Classic wisdom about the fit between products and markets is equally applicable to cryptocurrencies.
By Jason Rosenthal, Head of a16z Crypto Startup Accelerator
Translated by Luffy, Foresight News
Investors and entrepreneurs (including myself) have spent decades thinking about and pursuing the fit between products and markets. 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, success requires a rare combination of skills and environment, which can be very challenging, even for the most outstanding and experienced founders.
We have various tools and knowledge of various processes and best practices to find product-market fit: from deep detection of conversion funnels to complex multivariate testing. But compared to the magic and joy that comes from finally matching a high-quality product with a huge market, traditional methods may seem somewhat academic. Especially for Web3 projects, they 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 the fit between products and markets is highly applicable to cryptocurrencies: find it, or you will 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 establishing incentive systems that strengthen product-market fit, each step is crucial.
1. Design network effects from the early stages
In the early stages of my career, Bob Metcalfe, co-founder of 3Com and co-inventor of Ethernet, was one of the first CEOs I admired. He was also one of the first to think deeply about and articulate the power of network effects. Thanks to him, we have Metcalfe's Law, which states that the value and influence of a network are proportional to the square of the number of users or devices connected to the network. Metcalfe's Law initially applied to communication devices within telecommunications networks and (later) Ethernet users. Now, the meaning of "network effects" has been expanded: a network (whether it's a social network, blockchain, or both) becomes more valuable to users as more people use it.
For decades, from network protocols to network email to social networks, incorporating strong network effects into software products has always been a successful strategy. Now, with blockchain, we have more tools available for developing networks. Tokens are a very powerful new element that can be designed to reinforce network effects through incentives, airdrops, funding for traceable public goods, and more. For the first time in history, builders can design native, protocol-specific incentive mechanisms in their products to encourage desired behavior, coordinate stakeholders, and attract decentralized communities.
Builders can create a reinforced flywheel by deeply considering how to design and leverage these incentive structures from the early stages of product development. But before embarking on this journey, it is important to note that while these tools are useful, they are not a magic wand to solve significant product problems. Deploying these mechanisms thoughtlessly can actually hinder product-market fit and become a challenge for the company's development for a long time to come.
2. Find and collaborate with the best projects to find the product-market fit point
We are still in the early stages of blockchain networks as a developer platform. Convincing some of the best projects (projects that other startups want to emulate or projects that attract developers) to build and deploy on a given platform can push it toward the product-market fit point. This momentum can reset the trajectory of the company, as other high-quality developers may follow early adopters.
This is also where productive partnerships come into play: these partnerships can help build and validate your product. At this early stage, it is relatively easy for startups to identify projects with the strongest teams, usage, and market appeal to build on the platform. However, how do you know who to collaborate with? Here are some signals for finding suitable partners and some tips for working with them:
Popular brands
How do you judge whether a brand has substance behind it, rather than just an atmosphere? One way is to observe the pride people have in becoming a part of it and participating in it. Collaborating with brands that people appreciate can help the team build credibility within a specific audience. Instead of just collecting brand logos, consider them as communities of customers and target audiences to help you find the product-market fit point.
Market appeal
Which companies' news do you often hear? Of course, the simplest way to identify the "best" products is to observe those that are widely used and loved, or those used and loved by people you know and trust.
Growing builder community
Where are people building? When deciding which companies to partner with, it is helpful to look for companies with a strong builder community. Leveraging products that people enjoy building can help the team tap into 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 "popular" companies, establishing partnerships (validating concepts, making connections, finding new use cases, etc.) can drive the entire industry forward.
3. Let the "smartest" users influence the product roadmap
Certain user, customer, and network participant groups have a natural understanding of the power and potential of new technologies. These are what I call "smart users." They are also known as "power users" and so on; here, I refer to those who provide signals for trends and market trends as early adopters. In the early stages of the technology market, these groups often predict opportunities and define trends earlier than anyone else.
In the early days of public cloud (I worked in this industry before the term "cloud" appeared), rapidly growing startups helped cloud providers improve and strengthen their auto-scaling services. These companies helped drive product priorities and demands, especially when it was difficult to determine which features to optimize first or why. Therefore, identify these leaders in your field early on. Then, understand their needs deeply. Over time, others will follow in their footsteps.
But how do you identify the "right" users who others will follow? Founders can start by having as many and as continuous conversations as possible. In the early stages, when founders are deeply involved in daily development and customer support, they have the opportunity to gather real data through conversations with customers and contributors.
The beauty of Web3 is that the space is relatively small. Since most of Web3's content is publicly built, 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 for the thoughts of existing customers. This is a key advantage, as Web3 has a smaller and more concentrated user base, whereas in other industries, talking to too many customers at once can lead you astray.
The early stages of finding product-market fit are the best time for one-on-one conversations with your customers. Involving active users and early adopters in your product development and gaining a deep understanding of their behaviors and needs will help you define the roadmap in uncertain areas. Over time, other customers may follow the lead of this smartest group, which in turn will increase attractiveness 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 (many crypto projects have "airdrop hunters"). Ultimately, a group of people and bots generate valueless activity on the network, hoping to receive airdrops and cash out early. Therefore, when designing reward systems and token distribution, it is necessary to clear out arbitrageurs who contaminate 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 also avoiding sowing seeds of distrust in the early stages of the product. Airdrop hunters selling tokens for quick profits can lead to price fluctuations, ultimately disrupting the project's ecosystem. Now, more than ever, it is important to accurately understand who is using the network and how they are using it. Then incentivize positive activities while suppressing negative behaviors.
So how can the team distinguish distracting noise from useful product signals? As malicious users become increasingly adept at gaming the system with false activities, this task is not as simple as it seems. The tools and methods used to distinguish high-value users from low-value users in a given protocol are rapidly evolving. For example, metrics such as Total Value Locked (TVL), active wallets, and daily transactions were once valuable for Web3 teams, but are now relatively poor indicators of network health. There is currently no definitive "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 work being done now will shape the best practices playbook that future builders will follow.
5. Invest in developers
If it's not 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 involve more people and reward them for helping develop the network.
For example, distributing token grants to these groups can encourage compound growth and attract and reward early adopters. But it must be done well (e.g., using a complex set of incentives from the inside out for individuals and development teams). When deciding who to support and how to sustain the project in the long term, it is important to strategically consider the value the launch project will bring to the network.
Following a simple three-step plan can ensure that the project delivers on the original intent of token grants:
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 time frames? A simple way to think about this is to ask: What features do we need to have an expected impact on the product, protocol, or community?
Milestone rewards: Avoid the trap of prepaying for something that will never be delivered. Instead, provide appropriate rewards when partners reach milestones. To effectively incentivize partners, it is important to keep them aligned with the roadmap and only distribute token grants when they provide critical practical features for the community.
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 significantly exceed the resources invested. This may seem obvious, but faced with FOMO and other market pressures, teams are easily swayed from the value. This was most evident in the last bull market, when many traditional brands and large Web2 companies experimented in Web3, only to flee the market when they encountered resistance.
Of course, product-market fit is tailored to each founder, startup, and market. These are just general recommendations for companies that are just starting out. To put them into practice, it is important to consider your own practical experience and key metrics. Start with a hypothesis and a core belief about what you need to do to find product-market fit, then determine which experiments are needed to prove (or refute) these hypotheses.
Finally, it's important to know that there are many factors at play when exploring product-market fit. Not all products or markets will yield billion-dollar outcomes. However, every founder can take pride and comfort in knowing that they have spared no effort in pursuing product-market fit. Every dedicated attempt will bring you rich experience or extraordinary success: outstanding products in great markets.
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