a16z: 5 Strategies for Web3 Projects to Achieve Product-Market Fit

Original Title: “How to find product-market fit: 5 strategies for web3”

Author: Jason Rosenthal, Head of a16z Crypto Startup Accelerator

Translator: Luffy, Foresight News

Investors and entrepreneurs (myself included) have spent decades thinking about and pursuing product-market fit, and now we can define this concept for builders as simply as understanding the commercial value of a product. One definition of product-market fit that I like comes from Eric Ries: "When a startup finally finds a broad customer base that resonates with its product." It sounds simple, and companies that successfully find product-market fit make it all look easy. But in reality, the rare fusion of skills and environment required for success can be very challenging, even for the best and most experienced founders.

We have various tools and know various processes and best practices for finding product-market fit: from deep analysis of conversion funnels to complex multivariate testing. However, compared to the magic and joy that comes from ultimately matching a quality product with a huge market, traditional methods may seem a bit academic. Especially as Web3 projects face a unique set of challenges: the playbook is still being written, the underlying infrastructure is still evolving, and so on.

Nevertheless, classic wisdom about product-market fit is very applicable to cryptocurrency: find it, or you will ultimately fail. New startups must focus on pursuing product-market fit. Furthermore, to surpass all other competitors and solidify market leadership. So how should Web3 companies pave the way for future success? Here, I share five launch strategies for Web3 teams, from new customer research methods to building incentive systems that reinforce product-market fit—each step is crucial.

1. Design Network Effects from the Early Stages

In the early part of my career, Bob Metcalfe, co-founder of 3com and Ethernet, was one of the first CEOs I admired. He was also one of the first to deeply think about and articulate the power of network effects. Thanks to him, we have Metcalfe's Law, which states that the value and impact of a network are proportional to the square of the number of users or devices connected to it. Metcalfe's Law originally applied to communication devices within telecom networks and, later, Ethernet users. Now, the meaning of "network effects" has expanded: a network (whether a social network, blockchain, or both) becomes more valuable to users as more people use it.

For decades, from network protocols to web email to social networks, designing powerful network effects into software products has been a successful strategy. Now, with blockchain, we have more tools available to develop networks. Tokens are a very powerful new primitive that can create self-reinforcing network effects through incentives, airdrops, funding for retrospective public goods, and more. For the first time in history, builders can design native, protocol-specific incentive mechanisms into their products to encourage desired behaviors, coordinate stakeholders, attract decentralized communities, and more.

Builders can create a reinforcing flywheel by thoughtfully considering how to design and leverage these incentive structures from the earliest stages of product development. But before embarking on this journey, one thing needs to be noted: while these tools are useful, they are not a magic wand for solving significant product issues. Thoughtlessly deploying these mechanisms can actually hinder product-market fit and become a long-term burden on the company's growth.

2. Find and Collaborate with the Best Projects to Identify Product-Market Fit

We are still in the early stages of the maturity curve for blockchain networks as developer platforms. Convincing some of the best projects (those that other startups want to emulate or that attract developers) to build and deploy on a given platform can move them closer to product-market fit. This momentum can reset a company's trajectory, as other high-quality developers may follow early adopters.

This is where fruitful partnerships come into play: these partnerships can help build and validate your product. At this early stage, it is relatively easy to identify projects with the strongest teams, usage, and market appeal among developers seeking platforms. However, for startups, how do you know who to partner with? Here are some signals that you've found the right partners, along with some tips for collaborating with them:

Popular Brands

How do you determine whether a brand has substance behind it, rather than just hype? One way is to observe the pride people take in being part of it and participating in it. Partnering with brands that people admire can help teams build credibility within specific audiences. Don't just collect logos of brands; view them as communities of customers and target audiences that can help you find product-market fit.

Market Appeal

Which companies do you frequently hear about? Of course, the simplest way to identify "best" products is to observe those that are widely used and loved or those that informed individuals you know and trust use and love.

Growing Builder Communities

Where are people building? When deciding which companies to partner with, it can be helpful to look for companies with strong builder communities. Products that people enjoy building can help teams leverage and borrow existing expertise and skills. It can also help bring a builder community to a specific product.

More broadly, founders can view these teams as a group of peers. In addition to partnering with "hot" companies, forming partnerships (to validate concepts, build connections, find new use cases, etc.) can drive the entire industry forward.

3. Let the "Smartest" Users Influence the Product Roadmap

Certain users, customers, and network participants have an innate understanding of the power and potential of new technologies. These are what I call "smart users." They are also referred to as "super users," etc.; here, I mean those early adopters who signal trends and market directions. In early technology markets, these groups often predict opportunities and define trends earlier than anyone else.

In the early days of public cloud (I was in the industry before the term "cloud" emerged), rapidly growing startups helped cloud providers improve and enhance their auto-scaling services. These companies helped drive product priorities and demand, especially when it was difficult to articulate which features to optimize first and why. Therefore, identify these leaders in your field as early as possible. Then, deeply understand their needs. Over time, others will follow in their footsteps.

But how do you identify the "right" users that others will follow? Founders can start by having as many conversations as possible, as continuously as possible. In the early days, when founders are deeply involved in daily development and customer support, they have the opportunity to gather real data by talking to customers and contributors.

The beauty of Web3 is that the space is relatively small. Since much of Web3 is built publicly, founders can more effectively search for interesting posts, topics, and conversations related to what they are building on X and Farcaster. They can look for conference speakers and attendees or ask existing customers for their thoughts. This is a key advantage; Web3 has a smaller and more concentrated user base, and in other industries, talking to too many customers may lead you astray.

The early stages of seeking product-market fit are the best time for one-on-one conversations with customers. Involve active users and early adopters in your product development and gain deep insights into their behaviors and needs, helping you define the roadmap in uncertain areas. Over time, other customers may emulate the practices of this smartest group, which in turn will increase appeal and market share.

4. Reward the Right Users

As mentioned earlier, tokens can enhance network effects; but they also face challenges from regulation, operations, and bad actors.

In particular, any new token or incentive system will attract super users and arbitrageurs for the "right" reasons (the "wool pullers" of many crypto projects). Ultimately, a group of people and bots generate worthless activity on the network, hoping to receive airdrops and cash out early. Therefore, when designing reward systems and token distributions, it is essential to clear out arbitrageurs that pollute product signals while rewarding super users who provide long-term value to the network and help drive others.

The goal here is to build a strong community while avoiding sowing seeds of distrust in the early stages of the product. Airdrop hunters seeking quick profits may sell tokens, leading to price volatility and ultimately undermining the project's ecosystem. Now, more than ever, it is crucial to have a clearer understanding of who is using the network and how they are using it. Then, incentivize positive activities while suppressing negative, harmful behaviors.

So how can teams distinguish distracting noise from useful product signals? As malicious users become increasingly adept at using false activities to game the system, this task is not as straightforward as it seems. The tools and methods we use to differentiate high-value users from low-value users within a given protocol are rapidly evolving. For example, metrics like Total Value Locked (TVL), active wallets, and daily transactions were once valuable indicators for Web3 teams but are now relatively poor indicators of network health. There is currently no definitive silver "North Star metric." However, many teams launching tokens in 2024 are experimenting with creative approaches, so keep an eye on this area.

I believe the ongoing work will shape the best practice playbook that future builders will follow.

5. Invest in Developers

If it isn't clear yet, the ability to create and collaborate with users and builders is one of our greatest opportunities to refine product-market fit, especially in areas where traditional strategies often fail. Deploying tokens is an effective way to engage more people and reward them for helping to grow the network.

For example, distributing token grants to these groups can encourage compound growth and attract and reward early adopters. But this must be done well (e.g., using a complex set of inside-out incentives for individuals and development teams). When deciding whom to support and how to sustain projects long-term, it is important to strategically consider the value that launching projects will bring to the network.

Following a simple three-step plan can ensure that projects deliver on the original intent of token grants:

1. Plan Key Moments and Timelines: What is the scope of the given project? Will it be completed in a month, a quarter, or a year? What development milestones must be achieved within these timeframes? A simple way to think about this is to ask: What features do we need to have the expected impact on the product, protocol, or community?

2. Milestone-Based Rewards: Avoid the trap of prepaying for things that will never be delivered. Instead, provide appropriate rewards as partners reach milestones. To effectively incentivize partners, ensure they are aligned with the roadmap and only distribute token grants when they deliver key utility features for the community.

3. Understand the Potential Value of Each Development Project: Determine the project scope based on the value to the network. The total value created by the project should far exceed the resources invested. This may seem straightforward, but in the face of FOMO and other market pressures, teams can easily overlook value. This was most evident in the last bull market, when many traditional brands and large Web2 companies experimented in Web3 and then quickly exited the market when they encountered resistance.

Of course, product-market fit is tailored for each founder, startup, and market. These are just general suggestions for companies that have just embarked on their journey. To put them into practice, be sure to consider your own experiences and key metrics. Start with a hypothesis and a set of core beliefs about what you need to do to find product-market fit, then identify what experiments need to be conducted to validate (or invalidate) those hypotheses.

Finally, be aware that many factors are at play when seeking product-market fit. Not every product or market will yield billion-dollar outcomes. However, every founder can take pride and comfort in knowing that they are doing their utmost in the pursuit of product-market fit. Every earnest attempt will bring you rich experiences or extraordinary success: exceptional products in great markets.