Original author: Jason Rosenthal, head of a16z crypto startup accelerator
Original translation: Luffy, Foresight News
Investors and entrepreneurs (myself included) have spent decades thinking about and pursuing product-market fit, and now we can define it for builders as simply as understanding the business value of a product. One of my favorite definitions of product-market fit comes from Eric Ries: “When a startup has finally found a broad base of customers that resonates with its product.” It sounds simple, and companies that have successfully found product-market fit make it look easy. But in reality, success requires a rare confluence of skills and circumstances that are often very challenging, even for the best and most experienced founders.
We have all the tools and know all the processes and best practices to find product-market fit: from deep funnel testing to complex multivariate testing. But traditional approaches can seem a bit academic compared to the magic and joy of finally matching a great product with a great market. Web3 projects in particular face a unique set of challenges: the manual of practice is still being written, the underlying infrastructure is still evolving, and so on.
Still, the classic wisdom about product-market fit applies to crypto very well: find it, or you’ll fail. New startups must focus on pursuing product-market fit. And, more importantly, surpassing all others and cementing market leadership. So how can Web3 companies pave the way for future success? Here, I share five startup strategies for Web3 teams, from new customer research methods to building incentive systems that reinforce product-market fit. Each step is critical.
1. Design for network effects from the beginning
Early in my career, 3.com co-founder and Ethernet co-founder Bob Metcalfe 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 is proportional to the square of the number of users or devices connected to it. Metcalfe’s Law originally applied to communications devices within telecommunications networks, and (later) to Ethernet users. Today, the meaning of “network effect” has expanded: a network (whether a social network, a blockchain, or both) becomes more valuable to its users as more people use it.
Designing strong network effects into software products has been a successful strategy for decades, from web protocols to web email to social networks. Now, with blockchain, we have even more tools at our disposal to grow networks. Tokens are an incredibly powerful new primitive for designing self-reinforcing network effects through incentives, airdrops, retroactive public goods funding, and more. For the first time ever, builders can design native, protocol-specific incentives into their products to incentivize desired behaviors, align stakeholders, attract decentralized communities, and more.
Builders can create a reinforcing flywheel by thinking deeply about how to design and leverage these incentive structures from the earliest stages of product development. But before embarking on this journey, it’s important to note that while these tools are useful, they are not a magic wand that solves major product problems. Deploying these mechanisms without thinking can actually hinder product-market fit and become a problem for the company long into the future.
2. Find and work with the best projects to find product-market fit
We are still early in the maturity curve for blockchain networks as developer platforms. 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 move it toward product-market fit. This momentum can reset a company's trajectory as other high-quality developers may follow the early adopters.
This is also where fruitful partnerships come into play: These partnerships can help build and validate your product. At this early stage, it’s relatively easy for developers seeking a platform to discern the projects with the strongest teams, usage, and market traction. However, for a startup, how do you know who to partner with? Here are some signs that you’ve found the right partner, and some tips for working with them:
Popular brands
How can you tell if there’s substance behind a brand, not just vibe? One way is to look at the pride people take in being a part of it and participating in it. Partnering with brands that people admire can help your team build credibility with a specific audience. Don’t just collect logos of brands, but think of them as communities of customers and target audiences that can help you find product-market fit.
Market attractiveness
Which companies do you hear about most often? Of course, the easiest way to identify the “best” products is to look at those that are widely used and loved, or that are used and loved by people in the know who you know and trust.
A growing community of builders
Where are people building? When deciding which companies to work with, it’s helpful to look for companies with a strong community of builders. Having products that people love to build can help teams leverage and borrow existing expertise and skills. It can also help bring a community of builders to a specific product.
More broadly, founders can view these teams as a group of peers. Beyond partnerships with “hot” companies, building partnerships (validating concepts, building connections, finding new use cases, etc.) can move the entire industry forward.
3. Let the “smartest” users influence the product roadmap
Certain groups of users, customers, and network participants have an innate understanding of the power and potential of new technologies. These are what I call "smart users." Some call them "super users," etc.; here, I mean the early adopters who provide signals for trends and market directions. In early technology markets, these groups often anticipate opportunities and define trends before anyone else.
In the early days of public cloud (I worked in the industry before the word “cloud” was coined), startups with rapidly growing load helped cloud providers improve and enhance their autoscaling services. These companies helped drive product priorities and demand, especially when it was hard to tell which features to optimize first or why. So identify these leaders in your space early on. Then deeply understand their needs. Over time, others will follow their lead.
But how do you identify the “right” users that others will follow? Founders can start by having conversations as often and as continuously as possible. Early on, when founders are deeply involved in day-to-day development and customer support, they have the opportunity to get 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 in the public, founders can more efficiently search X and Farcaster for interesting posts, topics, and conversations related to what they are building. They can seek out conference speakers and attendees; or ask existing customers what they think. This is a key advantage; Web3 has a smaller and more focused user base; in other industries, talking to too many customers at once might lead you astray.
The early stages of finding product-market fit are your best time to have one-on-one conversations with customers. Involve active users and early adopters in your product development and gain insights into their behaviors and needs, helping you define your roadmap in uncertain territory. Over time, other customers are likely to follow the lead of this smartest group, which in turn increases traction and market share.
4. Reward the right users
As mentioned earlier, tokens can enhance network effects; but they also come with challenges ranging from regulation, operations, to bad actors.
In particular, any new token or incentive system will attract both super users and arbitrageurs (the “freeloaders” of many crypto projects) who are there for the “right” reasons. In the end, there is a group of people and bots that generate worthless activity on the network in the hope of getting an airdrop and cashing out early. Therefore, when designing the reward system and token distribution, it is important to weed out arbitrageurs who pollute the product signal while rewarding super users who provide long-term value to the network and help bring others along.
The goal here is to build a strong community, but also avoid sowing seeds of distrust in the early stages of a product. Airdrop parties selling tokens in pursuit of quick gains can cause price volatility that can ultimately damage a project’s ecosystem. Now, more than ever, it’s important to understand more accurately who is using the network and how. Then incentivize positive activity while disincentivizing negative activity.
So how do teams distinguish distracting noise from useful product signals? This job is not as simple as it seems, as malicious users are getting better at gaming the system with fake activity. The tools and methods we use to distinguish high-value from low-value users in a given protocol are evolving rapidly. For example, metrics like total value locked (TVL), active wallets, and daily transactions, which were once very useful for Web3 teams, are now a relatively poor indicator of network health. There is no single silver “North Star Metric” that is certain yet. However, many teams launching tokens in 2024 are trying creative approaches, so keep an eye on this space.
I think the work being done now will shape the best practice playbook that future builders 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 biggest opportunities to hone product-market fit, especially in areas where traditional strategies often fail. Deploying tokens is an effective way to get more people involved 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 only if done well (e.g., using a complex set of inside-out incentives for individuals and development teams). It is important to think strategically about the value that launching a project will bring to the network when deciding who to support and how to sustain it over the long term.
Following a simple three-step plan can ensure that projects deliver on the original purpose of token grants:
Plan key moments and timelines: What is the scope of a 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 desired impact on the product, protocol, or community?
Milestone Rewards: Avoid the trap of paying upfront for something that will never be delivered. Instead, reward partners appropriately when they reach milestones. To effectively incentivize partners, be sure to keep them aligned with the roadmap and only issue token grants when they deliver key utility features to the community.
Understand the potential value of each development project: Scope projects based on their value to the network. The total value created by the project should significantly exceed the resources invested. This statement may seem clear, but it is easy for teams to lose sight of value in the face of FOMO and other market pressures. This was most evident during the last bull run, when many traditional brands and large Web2 companies experimented in Web3 and then immediately fled the market once they encountered resistance.
Of course, product-market fit is tailored to each founder, startup, and market. These are just general recommendations for companies just starting out on their journey. To put them into practice, be sure to consider your own practical experience 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 determine what experiments you need to run to prove (or disprove) those hypotheses.
Finally, know that there are many factors at play when it comes to finding product-market fit. Not every product or market leads to billion-dollar outcomes. However, every founder can take pride and comfort in the fact that they left no stone unturned in their pursuit of product-market fit. Every attempt that goes all-out will either bring you a great experience or a great success: a great product in a great market.
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