Honesty, wisdom, and energy. If you don't have the first, the other two will harm you.

Written by: Qiao Wang

Translated by: TechFlow

I often hear this question from founders and venture capitalists: "What criteria do you use to select teams for AllianceDAO?" So I decided to write down my thoughts.

But in the process of writing this article, I realized that this is not only what we are looking for when screening applicants, but also the conditions required to become an excellent crypto founder. The difference between "what we are looking for" and "what is needed" is that the former is just an assumption, while the latter is based on empirical evidence.

I don't delude myself into thinking that I know the perfect answer to this question, but over the past three years, we have been involved in about 200 startups, and some patterns have begun to emerge.

Insight

I will start by providing a practical alpha for potential applicants. One of the most important questions on our application form is "What unique insights do you have about your users?" As far as I know, having profound insights is one of the key differences between excellent crypto founders and poor founders. However, few applicants can give a thoughtful answer to this question.

Profound insight into users is often an idea around which an entire business can be built. For example, Tensor's (ALL7) initial insight was that despite Opensea and Magic Eden dominating, there was still an important group of users not being served, professional NFT traders. These traders needed different tools, such as sweeping or advanced analytics. This is not much different from the world of fungible tokens, where professional traders need tools like Perps or new ERC20 snipers. Tensor's entire product vision is to serve these professional traders.

But outstanding insights are not necessarily limited to this. It can also be a surprising observation that makes us (the interviewers) think, "Wow, I never thought of that before, but it makes sense." An example is when the founder of StepN (ALL7) told us in an interview, "Many people go to the gym not because they need a trainer or equipment, but because they need real engagement to hold themselves accountable." The fact is, we screen thousands of applications every year, and very few things impress us. Being able to teach us something new tells us that the founder has the ability to think independently, rather than joining the cryptocurrency industry after reading some "why Web3 is important" articles from venture capital firms on the internet.

Sometimes, great insight is entirely counterintuitive. When Ostium (ALL9) first met us, they pitched "commodity RWAs" to us. At that time, "RWAs" as a category was almost ignored—no tokenized sovereign debt project had achieved real success—let alone "commodity RWAs." So I argued, "In the crypto space, no one cares about gold and oil, they are asset classes for the elderly." Kaledora countered, "r/wallstreetbet is very interested in lean hogs and orange juice because they are very memeable, and yet retail has no simple way to leverage trade them." I don't know if putting commodities on the chain will have a great impact, but I like this kind of counterintuitive thinking.

Now, you might argue that these insights seem trivial and may even be proven to be completely wrong. Indeed, but having insight itself is not the factor that makes founders successful. On the contrary, having insight includes two crucial qualities.

First, I want to quote Ilja from Tensor, "If you don't have* contrarian thinking, you don't have a* startup**." It's not just investors who have to bet against the trend. Founders must also do so. In fact, when was the last time a successful crypto startup didn't have controversy at the beginning? Do you remember how many people dismissed Solana? Do you remember the debate around Uniswap's CLOB and AMM? Almost by definition, entrepreneurship is about discovering a secret that others don't know or few people acknowledge. Otherwise, the company may already exist.

The second quality of having insight is that founders have actually spent a long time in their field, and spending a long time in their field indicates perseverance, genuine passion, or both. I have written about this before, but I found that new crypto founders usually need to spend at least 1 to 2 years to form genuine insights. But why does it take so long? Well, I suspect it's because crypto is fundamentally different from Web2 or traditional finance (where most founders come from) and is often counterintuitive. Many times, founders give up on crypto within 1 to 2 years, just before that critical moment. This leads to my next point.

Elite School or Elite Company?

Here, I want to use a statistical trick. If you consider all crypto founders as a sample, there is definitely a correlation between attending elite schools or working at elite companies in Silicon Valley and future success. But if you consider the top 1% of the most outstanding founders as a sub-sample (which is the standard for entering AllianceDAO), then by visual observation, this correlation is almost zero. When I look at the most successful companies we have incubated and the most successful companies in the entire crypto space, very few come from elite backgrounds.

Now, to be clear, a correlation of 0 does not mean that an elite education predicts failure. Not at all. It just means that at the highest level, it is no longer an independent predictor of success. But why is this the case?

Some founders have been instilled with the belief from a young age that you must grow by 5% every week, otherwise you have failed. In fact, the growth trajectory of crypto products is rarely smooth. Instead, most products, from centralized products like Coinbase to protocols like Ethereum, have stair-step growth. This is mainly due to the cyclical nature of the broader market. Therefore, these founders give up too quickly, and almost always give up during the bear market when growth stagnates.

Another reason is that many founders from elite backgrounds come to the crypto space for the wrong reasons. They come to crypto because the opinions of Web3 being the future of the internet by thought leaders on Twitter, which they paid attention to at the peak of the bear market, led them to believe that the rising prices validated these claims from experience. If you are an immigrant from a lower class, you just want to make life-changing money with HarryPotterObamaSonic10Inu, or send money to your family, these claims sound absurd. Now, I do believe that Web3 will become an important part of the internet, but before entering a startup, you must be able to infer why from first principles and immerse yourself in existing crypto products to fully appreciate the power of crypto.

A direct consequence of senior elite individuals from Web2 or TradFi entering the crypto space for the wrong reasons is that they often become infatuated with decentralized Uber-like ideas. I know this word is overused and annoying, but it's clear that what works in Web2 or traditional finance does not necessarily work on the blockchain. When I interview applicants, I often ask myself or ask them, "What novel, weird, or even controversial consumer behaviors does your product bring?" Even if you're not a genius, you can realize that decentralization often makes the user experience worse, but if the product can enable consumer behaviors that were previously unexperienced, that may be acceptable. If it doesn't enable new behaviors, then it's just providing a worse user experience in competition with Web2 or traditional finance. An example is in DeFi, where you can use hundreds of financial products in one account comfortably, without creating a new account and undergoing KYC for each new product.

There is a question on our application form that I am very concerned about: "Why choose to work on this idea?" Solving your own problem or a friend's problem may be a good answer. It is said that this answer often comes from founders in emerging markets or the DeFi space, both of which are the opposite of what I call "elite." For example, Felipe built Kravata (ALL12) because he needed an offshore fiat exchange service in Latin America. Jackson built Thunder (ALL12) because he was very frustrated with how difficult it was to mimic new ERC20 and Friendtech keys.

The key is that if crypto is indeed a long-term equalizing force for the 8 billion people on Earth, then logically it must also be an equalizing force for crypto entrepreneurs. That is, the likelihood of success for founders from underprivileged backgrounds should be the same as for elites. This is because they inherently understand those same underprivileged users.

Therefore, we hardly care about elite qualifications. We really don't. About two-thirds of the applicants we admit are complete strangers online, and they put a lot of thought into their applications and interviews. Many VCs believe that introductions are necessary because being able to enter the VC community through the network is your first test: if you can't even get a warm introduction, you can't get users. I sympathize with this view, but I also believe that for entrepreneurs in the world who are not privileged, their distance from elite VCs is not 1 degree to 2 degrees, their better use of time is to connect with users rather than VCs.

Perseverance

While elite qualifications may not necessarily be a good indicator of first principles thinking, they are a good indicator of perseverance. Many people, including myself, believe that perseverance is the biggest commonality among successful founders in any industry.

On our application form, we ask applicants to describe a particularly persevering example. But to be fair, it is very difficult to judge a founder's perseverance based solely on this question or an interview. However, sometimes they tell us surprising things. One of our alumni (anonymously for privacy reasons) told me, "All my classmates from (a top university) have achieved great success in the field of artificial intelligence. If they can do it, I can too." I felt the pressure from him/her.

Now, many people would argue that money and fame are not good reasons to start a startup. I'm actually not sure if this is correct. But setting aside this debate, the most persevering people I know all have a huge chip on their shoulder. No matter how much success they have achieved, they always seem to have something to prove. Many have experienced early trauma. Musk and Jobs were both raised by an abusive father.

However, it is also possible that perseverance is more important in the crypto industry than in other industries. Tell me another industry that experiences a complete boom and bust cycle every four years. Or another industry where the SEC chairman has made it his personal mission to eradicate. Or another industry where all major figures are imprisoned in less than a year. Every time I see tweets like "I aged 3 years in the past 24 hours" or "I survived the bear market of 2022.11.20," I laugh. This is not an industry for the faint-hearted.

One simple but not easy way to artificially increase perseverance is to find a co-founder whom you know well, preferably someone you have worked with in the past. We also ask applicants on the application form how they met their co-founder. Having a co-founder serves the purpose of not only complementing each other's skills but also providing each other with psychological support in times of hardship. The issue is that working with someone you just met at a conference rarely succeeds; it really needs to be someone you have already built a trusting relationship with. Therefore, during bear markets, many founding teams split up. They claim it's due to different visions, but upon closer inspection, the real reason is a lack of trust. If you can't find someone you trust, it's better to go alone (and possibly seek peer support from founder communities like AllianceDAO).

Honesty

Buffett said it best: "I look for three qualities: honesty, wisdom, and energy. If you don't have the first, the other two will harm you." In fact, all the major figures who have been imprisoned in the past year had the latter two, but not the first. I believe the word "honesty" needs no further explanation.

Coincidentally, the three elements of "honesty, wisdom, and energy" align very well with all the attributes I discussed above. Insight is related to wisdom, perseverance is related to energy, and a background without privilege may encompass both.

In addition to these, we certainly care about distribution, market size, engineering capabilities, defensive capabilities, regulatory risks, and so on. But a weakness in any of these areas does not necessarily ruin the deal. We often work with first-time founders who are insightful, underprivileged, persevering, and honest, helping them grow. These qualities may take years to cultivate, or even be innate, which is why they are unquestionable. All other elements can be learned or acquired. All common mistakes can be avoided.

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