Web3 / Startups

If your startup is making consensus-driven decisions, it is ngmi.

Too much consensus kills creativity. In fact, the more disagreements and open name-calling, the better. Founders and early teams (the first 10 people) that cannot take brutal truths aren’t going to make great startups. After all, all startups aren’t equal.

Some major differences in consensus-driven startups vs individual-driven ones:

Consensus-Driven startups	Individual-driven startups
Approval junkies	Ask for forgiveness rather than permission (means the person is ready to take accountability)
High string of dependencies: “graphic designer to copywriter to editor to founder to publish”	Low dependencies: i design the banner in Canva, write it, edit it, get a couple of opinions (maybe) and hit publish
Uncomfortable discussions are avoided	Uncomfortable discussions are blunt
Disagreements in private, quietly, soften the blow	Disagreements are loud, public, and direct
Diluted responsibility: “we, we, we”	Concentrated responsibility: “i, i, i”
Right process matters more	Right outcome matters more

I was raised on the Dhanda ethos. Quality, margin, and profit were daily thoughts and discussions. It was pleasurable to mechanically do this and see the ‘number go up’ every evening.

But it was also the time when all the woke knowledge was just entering India. Movies were questioning 9-5 and ‘pursue your passion’ was the thing.

My young rebel phase found Paul Graham as a saviour and a mid-ground. I could use business and marketing acumen but build another Facebook? Of course this is the best option.

For years I thought this is what everyone in startup circles understood.

But no, I discovered that people mean different things when they say startups.

Here is what I mean

• Rails as opposed to wagons: Facebook became the rails on which much of internet data travels. Not one app that would allow for booking of doctors. Nothing wrong with that but making $1mn ARR would make me feel my Gujju dhanda was a better path
• $1billion or nothing: This is a different mindset. To be in the top club, the thinking changes. Founders who want to do this have to understand the Zero to One mindset. Wagons can afford to slack
• Thesis / Product innovation rather than rent-seeking: One of the options I thought of in 2009 was to start making software for Iron and Steel manufacturers and stockists. This was a market where I had networks and in 2009, hardly anyone in India understood how to make a B2B software at scale. When I researched this, I landed on SAP and realised I’ll probably just end up tweaking the large companies’ products to fit ‘my vertical’ because I had the gap to seek rent. For some reason, the idea became really unsexy to me. I want to build a product that pushes something forward.

This is the kind of founder that I like to support and work with.

But I do realise not everyone wants to do all of this.

Web3 is in a unique transition mode.

Web3 natives are very young who understand the nuances and are getting paid $5-10k via just bounties and airdrops. They are new to the business / corporate side of things.

Some people have worked at an agency and they know how it works but have little idea about web3.

Then some people possess a particular skill. They are a good writer and they may know web3 or agency business.

This presents this trilemma.

I was talking to a top SF-based VC about a Web3 incubation program.

He said: but the conversion ratio is very low.

What he meant is the conversion from hacker numbers to founder numbers.

Although I’m writing this from a chain perspective, this applies largely to any web3 project trying to drive adoption, and major overlap with the early-stage VC mindset is needed.

Hacker and Founder

Hacker numbers are typically what a Layer 1 would track:

• Integrations
• Transactions per app
• Key infra building

This requires a lot of developers building various layers, which is education and dev support. Even hackathons.

I can see a hacker is an engineer with a laptop. Highly intelligent and knows how to build software.

But the VCs who invest in these Dapps or downstream protocols are looking for their growth possibilities.

Their metrics are:

• TAM
• Market share
• Revenue
• Traction
• Community

These metrics require a founder’s mindset.

The persona of a founder is someone who is making sales calls, doing investor pitches, working with cost optimization, hiring a formidable team.

Globally, only a fraction of devs end up being founders. I believe most don’t even intend to. After all, a founder’s life is not an easy one.

Web3 Dev Ecosystem

Back to the market, a typical hackathon participant, a hacker, is a young graduate or a student looking to learn, and maybe a job.

The sheer number of hackers is staggering.

Thousands of projects across Eth Hackathons.

But how many of these got funded? Less than 2% according to an estimate.

This plus some peculiarities creates typical conditions for those driving adoption. Let me discuss three specific factors.

Time from hackathon to funding is high

Let’s say we find a good hackathon project with a founder(s) (or founder material) at the helm. This founder/team will go through the funnel and get funding between 6-12 months. From Preseed to Seed sometimes takes 1-2 years even for good founders.

One factor that I’ve identified is definitely the lack of emphasis/support on the business side of things. Almost zero education. Hardly any VC will train or be hands-on. Coaching is only for the most elite founders. There might be other factors too.

For an L1, this means the cost of supporting every founder from hackathon to seed funding is much higher. And the pipeline for their venture arm will look very different.

Education and Adoption often don’t go along

These two goals look like they have a lot of overlap. And often a chain/protocol will spend a lot of money in education while expecting adoption (integrations and transactions).

Education initiatives like college outreach, workshops, meetups, and devrel support will lead to branding + integrations that will be abandoned.

Whereas real integrations that sustain + transactions will come from funded startups that manage to scale and dominate a market.

Remember the difference between a hacker and a founder?

Chain ecosystem folks and VC arms see this as one funnel.

But these are two separate tracks. And mixing their efforts + budget will not yield results in either.

There is no Stanford (sadly!) where you have hackers going through the founder’s funnel with the support of YC, angel networks, advisors, coaches or venture studios.

Don’t spend wide, spend deep

We saw that the numbers game is skewed here. Spending wide in the name of adoption will not lead to any ROI. The surface area is too wide.

I’ve seen one chain setting up a stall in Goa trying to “educate” tourists to download their wallet for $10 airdrop of their token.

Many have organized meetups where students are “incentivised” with t-shirts, food or drinks.

Or workshops in colleges without any record of producing founders. Glamorous hackathons. Parties and the list can go on.

Those who intend to build a sustainable scaled startup care for tech, support, and focused ecosystem support in getting off the ground. What they don’t know they need is business education, support, and coaching.

Conclusion

This market is different. But chains / VCs have been the degens in the last cycle. Without understanding the nuances, they’ve ended up shooting with a machine gun instead of sniping.

This cycle is for correction.

Experiments:

Founder House at EthIndia was an experiment to see if we could provide an disproportionately high attention and money to founders.

Founder House

10 devs who want to create unicorn companies/projects
in 1 Villa
For 10 days

❌ No merch
❌ No bounties
❌ No alcohol
✅ Free stay for 10 days
✅ Good food
🤯 Other brilliant minds
✅ Work from one villa

Who is coming to EthIndia? pic.twitter.com/GUD3lhN9l9

— pareen (@PareenL) November 21, 2023

On-going collection of Datapoints:

Observed:

• Chain loyalty hardly ever shifts in early stages
• Devs become loyal to whichever chain supports them in their earliest days

Hacker mindset Datapoints:

• Build on my chain or leave. These devs are potential founders who would build on your chain if you form a relationship with them and help them out.

Asymmetric returns and power have always been building the core tech rails for any innovation/invention.

I visualize this cycle as going ‘from scammers to suits’.

I will not spend time researching mind-blowing examples but explaining the theory. It should be obvious to those who have studied or witnessed a wave with shiddat. Some day, I will revise this and sprinkle it with examples, and name the participants to add color.

Every tech starts on the fringes.

Few adopt it for fun.

More come in for the cause.

The decision of whether the tech has more impact than cost is decided at this level.

Many technologies die at this stage.

Those that do have more impact than cost start creating value for those in it for the cause and for fun.

This is seen by speculators. Speculators will consist of short-term thinkers and a small portion of believers.

Short-term thinkers will often fund scammers while believers try and build something cool and useful.

Speculators will provide the budget for lift-off. Some of these speculators are also distribution/media channels to spread the technology.

Early adopters will enter.

Speculators + early adopters help cross the chasm towards mainstream adoption.

Before crossing the chasm, since the technology is so new and there is hardly any clear standards, it is quite difficult to identify the scammers from the believers.

Once mainstream users start trickling in, there is a clear need for consolidation, standards, and a coherent narrative.

This is where the suits shine.

Consulting firms, hedge funds, and everyone else will enter now that there is certainty.

It is time for the degens to get out because they do not like the dilution of ethos and bureaucracy brought on by the suits.

Some of the degens mature to become veterans and stay as the status quo.

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This is purely based on my observation. Tell me where are the inconsistencies. I will keep refining this model to arrive at a good framework.

For those who want to make things happen, you got to make them happen. The Left today has been brought up on some drug which makes them think there is some perfect world that an authority figure has to provide for every young person.

That is not true. You want something, you got to point your power at it.

Asking for others to do anything without committing your time, attention, and money first is a sure-shot way of becoming a complainer lefty.

There is no perfect place / government / community / country. Because human beings always want something else. We have to understand that things have been here for a long time before any of us got here and they will be there long after we are gone. No problem of ours is that important to the entire world.

In 2024, here is a recipe for a tweet whenever you want to change anything:

• I want to change _______________
• Problem / complaint:
• Possible solution(s):
• I am committing x number of hours over the next two years and $y to change this or letting go of $z in salary to make this happen
• Who else wants to join me?
• We may fail but we have got to try

I believe this will be a clear ground for any movement to start. Founder has to commit to a certain amount of risk in terms of time / money.

Use of words cannot be ‘i prefer’. It must bring more certainty.

Speeches and long posts become protests and we hardly get anything out of it.

As founders, we tend to look at funding as an event. But we should look at funding as shifting of rails to make you go faster. It is part of the process, not one point in time when you prepare a deck and get some money in the bank. Think of it like surfing more than skydiving.

As a startup grows, ideally with exponential potential, investors would want to thrust that growth with some money and get an upside of it. This is the wave. You have to position and re-position and try different things until you hit one of these waves where users or revenue starts coming in.

Great VCs will not invest on fomo. They would want to see some proof of the founder being formidable and the product / market being conquerable.

One of the founders that I have been working with got tailwinds. They were paid little attention by chains and investors alike. But as their numbers started growing, they started getting inbounds – from every top VC including a16z.

I have seen many founders get into this position. Many of them don’t know how to act once they’ve caught the wave and they fall multiple times before raising good money or giving up by raising from tier 2 investors.

So here are some tips:

• You need to know the next milestone and have a reasonable view on how you will get there. Taking money is just the start of bigger challenges. You will be standing on the surfboard instead of paddling now. The risks are higher, your burn is higher. So you better have a reasonable idea of where you are going to get with this money. Communicate that to your investors. Get their buy-in.
• Remember, external market conditions in web3 are subject to change every week. So just because your sector is hot today doesn’t mean it will remain forever. Make sure your investors aren’t investing on hype. This will make them bad partners or even drivers of bad behaviour (like premature token launches).
• Don’t become egoistic. It is the wave that is pushing you, even if you achieved a great product or good growth numbers. Many founders reject good tier1 VCs because they want a slightly better valuation or are waiting for someone better. If the investors have great reputation and believe in what you are doing, close the deal.
• Vision expansion. I have made this mistake earlier. Because we are getting more money than we want to raise, we sometimes end up broadening the vision. This takes away focus. More money doesn’t mean you can conquer one layer above/below you or an adjacent market. Startups have to be razor-sharp and the aim is to conquer 60%+ in one vertical. This results in making loose promises of grand visions to the investors. Don’t do this. Raise only what is needed.
• Make sure you know the weakest links in your chain. Just because top VCs are courting you doesn’t mean you have everything figured out. If you have, great. But most founders haven’t. This is an exercise that keeps you grounded, lets your investors know that you aren’t too delusional, and helps you stay on course.
• Don’t pit investors against each other. This is very counter-intuitive but every VC back-channels with their competitors. At a point where you pitched to 5 VCs, they have evaluated you from every major angle.
• There will most likely be the one investor/operator who doesn’t believe in what you are doing and will make sure they communicate it to all others. Admitting what you know and what you don’t know reasonably is the best way to be transparent and make such back-talk die. Believers will step forward and others will be bogged down by the market gossip. If you are building something on the cutting edge, there are multiple risks and a great VC understands that.

Surf the wave well. You are in a rare special spot!

Will keep adding to this and writing much more. Subscribe from the sidebar.

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To be written:

All money is not equal.

The aim should always be to raise from the best.

Investors are like partners.

Startups got to dominate or die. Power law applies