Alliance DAO: Four Reasons Why Crypto Startups Fail

2023.05.26

Alliance DAO: Four Reasons Why Crypto Startups Fail

There is no single best way to build a cryptocurrency startup.

2023.05.26 - 02:47:26

加密初创公司

Navigating Web3 tides with focused insights

There is no single best way to build a cryptocurrency startup.

Written by: Qiao Wang

Compiled by: 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 holds true. However, during my work with over 100 founders at Alliance across different phases of the market cycle, I’ve learned many new lessons.

These lessons can be distilled into four key points.

Acquisition is easy; retention is hard

User acquisition is relatively easy because it’s directly proportional to the time, money (and tokens) you spend. The more resources you invest in acquiring users, the more users you get. You can usually track exactly where they come from, so you can double down on effective acquisition strategies.

However, just because users come doesn’t mean they’ll stay. By now, everyone should have learned this from all the liquidity mining incentives and retroactive airdrops our industry has run since DeFi Summer.

I once spoke with a founder who worried about their lack of user growth and blamed their marketing team. I asked a simple question: do you measure user retention? Net promoter score? Or PMF* survey? The founder said no. A week later, he came back with the numbers I’d requested—and it became clear the problem wasn’t his marketing, but that his users weren’t staying. To put it bluntly, his product sucked.

(TechFlow note: Product Market Fit refers to the optimal alignment between a product and the market—when the product perfectly meets market demand and satisfies customers.)

It turns out many startups are in the same boat, unaware their product is flawed—so they waste time focusing on the wrong things.

Quantitatively and qualitatively track your PMF. Measure the above metrics, and trust your instincts through extensive conversations with users. Recognizing the problem is the first good step.

If you fail five years from now, it likely won’t be because you’re bad at acquiring users, but because you’re bad at retaining them. That’s what YC means by “build something that 100 people love, not something that a million people kind of like.”

Finding product-market fit doesn’t require massive funding or headcount

On the contrary, over-fundraising and over-hiring before any sign of product-market fit is one of the most common reasons crypto startups fail.

Despite the bear market, our industry remains flush with venture capital, and many VCs remain highly insensitive to valuation. Many startups raise eight-figure seed rounds—not because they should, but because they can.

The result? With too much money in the bank, founders spend their days thinking about how to spend it—how to hire more people, manage them afterward, and align everyone’s vision within an bloated organization—instead of focusing on the only thing that matters: product-market fit.

Growing your team feels good. It feeds your ego. But team size is a completely vanity metric. Product-market fit is rarely something you can solve simply by throwing more people at it. Usually, only a few individuals truly drive progress—by running fast experiments sequentially, not simultaneously.

The only exception in crypto I can think of is if you’re building a cutting-edge distributed system, such as a Layer 1 blockchain. But even then, Solana had the least funding and human resources during the last bear market compared to other “ETH killers,” yet still outperformed all of them.

When overwhelmed by the scale of problems, the best solution isn’t hiring more people—it’s reducing scope. Prioritize. Focus. Ignore the rest. Only consider scaling once you see real signs that users love your product.

It may take 6 to 24 months to find what works

Building real expertise in crypto and deeply understanding your users takes time.

Building apps that can’t be shut down by APIs or cloud providers? Sending over $10,000 without being hassled by banks? Providing liquidity using the same algorithms as professional market makers?

I believe many new crypto founders have heard of these things before, but fully grasping their nuances requires immersing yourself as an active user of existing products and obsessively talking to users. If you’ve built a DeFi protocol or NFT marketplace and have never been hacked—or haven’t known anyone who has—you’re sorry to say, unlikely to succeed soon, because you haven’t yet developed deep crypto insight.

I’ve lost count of how many new crypto founders from Web2 or TradFi backgrounds tend to project their prior experience onto crypto—more specifically, mapping 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 crypto. The best crypto products are all built by crypto-natives: Ethereum, Metamask, Uniswap, Opensea, etc.

Gaining deep crypto insight takes time—but once you do, you gain an unfair advantage over competitors. Unfortunately, many founders give up before reaching this critical point, which leads to the next issue...

The longer you survive, the luckier you get

Every bear market feels eerily similar: founders and investors agonize over the same three things. “We still don’t have a killer app.” “The market is small.” “Regulation will kill crypto.” Then they exit the space.

Let me address these one by one—because every person I know who pivoted away during the last bear market regrets it.

“We still don’t have a killer app” usually comes from people who’ve never spent time in developing countries. If you spend more than a few hours outside G7 nations, the probability approaches 1 that you’ll meet someone using BTC as censorship-resistant wealth storage or USDT as an inflation hedge.

“The market is small.” The reason the market feels small today is almost definitional: it’s not 8 billion people on Earth, but only the tiny fraction who hold crypto wallets. The huge friction of installing a wallet creates an artificial boundary between the crypto market and others. Yet everyone in this space is betting on the same trend that’s persisted for the past 14 years: volatile but overall increasing daily active wallets.

“Regulation will kill crypto.” This is precisely why now is the time to double down. Powerful technologies like crypto, AI, and the internet provoke fear among those in power. The U.S. may try to suppress crypto, but other jurisdictions like Dubai and Hong Kong are openly embracing it. Crypto will thrive despite hostile regulations.

Finally, let me tell the story of Opensea. In the last bear market, Opensea had at least three competitors. All four markets offered nearly identical products and made little progress. Yet the bear market was so brutal that all three competitors collapsed, leaving only OS. The rest is history. OS survived, emerged as the sole player at the dawn of the 2021 NFT bull run, quickly dominated, and evolved into a unicorn.

Overall, each of these four lessons ties back to the product:

Failing to realize your product sucks;
Over-expanding before having a product people love;
Not understanding your users deeply enough;
Pivoting at the worst possible moment.

Indeed, it’s become cliché, but the product is the most important thing. Focusing heavily on tokenomics, hiring, marketing, or community management before achieving a beloved product is premature. What matters is building a product that solves real problems and delivers value to users. This requires deep understanding of user needs and preferences, and a willingness to iterate and improve based on feedback. Therefore, my advice is to always prioritize product development and user satisfaction.

Appendix: Strategic Recommendations

It’s important to remember there’s no single absolute best way to build a crypto startup, but statistically speaking, the following approaches work.

Sales, Growth & Marketing

Avoid external marketing agencies. Based on insights shared by founders who’ve used such services, success stories are rare. Instead, opt for in-house marketing. Leverage your investors to amplify your message and connect you with media.
If your product targets enterprises or developers, content marketing is by far the most scalable way to build top-of-funnel awareness 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, before deploying it, try things that don’t scale.
For enterprise/developer products, crypto conferences can be a strong user acquisition channel. For consumer products, they’re a waste of time.
Gaining visibility on major podcasts and conferences can be challenging, as they typically seek established names. Early-stage startups, by definition, aren’t established. Instead, focus on creating high-quality content to earn recognition.
Large marketing events like fundraising announcements aren’t primarily aimed at attracting users—they’re meant to attract potential employees. Future hires conduct due diligence and notice such announcements.
Twitter is a lagging indicator of your success, not a leading one. Don’t obsess over it.

Hiring

So far, leveraging your personal network is 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 tap into their networks as well.
Your community—Discord, Telegram, Twitter, or newsletter—is the second-best channel. Ask if anyone (or their contacts) would be interested in working with you.
Only after exhausting personal networks and community connections should you consider using crypto-specific recruiters or hiring platforms like Alist, Triplebyte, and coding schools.
Consider hiring experienced Web2 engineers and training them in Web3, as experienced Web3 engineers can be hard to find.

Community Management

An active community is not the cause of a great product. An active community is the result of a great product.
Enterprises and developers use Telegram. Consumers use Discord.
For consumer-facing products, don’t optimize for community engagement. Treat your community primarily as users. Seek feedback, run tests, address pain points, share updates and roadmap progress, and educate them on how to use the product.
In the early stages, one of the founders should serve as the community manager.

Tokenomics

Token incentives should be viewed as a marketing strategy. But without a beloved product, token incentives are wasted—users will simply dump the tokens and leave.
Launching token incentives too early can obscure your understanding of true product-market fit. You won’t know whether users are coming for the product or the financial incentive.
Tokens are a double-edged sword for your community and employees. In bull markets, price increases boost excitement and participation. In bear markets, price drops hurt morale. It’s no different from public companies.
Don’t try to time the market—but if anything, launch your token during a bear market. You want your token to rise over time, and the way to achieve that is by starting from a low base.
You will never get the token design right on the first try.
Avoid lavish rewards. Use tokens simply, intermittently, and moderately.
While you should draw inspiration from leading products in your vertical, you should design your token from first principles based on your product’s unique needs. Every product is different, so every token design should be different. Remember, tokens are a marketing strategy—so whether and how to use them depends entirely on the product.
I’m skeptical of hiring external token consultants. If you do hire someone, you should at least create a first draft yourself and use them only as an independent feedback source. Token design isn’t rocket science, and nobody understands your users better than you—so nobody else knows the ideal design as well as you do.
Engage exchanges early. They have varying requirements that evolve over time—and these often directly impact your token design.
Connect with experienced legal professionals early. Understand how securities laws and other regulations apply to token issuance. The best way to find great lawyers is to ask peers and investors for recommendations.