Half-life of Web3 Token Projects.
Why do token projects fail? And discussing the path from exuberance to fundamentals.
Hello everyone,
Welcome to the first edition of the NotCryptoBro’s Memo. I am really grateful for all of your support till now and I promise to make each memo worth your time.
My Experience.
I have spent several years of my career working with early-stage Web3 founders. I like to work in the early stages of a startup because it gives me an opportunity to connect and build relationships with the founders and the team. As I believe, building a product needs to be value-driven rather than transaction-driven. Further, contributing from the ground up helps build strong foundations and avoid many of the common pitfalls of a startup, thus saving precious time and resources.
Last year, when I helped launch the APE 0.00%↑ token (ApeCoin at $8B Fully Diluted Market Cap) and Otherside NFTs (generating $235M in revenue), every project and founder I talked to after the launch wanted to replicate the same level of success.
I knew ApeCoin was a convergence of small steps orchestrated in perfect synchrony over months—it was an outlier. However, none of the startups wanted to understand how and why Yuga Labs and ApeCoin achieved that level of success. They simply wanted to copy the Yuga playbook. As a result, most of the projects FAILED.
So, I thought it’s worth diving deeper into,
“Why do so many Web3 token projects fail?”
and “How can we avoid committing the same mistakes?”
Background.
To begin with, the ground reality is that, be it Web3 or Web2, early-stage startups have a very low rate of survival. Especially when you are trying to accomplish everything that a Web2 startup does in 8–10 years in just 2-4 years. Not to mention, in an open environment, the variables for failure increase quite significantly.
According to a report published by Lattice, a Web3 venture capital firm, only 5% of the companies funded in 2021 were successful in attaining product market fit. The data has been put together by analyzing 780 publicly available crypto pre-seed & seed rounds from 2021. The total investment amount for these companies exceeded $2.6B.
What's much worse is that most of the projects were unable to accomplish even a sliver of what they promised, even after raising several millions of dollars.
I noticed that all of the unsuccessful projects had some traits in common. But first, let’s unpack a bit about how we got here.
A Walk Down Memory Lane.
It all goes back to the fundamentals. In a typical Web2 setup, startups are accustomed to a framework of stage-based capital raising. Which roughly includes the following:
Pre-seed/Seed. This is the story and narrative stage. Startups build or provide a proof of concept and validate the need for their product based on a vision and perhaps a slide deck.
Series A. Once a need is met, startups tweak the product for Product Market Fit (PMF). This stage requires quick scaling as more users and customers identify with the problem and use the product to solve it.
Series B. With scale comes technical debt, new opportunity areas, scaling teams, and hitting challenging KPIs (product and revenue). To achieve all this, projects are required to raise more capital, obviously.
Series C (and beyond) More growth, more problems—international expansion, governance structures, going after new verticals, marketing, compliance spending, and much more. The capital infusion gets bigger and bigger.
All this while (more or less) making sure certain threshold metrics are hit to justify the valuation for the next round and the need for more capital, marketing, new features, etc. Otherwise, it’s typically time for a fire sale or to go bust. As they say, simpler times.
So, How Did We Get Here?
In the world of information abundance, anyone who can claim will claim to be the Master of the Universe.
Primarily when everyone’s going after the scarcest resource in the world, i.e., attention span. The louder a voice, the more considerable the clout. And that’s where the problems begin, especially for builders in Web3.
The last few years have sent the message that vanity metrics like X followers, degenerate behavior, securing easy capital, and partnerships in the pipeline with no revenue are the way to operate in Web3. Things couldn’t be farther from reality. While all of these metrics are good in their own right, they do not help build sustainable businesses.
Model Flipping.
The Web3 model is disruptive, and it flips the capital-raising model on its head. Let’s take a crack at what happens here.
Build a product people want, i.e., find a problem that can be solved by blockchain technology and that might need token incentives for growth » Raise Seed capital
Build a community, i.e., find users who relate to the problem, and if enough users face the problem, a community is established » Raise Series A capital
Alright, we follow the same path as any Web2 startup till we “build a community”. But here comes the flipping. This is where crypto-based incentives start playing a bigger, greedier role and kick EVERYTHING into fifth gear without the clutch. If (a big IF) things are planned correctly, you end up launching a token, and then...
Provide ownership to the community, i.e., have token incentive mechanics for users to stay and grow the ecosystem/protocol.
Continue to deliver value through new products/IP/services i.e. simply put, help the token accrue value by building new products following the same principle as #1 and #2 above. Rinse and Repeat.
It seems simple enough, right? I wish. While model flipping is disruptive, leveraging the model to build is a $hit $how at best.
Let’s Dig Into Why the $hit Hits the Fan?
Growing up, I was told to do the work, and money would follow. Crypto changed that basic understanding. When you put short-term financial incentives front and center, that typically demands no "work"—what's the point in building for the long term?
As such, 6 key patterns emerge:
Missing Problems, Missing Solutions.
Founder’s Blank Canvas: No Strokes of Experience.
No Incentive Alignment Between Project Milestones and Token Unlock Schedules.
Priority Is Token Launch Over Product Development and Traction.
Too Many ‘Advisors’.
Are Tokens [Absolutely] Necessary?
Let’s dig in.
1. Missing Problems, Missing Solutions.
Problem: This, I believe, is a no-brainer. If we can’t identify a problem, how do we align on solving or selling the solution? A ‘problem’ I believe EVERYONE wants to solve is ‘Web3 adoption’. But the thing is, ‘Web3 adoption’ is not a problem. The problem is to find a desirable, technically feasible, and economically viable way to integrate Web3 technology into large problem sets. All of this while ensuring the trifecta of decentralized governance, security, and scalability stay intact.
As Polygon’s co-founder, Sandeep Nailwal, said, “Not every problem needs a Web3 solution”. Today, most digital assets and Web3 space primarily sell one thing: asset price speculation and volatility, which is geared towards ‘traders’.
Impact: This approach results in copy-paste protocols lacking creativity and analytical know-how. The focus is on "speed to liquidity" (via tokens) over building innovative products looking to satisfy their users’ needs. This deprioritizes the need to innovate and instead launches half-baked solutions to cash in on the mania.
Recommendation: To build a legacy product, the first step needs to be building out the user persona. The questions to consider are...
What are the user’s pain points?
Is there a solution in the space that solves it?
If yes, why have they been unable to solve it completely?
If not, has it been attempted?
Do I absolutely need to integrate Web3 technology to solve it?
Narrow down the ideal user persona as much as possible. One of the best examples I find that did it is Blur. If someone had asked over a year ago whether anyone could beat Opensea as an NFT trading platform, most of us would have said, "No, impossible."
However, Blur did the impossible. If you noticed, they did not target the entire "Traders" community. Instead, they targeted the high-frequency traders, aka, the "Degens". They wanted to satisfy the degens by building a simple and fast platform for NFT trading for traders. The airdrop was the cherry on top. I would encourage you to check out 0xDesigner’s X for some good ideas utilizing web3 technology.
2. Founders' Blank Canvas: No Strokes of Experience.
Problem: Nearly 50% of ‘operators’ in the space are below 30 years old. That in and of itself is not a problem; after all, young leaders are the backbone of our economy. However, when experience is decoupled from any relevant business experience or performance metrics and the primary moat is marketing [shilling] and X followers, there is a problem.
The inexperience becomes apparent when, after talking about the projects, all the team can show for traction is the 100s of partner logos who are looking to work with them without any commercial partnership or letter of intent.
Impact: This naivete has given birth to ‘Shiller’, ‘influencers’, and ‘Crypto Bros’ who feast on the founder's inexperience. Ultimately, it fuels a cesspool of projects that eventually feel like a pyramid scheme.
Recommendation: It’s easier said than done, but finding and funding the right projects is hard. Ultimately, a signal to opt-in for is to look at the founding team (especially at an early stage) and look for patterns such as in-house business-tech experience, prior products built or sold, the ability to attract smart talent, and last but not least, how often the team name-drops. Also, try to see if the project has delivered a pre-product or pre-product market fit. In a nutshell, the focus should be building products or services with a clear vision or narrative.
3. No Incentive Alignment Between Project Milestones and Token Unlock Schedules.
Problem: I believe token distribution, lockups, and vesting schedules are broken as they exist today. The ultimate salesman of ANY product is the founder or the founding team. Period. But the basic question anyone must ask in Web3 is,
‘What’s the incentive for a Founder/Team to continue building a network or protocol after they have made a lifetime worth of money on their first token unlock?’
I have seen oblivious community members/users left holding project tokens in hopes of continuous delivery from the Founders (and helping accrue value to the held tokens). But given the typically short unlock schedules for founders, the ultimate salesmen either
a) don’t have any incentive to continue building since most unlocks are fairly linear with no KPIs associated with it or,
b) have already gone through a brutal TGE process that encapsulated taking care of community voices, the regulatory landscape, investors, etc.
Impact: Without a standardized, proper long-term incentive structure, cases of abuse, opportunism, and fraud are inevitable. Thus, it is hard for legitimate projects to build trust in the long-term commitment of the team and founders.
Recommendation: I think a radical change is required as part of the maturity of the Web3 and digital assets space. Especially considering the instant liquidity of the tokens and the fact that crypto projects are long-lasting initiatives, These projects should adopt longer lockup periods (not shorter ones) coupled with measurable KPIs to hit.
4. Priority Is Token Launch Over Product Development and Traction.
Problem: Where do I even start on this one? Web3 founders often consider launching a token as their biggest ‘event’. I have some news: the token launch is not an event; it’s the birth of an entire product ecosystem – please, don’t sleep on it.
And what typically sweetens the ‘event’ is being launched on big-name centralized exchanges (CEXs), like Coinbase, Binance, OKX, Huobi, and others, because, guess what? That’s where deep pocket liquidity exists, and it provides a stamp of approval to retail investors that ‘yes, this is a legit project!’. But (and a big BUT), the token generation/launch event (aka TGE) takes A LOT of bandwidth from the core team, which forces them to focus on this ‘event’ instead of their product or platform.
What makes me sad is that more often than not, founders ask me, "How do I drum up hype for my token launch?", and not how to build a better product or platform...
Impact: Overindexing the success of a tool that powers a startup’s ecosystem (i.e.tokens) instead of the ecosystem and product is a fool’s game. But if I am being honest, this is not entirely the fault of the Web3 startups either. Getting the backing of big exchanges, celebrities, and partners does garner some eyeballs. However, this attention lasts less than that of a goldfish’ because there’s often no strategy or plan to execute post-TGE. Either way, it’s a lose-lose.
Recommendation: Founders need to leverage partners that can intelligently (keyword) speak about their business and not just fuel the hype around the token. Focus and prioritize product development and community over token launches. You want to know what Yuga Labs did, right? This thinking was right at the top of their strategy.
At the end of the day, you cannot control the markets and price volatility, but what a startup can do is control its own product development and stay true to its core set of users.
5. Too Many ‘Advisors’.
Problem: Web3 is a complicated space layered with legal, regulatory, and technical challenges. And it can fluster even the best of teams. So it’s important to have advisors and subject-matter experts in your corner who can help your startup navigate the space. However, I often see too many ‘advisors’ involved with no clear value-added input. This can be counterproductive.
Impact: Startups are left listening to way too many voices and dealing with way too many third parties to coordinate product development and launch tokens. That in turn creates internal and community friction, delays product launch dates, and oftentimes makes investors question why they have given their capital to a startup that needs to outsource every single aspect of their operations. A quick LinkedIn search reveals that there are over 6,600 “Web3 Advisors”.
Recommendation: One of the ways to navigate this landmine is to carefully select who you take advice from. Everyone has an opinion on everything. A founder’s job is to decide whom they want to work with based on criteria like experience, skillset, reasoning, their gut feeling, and carefully consider how the decisions impact your burn rate (it is super critical not to run out of capital by spending on things that are NOT A MUST).
6. Are Tokens [Absolutely] Necessary?
Problem: One of the most game-changing aspects of digital assets and Web3 ecosystem projects is the token incentivization model. The idea is that users can be rewarded (via tokens or digital assets) and incentivized for certain actions. These digital assets, or tokens, can then be seamlessly exchanged for other digital assets within the Web3 ecosystem. A truly borderless network of assets.
However, I think this has been way overused, as we see startups rushing to launch a token even before they identify ANY need to do so. All in the hope that it will create a positive sentiment in the community and will, help with exit liquidity. And, if I am being candid, currently, digital assets are at best used to buy user/community loyalty and acquire low-value add users that dump the tokens as soon they receive a free airdrop.
Impact: As a result, we have Coinmarket Cap tracking 9K+ tokens on its server. This has been caused by mass hysteria and speculation around tokens, which in turn further perpetuate this type of behavior. Thus, founders end up launching the tokens instead of thinking through the strategic need for a token.
This actually is also exacerbated by the community pretty much holding the founders hostage by threatening to exit their community if their ‘loyalty’ is not rewarded by a token launch. Yes, I have seen that happen as well.
Recommendation: When planning to integrate tokens into a project’s ecosystem, it’s important to understand the unit economic flow of the token, to and from the network. Is the flow even circular? Here are some things to question:
10 ways the tokens will be burned or flow back into your treasury
Can the project truly launch without a token?
Is it necessary to decentralize decision-making power/Governance before any product/platform traction?
Does the end product benefit in any way because of the token?
How will the community use the token?
If all of the answers satisfy the need to launch a token, I’d then recommend first testing out the token's economics in a private (not on the mainnet). It can be done by running an A/B test with different scenarios and a small community of testers. This will help stress test the demand/supply side of the token and iron out irregularities and bugs before releasing it on the mainnet.
Concluding Thoughts.
Reading this memo, you might think that the ecosystem is filled with non-competent startups. Trust me, it is not the case.
As someone who has collaborated with hundreds of founders to date, I understand startup struggles. Growing from 0 to 1 and beyond is hard. I care deeply about startups that are building in Web3. I understand that it is much more challenging to build a project in Web3 than in Web2 when there are so many attack vectors that need to be dodged to be successful.
Note, I didn’t even get into the security hacks and how billions of dollars get drained from project treasuries, ultimately leading to startup death, even before it starts to crawl. That’s a memo for another day.
Through today’s issue, I wanted to make sure I clearly identified some of the biggest challenges that lead to Web3 token projects failing. A change in how we evaluate and think about projects both from the perspective of an investor [or community] and a builder I do not expect the change to be implemented overnight. It will take time, but it will happen.
All I can do(and you as an extension), is act as catalysts for change.
I hope you found today’s memo insightful and took home several key points. Do let me know what your thoughts are on "Why web3 projects fail? And how can we change it?" and “Do you resonate with some, if not all of the challenges above?” by replying to this email.
Till next Thursday!
NotCryptoBro
[aka Rohan Handa]