Alliance DAO: Four Reasons Why Crypto Startups Fail
Acquisition is easy, retention is difficult.Author: Qiao Wang
Compiled by: Shenchao TechFlow
Two years ago, I wrote an article about common pitfalls for Web3 founders. Two years later, most of the content in that article still applies. However, during my collaboration with over 100 founders at Alliance, I have learned many new lessons at different stages of the market cycle.
These lessons can be distilled into four key points.
User Acquisition is Easy, Retention is Hard
User acquisition is relatively easy. It is directly proportional to the time and money (and tokens) you invest. The more resources you spend on acquiring users, the more users you will get. Typically, you can accurately track where they come from, allowing you to double down on effective acquisition strategies.
However, just because users come doesn’t mean they will stay. By now, everyone should have learned this from all the liquidity mining incentive programs and retroactive airdrops our industry has seen since DeFi Summer.
Once, I spoke with 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 user retention? Or net promoter score? Or PMF* surveys? The founder said he did not. A week later, he came back with the numbers I requested, and it was clear that the problem was not his marketing, but that his users were not sticking around. To put it bluntly, his product was terrible.
(Note: Product Market Fit refers to the optimal alignment between a product and the market, meaning the product offered meets market demand and satisfies customers.)
It turns out that many startups are in the same boat, often without realizing that their product is poor. As a result, they waste time on the wrong things.
Track your PMF quantitatively and qualitatively. Measure the above metrics and trust your instincts through extensive conversations with users. Realizing there is a problem is a good first step.
If you fail in five years, it is likely not because you are bad at acquiring users, but because you are bad at retaining them. YC's motto, "Build something 100 people love, not something 1 million people kind of like," captures this sentiment.
Finding Product-Market Fit Doesn’t Require a Lot of Money and Manpower
On the contrary, over-funding and over-hiring before any signs of product-market fit is one of the most common reasons for failure in cryptocurrency startups.
Despite the bear market, our industry is still filled with venture capital, and many VC firms are very insensitive to valuations. Many startups raised eight-figure seed rounds, not because they should, but because they could.
The result of having too much money in the bank is that founders spend their days thinking about how to spend it, how to hire more people, how to manage those people after hiring them, and how to coordinate everyone’s vision in a bloated organization, rather than focusing on the only thing that matters: product-market fit.
When your team grows, it feels good. It satisfies your ego. But team size is a completely vanity metric. Product-market fit is often not something you can solve by simply throwing more people at it. Usually, only a few people truly drive the organization forward, and they do so by conducting rapid experiments sequentially rather than simultaneously.
The only exception I can think of in cryptocurrency is if you are building a cutting-edge distributed system, like a layer one blockchain. But even then, Solana had the least funding and manpower during the last bear market compared to other "ETH killers," yet still outperformed all their competitors.
When you feel overwhelmed by the number of problems, the best solution is not to hire more people, but to reduce the workload. Prioritize, focus on the essentials, and ignore the rest. Only consider scaling when you start to see signs that users genuinely love your product.
It May Take 6 to 24 Months to Find a Viable Approach
Building true expertise in the cryptocurrency space and deeply understanding your users takes time.
Building applications that cannot be stopped by APIs or cloud providers? Sending over $10,000 without being bothered by banks? Providing liquidity using the same algorithms as professional market makers?
I believe that founders new to the cryptocurrency space have heard about these things before, but to fully understand the nuances, one must immerse themselves in the active users of existing products and obsess over talking to users. If you have built a DeFi protocol or NFT marketplace and have never encountered a hack or don’t know anyone who has been hacked, I’m sorry, but you won’t succeed anytime soon, as it means you haven’t deeply understood cryptocurrency.
I can’t count how many new crypto founders from Web2 or TradFi backgrounds tend to project their existing experiences onto crypto, specifically mapping existing Web2 or TradFi products onto cryptocurrency. Just because a product exists in Web2 or TradFi doesn’t mean it addresses a real pain point in cryptocurrency. The best cryptocurrency products are built by crypto natives: Ethereum, Metamask, Uniswap, Opensea, and so on.
Deeply understanding cryptocurrency takes time, but once you do, you have an unfair advantage over your competitors. Unfortunately, many founders give up before reaching this critical moment, leading to the next problem…
The Longer You Survive, the Luckier You Get
Every bear market is so similar, with founders and investors agonizing over the same three things: "We still don’t have a killer app." "The market is small." "Regulation will kill cryptocurrency." Then they exit cryptocurrency.
First, let’s address these issues. Because every person I know who turned to other fields during the last bear market regrets it.
"We still don’t have a killer app" usually comes from someone who has never been to a developing country. If you spend more than a few hours outside of G7 countries, the probability of encountering someone using BTC as an uncensorable store of wealth or USDT as an inflation hedge approaches 1.
"The market is small." The reason the market feels small today is almost definitional: the market is not 8 billion people on Earth, but a small subset of people with crypto wallets. The massive friction of installing a wallet is what creates artificial boundaries between the crypto market and other markets. However, everyone in this space is betting that the same trend that has persisted for the past 14 years will continue: the fluctuation of daily active wallets but an overall increase.
"Regulation will kill cryptocurrency." This is exactly why now is the time to double down. Powerful technologies like cryptocurrency, AI, and the internet evoke fear among those in power. The U.S. may try to kill cryptocurrency, but other jurisdictions like Dubai and Hong Kong openly embrace it. Cryptocurrency will thrive in hostile jurisdictions.
Finally, let me tell you the story of Opensea. During the last bear market, Opensea had at least three competitors. These four markets had almost no distinction in their product offerings and made no significant progress. However, the bear market was so brutal that all three competitors fell, leaving only OS. The rest is history. OS persevered and became the only competitor at the dawn of the NFT bull market in early 2021, quickly dominating and evolving into a unicorn.
Overall, each of these four lessons relates to the product:
Not realizing your product is terrible;
Over-expanding before you have a product that people love;
Not knowing your users well enough;
Pivoting at the worst possible time.
Indeed, this has become a cliché, but the product is the most important thing. It is too early to overly focus on token economics, hiring, marketing, or community management before you have a product that people love. What matters is focusing on building a product that solves real problems and provides value to users. This requires a deep understanding of user needs and preferences, as well as a willingness to iterate and improve based on feedback. Therefore, my thought is to always prioritize product development and user satisfaction.
Appendix: Strategic Recommendations
It is important to remember that there is no absolute best way to build a cryptocurrency startup, but statistically, the following are effective.
Sales, Growth, and Marketing
Avoid using external marketing agencies. Insights shared by founders who have used such services indicate that success stories are hard to come by. Instead, choose to build an in-house marketing team. Leverage your investors to amplify your message and connect you with the media.
If your product is aimed at businesses or developers, content marketing is by far the most scalable way to build the top of the funnel in cryptocurrency.
If your product is consumer-facing, tokens are the most scalable user acquisition strategy. But you can only use this weapon once. Therefore, try those non-scalable things before using it.
For products aimed at businesses or developers, cryptocurrency conferences can be a great user acquisition channel. For consumer-facing products, they are a waste of time.
Gaining reputation on major podcasts and conferences can be challenging, as they often seek established names. Early-stage startups are, by definition, not established names. Instead, focus on writing high-quality content to gain recognition.
The goal of large marketing campaigns, such as fundraising announcements, is not to attract potential users but to attract potential employees. Future employees will conduct due diligence and see such announcements.
Twitter is a lagging indicator of your success, not a leading indicator. Therefore, do not overly focus on 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 also leverage their personal networks for recruiting.
Your community, such as Discord, Telegram, Twitter, or newsletters, is the second-best channel. Ask if anyone or their contacts are interested in collaborating with you.
Only after exhausting personal networks and community contacts should you consider utilizing cryptocurrency-specific recruiters or hiring platforms like Alist, Triplebyte, and coding schools.
Consider hiring experienced Web2 engineers and providing them with Web3 training, as experienced Web3 engineers may be hard to find.
Community Management
An actively engaged community is not the cause of a great product. An actively engaged community is the result of a great product.
Businesses and developers use Telegram. Consumers use Discord.
If it’s a consumer-facing product, do not optimize for community engagement; rather, primarily view your community as users. Seek feedback, test, address pain points, update progress and roadmaps, and educate them on how to use the product.
In the early stages, one of the founders should serve as the community manager.
Token Economics
Token incentives should be viewed as a marketing strategy. However, without a beloved product, token incentives are wasted, as users will simply sell the tokens and leave.
Launching token incentives too early may hinder your understanding of true product-market fit. You won’t know if users are coming for the product or for 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 low morale. This is no different from publicly traded companies.
Don’t time the market, but if you must, launch your token in a bear market. You want your token to appreciate over time, and the way to do that is to start from a low point.
You will never get the token design right on your first try.
Avoid lavish rewards. Use tokens simply, intermittently, and in moderation.
While you should draw inspiration from leading products in your specific vertical, you should design your token from first principles based on the unique needs of your product. Every product is different, so every token design should be different. Remember, tokens are a marketing strategy, so whether to use a marketing strategy depends on the specific product.
I am skeptical about hiring external token advisors. If you plan to hire someone, you should at least create a draft and use them solely as an independent source of feedback. Token design is not rocket science, and no one knows your users better than you, so no one else knows what the best design should be.
Get involved with exchanges early on. They all have different requirements, and their requirements evolve over time. Their requirements often directly impact your token design.
Connect with experienced legal professionals early. Understand that issuing tokens involves securities laws and other relevant regulations. The best way to find excellent lawyers is to seek recommendations from your peers and investors.
