Whether it’s the latest DeFi innovation or a ground-breaking new infrastructural development, Web3 moves at a mile a second. Attention and funds are both scarce resources, and projects that don’t have product-market fit run the risk of being left behind.
Web3 startups face a more competitive and fast-paced environment than their Web2 counterparts. This difference can largely be attributed to competing demands for liquidity—a requirement for integrating with the larger market—and the inherent “forkability” of open-source projects, with any developer able to fork a project’s source code to build a competing project.
This places a heavy burden on startup teams, who can spend months of their time and precious resources developing what they believe is the perfect product only to end up with little traction, awareness, or adoption. To avoid overcommitting to a product vision that won’t work, and to create a key value proposition that can overcome existing competitors, it’s imperative that startup teams do the due diligence work required and carefully construct a framework for building their product. While this is important in any startup scenario, there are a few elements specific to Web3 due to its fast pace and unique considerations.
- Use a lean software methodology to avoid common Web3 startup product development pitfalls.
- Before you start building in earnest, identify your ideal customer, find early adopters, and build a robust community to keep them engaged and educated.
- Leverage the power of Web3 community to validate the problem and solution through surveys and metric tracking.
- Create a key value proposition through a combination of problem-solution validation and competitor analysis.
- Build an MVP after finding problem-solution fit, and use a build-measure-learn feedback loop to quickly iterate.
Understanding Product Development in Tech Startups
Building a tech startup is usually a much less capital-intensive endeavor than building a company that sells physical products. For example, car companies require millions, if not hundreds of millions of dollars to prototype and manufacture cars. In comparison, there are relatively few sunk costs involved in building a software product.
Tech is also low-friction—changing or adding code is often easier than changing or adding to an existing physical product line. Everything is built through a computer and deployed through a backend service. There’s no need to invest in machinery, merchandise, or worry about supply chains and manufacturing.
This means that tech startups are uniquely positioned to operate using lean software development, a principle that prioritizes short-term product cycles and a dedication to iterative improvement by hyper-focusing on customer feedback, measurement, and learnings. Though the concept originated in the manufacturing industry, lean software development has become widely adopted by tech startups.
Why Take a Lean Software Development Approach?
Using lean methodology minimizes waste and prioritizes creating immediate customer value. Startups should develop quickly, fail fast, and apply learnings to build products and features that customers actually want.
Most startup teams have a clear idea of the product they want to build from the start. But while it’s both normal and healthy for startup teams to have a clear product vision in mind, the lean methodology challenges startups to prove their ideas are based on a solid foundation long before investing significant time or capital into building their product or service.
According to CB Insights, the top two reasons why startups fail are either because of a lack of capital or no market need.
For software startups, a lean approach means minimizing both of these risks by allocating resources to the most important aspects of the business and validating market demand before product development. In short: Spend money on the most important things and make sure there are interested customers before investing an excess of time and money.
To accomplish this, teams should break down the product development cycle into three core components: build, measure, and learn. First, build a product or feature in its most minimal form. Then, measure how successful that product or feature is with reference to key performance indicators (KPIs). Finally, codify these measurements into learnings and apply them to the next iteration of the product. While this sounds simple in theory, implementing a lean methodology within Web3 startups requires adapting this approach to the unique challenges and differences inherent to Web3.
Before implementing this three-step cycle, startups must take an often-unmentioned pre-step: Planning the first iteration of their product. Time and time again, popular approaches to building startups—from lean methodology to “Four Steps to the Epiphany”—emphasize the importance of starting with the customer.
Defining Target Markets in Web3
In order to build a truly useful and lasting product, it’s necessary to start with a well-defined target market. This is the first step for any startup looking to build a successful product—startups must validate their product ideas with their identified customer base and ask themselves: “Who is facing the problem I am attempting to solve?” Answering this crucial question is one of the most fundamental starting points for building a successful product.
Web3 Communities as Target Markets
Operating in an industry defined by decentralized governance, stakeholder-dependent business models, and permissionless access, Web3 projects have built-in advantages over traditional companies due to the natural buildup of community members. These communities are often made up of exactly the people Web3 founding teams are looking for—early adopters facing the problem that they are attempting to solve.
A community is a valuable resource for Web3 startup teams, able to provide valuable insight into both the problem and solution at every step, from ideation and finding problem-solution fit (more on this below) to launching the product on mainnet. Web3 projects should look to foster a minimum viable community (MVC) that accurately represents their target market and aligns with their end goal.
That’s why building the right community is one of the most important components for a burgeoning Web3 startup. A Web3 startup’s initial community should represent their beachhead market—a small market of users with similar pain points fulfilled by their proposed solution. With the right community, supported by constant and effective communication, Web3 projects have a built-in user base to start testing their ideas. These dedicated community members are the starting point for ideating around, testing, and iterating upon a product.
How to Build the Right Web3 Community
Web3 startups should think critically about the most important characteristics that determine whether a person will encounter the problem they’re attempting to solve and attempt to attract a high-quality community made up of dedicated members who fit this profile.
The first actionable step to building the right community starts with articulating a clear purpose and vision, usually in the form of a whitepaper, and creating a place to send interested users. In practice, this means creating a landing page and whitepaper with an explanation of the problem and proposed solution, and a Discord channel to begin creating a community filled with enthusiastic early adopters.
Here are some helpful tips for building an MVC:
- Leverage Existing Networks—Successful startup teams often have deep roots in their industry. Look to leverage existing connections that might be affected by the problem the project is looking to solve or seek referrals to those that may face the problem.
- Join Existing Web3 Communities—Many Web3 projects offer related services to each other, making existing Web3 communities a perfect environment for startups to find potential community members.
- Prioritize Community Management—Keep community discussion focused on the objective and community members informed and educated. The healthier the community, the more helpful their feedback will be.
Finding Problem-Solution Fit
In general, products are launched to solve a specific problem. A problem-solution fit is when a startup team is able to validate both that the problem it is attempting to solve is real and that its proposed solution would prove effective in solving it.
For example, take stablecoins—on-chain digital tokens pegged to a stable asset, most often the U.S. dollar. Stablecoins first rose to prominence because users had no access to stable assets, a massive problem in volatile market conditions. In an example of a problem-solution fit, stablecoins like DAI, USDT, USDC, TUSD, and UST now represent more than $180 billion in market cap across the larger blockchain ecosystem.
Stablecoins are a particularly good example of a good problem-solution fit because the market largely preferred a specific solution. While the need for a stable asset was clear, the solution for the market wasn’t just any stable asset, but a dollar-pegged stablecoin.
When looking to validate problem-solution fit for a Web3 startup, it’s important to get insight into whether a problem is actually worth solving. This is where a well-defined target audience, usually the Web3 startup’s native community, becomes useful. By conducting customer interviews and surveys of their community, Web3 startups can validate that the problem actually exists and take steps to better understand it—informing the development of the product’s first iteration.
Here are a few strategies and links to help guide this process:
- Create Qualitative Surveys—To start, ask open-ended questions that will give you insight into the root cause of the problem. For example, instead of asking if users want a stable asset, ask what problems they encounter due to a lack of one, or why they want one.
- Make Participation Simple—Use popular software such as SurveyMonkey or Typeform to streamline the survey creation process. These solutions are widely used, easy to implement, and familiar to most users.
- Keep the Circle Small—Qualitative surveys often require in-depth answers. Having too many participants, especially when they don’t perfectly match your target market, can lead to analysis paralysis and unclear results.
The second step is validating the proposed solution. This can be done in a variety of ways, but the key idea is to quantitatively measure the response to a proposed solution in an effective manner.
- Start With a Testable Hypothesis—The goal of solution validation is to definitively prove or disprove demand for a startup’s proposed solution as much as possible. An example could be: “We believe that users largely prefer decentralized stable assets denominated in dollars to other fiat-based stable asset alternatives.”
- Create Quantitative Surveys—Writing focused questions in formats such as multiple choice or number scale can give definitive answers to questions around the proposed solution. For example, giving survey respondents multiple solutions and asking them which one they prefer the most.
- Track Native Metrics—Make sure to measure native metrics such as the number of Discord participants, email subscribers, and beta test signups to better assess how compelling the solution is at its earliest stages.
- Use a Large Sample Size—Compared to qualitative research, quantitative surveys are used to find clear-cut answers and prove or disprove hypotheses. By having a significant sample size, startup teams can be more certain of their results.
Identifying Competitors and Alternative Solutions
For many Web3 startups, finding a good problem-solution fit should include performing a competitor analysis to evaluate alternative solutions in the market. Competing solutions are a good indicator that there is value in solving a specific problem.
For example, Uniswap largely solved the liquidity and pricing problem faced by blockchain-native decentralized exchanges when it introduced the x*y=k formula alongside revenue-generating liquidity pools. Since then, multiple competitors and alternative solutions such as Bancor, Curve Finance, PancakeSwap, and Trader Joe have successfully broken into the decentralized exchange market and captured a substantial subset of users.
Competitor analysis helps ensure that a Web3 startup is creating a unique solution that fulfills a specific niche. Web3 startups entering a competitive market require a key value proposition that attracts users to their projects over alternative solutions. This is particularly important for open source DeFi protocols, which are easily forked to build identical functionality.
Creating a Key Value Proposition
A good problem-solution fit requires understanding how competitors are tackling the problem and building a solution that tackles the same problem but in a better and more specific way for a specified target market. A great example of this is Curve Finance, a stablecoin-specific decentralized exchange built on top of Ethereum.
At first glance, it would seem that Uniswap and Curve are direct competitors, as both are decentralized exchanges targeting Ethereum users. However, the key value proposition that enabled rapid growth for Curve Finance was a linear addendum to the x*y=k formula that reduced slippage around certain price ranges—especially useful for reducing slippage in stablecoin-to-stablecoin swaps—as well as a liquidity gauge that gave community members the ability to direct and weigh liquidity rewards.
Because of Curve’s stablecoin-specific model and the complex system surrounding liquidity gauges, the target market for Curve was a smaller but more educated and active user base than that of Uniswap. The protocol provided advanced functionality for advanced users in contrast to Uniswap’s general-purpose solution, speaking again to the importance of finding a good problem-solution fit through the lens of target markets.
To find the key competitive advantage of their product, Web3 startups must focus on conceptualizing the specific problem they’re attempting to solve, naturally leading to a tailored solution. Early adopters are the bread and butter of emerging startups. Web3 startup teams should look to build the best solution for a smaller subset of users rather than spread themselves thin by targeting the larger market.
A few tips for conducting competitive analysis:
- Differentiate by Chain—While there are multi-chain Web3 solutions on the market, the fact remains that the layer-1 blockchain ecosystem is largely fragmented. Take note of alternative solutions that might exist on other chains, but focus mainly on same-chain competition.
- Use Competitor Products—It’s impossible to get a good understanding of a competitor’s product without using it. By trying out a competitor’s product, Web3 startups can often find inefficiencies that can impact product design.
- Join Community Platforms—Telegram, Discord, and other platforms are a great way to identify subpar functionality in competitors’ products, as community members will often ask questions and voice frustrations.
It’s important to note that finding a competitive advantage and creating a unique value proposition sometimes isn’t enough.
This is because of switching costs, or the costs that a consumer incurs as a result of changing products. Switching costs can come in many forms, from direct financial costs (gas fees to migrate liquidity) to intangible costs such as the time and effort spent to make the switch (due diligence on the project). A Web3 startup’s unique value proposition must be compelling enough for users to overcome the negative value of switching. A unique competitive advantage isn’t enough—startups must find a key competitive advantage.
Building a Minimum Viable Product
Identifying a problem, defining the target market, and then validating product-solution fit through various surveys and competitor analysis are all critical steps toward the goal of creating a minimum viable product (MVP). By ironing out these details before beginning product development, startup teams can save valuable time and money should their ideas fail the litmus test of problem-solution fit, and iterate according to their findings.
If a startup has found a problem-solution fit, it’s time to start building out the MVP—a product with just enough features that it can attract early adopters and validate the product. In Web3, this often coincides with a beta or testnet launch. Conceptualized in 2001 by Frank Robinson, MVPs enable startups to further validate their ideas while minimizing resource expenditure.
The philosophy behind the MVP is that startup teams should be able to move fast and iterate. By quickly introducing a minimum viable product to early adopters, startup teams can receive valuable feedback at a very early stage in the product development process, allowing for quick iterations and pivots based on user feedback.
The MVP Process
Building an MVP requires startups to think deeply about the product and its features and put the most critical features in front of their early adopters as fast as possible. The point of the MVP is not for Web3 startups to needlessly cut features but to focus heavily on a small subset of the most impactful features and validate them.
This is where the build-measure-learn feedback loop begins. Web3 startups should build, in the most bare-bones form, the feature that they believe their early adopters need the most. Then, they need to measure how successful it is by collecting key metrics such as UI interactions, transactions, and customer feedback. Finally, startups need to take those learnings and quickly iterate to solve common frustrations. This iterative process continues over and over until the team has created a version of the product known as the minimum marketable product (MMP), the first version of a startup’s product that is marketable to the public. In Web3, this is often when a project deploys on mainnet.
Iterating Fast With a Security Mindset
One unique problem that Web3 startups using this product development process face is the need to build highly secure software while making quick iterations.
In short, how can you build something fast when everything in Web3 needs to be completely secure? The answer: Insert security considerations directly into the MVP process. Using the MVP formula to iterate enables Web3 startup teams to security check small features. It’s much easier to test one feature at a time for possible hacks or exploits than it is to audit a large codebase at the end of the process. That said, it is recommended that Web3 startups, once ramping up, work with third-party auditors to further check the security of their smart contract code against possible attack vectors.
When beginning the MVP process, remember to:
- Test and Question Everything—At its core, an MVP is more of a process than a single product, and the core value of this process is the ability to test assumptions at the smallest scale possible. Question every new feature and build only what’s necessary.
- Categorize Potential Features—Categorize features into “must-haves,” “nice-to-haves,” and “add-ons.” By ranking various features, it’s easier to discern what should be built and tested first.
- Set Key Performance Indicators (KPIs)—When testing what about a feature is effective and what needs to be changed, identify KPIs that directly gauge success and measure them meticulously.
Achieving Product-Market Fit
Coined by investor and entrepreneur Marc Andreessen, the term product-market fit refers to when a new product perfectly fulfills market demand. Every highly successful startup can be said to have achieved product-market fit. For Web3 startups, achieving product-market fit is the ultimate achievement—one that results in skyrocketing liquidity, an influx of users that are easily retained, great customer testimonials, and more.
Product-market fit also happens explosively, and one of the most prominent problems a startup that has achieved product-market fit faces is simply accommodating the huge influx in demand. Timing is key, but unpredictable. For example, OpenSea and Uniswap—two of the largest Web3 projects in their respective verticals—have seen their user bases skyrocket in the past two years, yet both have been operating since 2018. They built a great product for their users, but had to wait for the market to catch up.
While it’s easy to tell whether a startup has or has not achieved it, there is no set formula for attaining a great product-market fit. Intellectuals and business leaders alike have tried time and time again to codify a winning formula, but achieving product-market fit is more of an art than a science.
However, by employing the methodology outlined in this article, startups can create a robust plan for every step of their product development journey, from problem validation to the product’s release on mainnet. Building a startup is tough, and it’s critically important to allocate time and resources effectively. These tried-and-true processes can help startups create strong products that solve real problems with little wasted effort.