriented products, crypto conferences can be a great user acquisition channel. For consumer facing products, they are a waste of time.
• Gaining a reputation on major podcasts and conferences can be challenging, as they often seek already established names. Early stage startups are not, by definition, established names. Instead, focus on writing quality content to gain recognition. *The goal of large marketing campaigns such as fundraising announcements is not to attract potential customers, but to attract potential employees. Prospective employees do their due diligence and see such announcements. *Twitter is a lagging indicator of your success, not a leading indicator. So don't pay too much attention to it.

recruitment

• Leveraging your personal network is by far the most effective way to recruit talent, especially in the early stages when your brand may not be strong enough to attract external candidates. Think of the best people you know and pitch your startup to them. Encourage everyone on your team to use their personal network for recruiting as well.
• Your community, like Discord, Telegram, Twitter or newsletters, is the next best channel. Ask if anyone or their contacts are interested in working with you.
• Only after you have exhausted your personal network and community connections should you consider leveraging cryptocurrency specific recruiters or recruitment platforms such as Alist, Triplebyte, and Coding School.
• Consider hiring experienced Web2 engineers and providing them with Web3 training, as experienced Web3 engineers can be hard to find.

Community Management

• An engaged community is not what leads to a great product. An engaged community is the result of a great product.
• Enterprises and developers use Telegram. Consumers use Discord.
• If it's a consumer-facing product, don't optimize your community for positivity, but treat your community primarily as users. Ask for feedback, test, address pain points, update progress and roadmap, and educate them on how to use the product.
• In the early stages, one of the founders should act as the community manager.

Token Economics

• Token incentives should be viewed as a marketing strategy. But without a beloved product, token incentives are wasted as users simply dump their tokens and leave.
• Launching token incentives too early may hinder your understanding of true product market fit. You don't know whether users come because of the product or because of financial incentives.
• Tokens are a double-edged sword for your community and employees. In a bull market, rising prices can boost excitement and engagement. In a bear market, falling prices can lead to a drop in morale. This is no different than a public company.
• Don't time the market, but launch your token in a bear market if there is one. You want your token to rise over time, and the way to do that is to start low.
• You will never get the token design right on the first try.
• Avoid lavish rewards. 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 based on your product's unique needs. Every product is different, so every token should be designed differently. Remember, the token is a marketing strategy, so whether to use a marketing strategy depends on the specific product.
• I am skeptical about hiring an external token advisor. If you're going to hire one, you should at least create first drafts and use them only as an independent source of feedback. Token design is not rocket science, no one knows your users better than you, therefore no one knows what the best design should be except you.
• Participate in exchange listing as early as possible. They all have different requirements, and their requirements have evolved over time. Their requirements often directly affect your token design.
• Get in touch with an experienced legal professional early on. Understand that issuing tokens involves securities laws and other relevant regulations. The best way to find a good lawyer is to seek advice from your peers and investors.