Why Blockchain Companies Fail?

Web 3.0 has seen exponential growth, most of us agree that the terminology lacks a standard definition or universally accepted approaches. However, we are still in the nascent stages of evolution and Web 3.0 has several unresolved issues hindering mass adoption. Talent, capital, and communities are extending support to Web 3.0 at an alarming rate. Many of these players have succeeded while several have failed or are heading down that path. I have been involved with this space since 2013 as an investor, advisor, and board member who has experienced a few successes and many failures. There are good reasons for Blockchain companies failing, the patterns are very clear and yet neither VCs, retail investors nor executives see them.

Defining Failure

In the new economy, failure is calibrated differently- it is not financial or legal failure leading to bankruptcy. In web 3.0, with good staking and some token value organizations will generate some cash flow. Even dead coins from 5-6 years ago have some volume, market cap, and a technical chart that can be traded. Inability to scale exponentially, losing community confidence, tokens getting on short trader’s radar, and inability to rapidly generate an ecosystem to compete are all regarded as a failure in this world. In my experience, companies had about 5 years to scale back in 2016-2018, that timeframe is now 2-3 years with the Blockchain world gathering a certain speed and momentum that spits out companies by the hour. Self-proclaimed crypto OG’s (now investors and advisors) find themselves stuck in the past and dish outdated advice from their time five years ago not realizing a lot has changed. Let us examine a few common causes of failure today.

Common Reasons for Failure

While there are dozens of reasons for the failure of Blockchain companies and organizations, most can be attributed to 2-3 large reasons i.e., poor leadership, living in the pre-2018 era, and Web 2.0 baggage. It is impossible to cover every single reason for the failure of every blockchain organization, I have outlined a few broad themes here. These are also based on my first-hand observations over the past decade I have spent here.

Living in the Pre-2018 era

Media coverage and exchange listings do not equal the value accrued to the protocol or project. The number of companies was less in the pre-2018 era, the media was reluctant to cover many companies, and the number of exchanges was limited. Times have changed today, there are over 18,000 blockchain companies with several hundred exchanges- the noise out there is unbelievable. Chances of any blockchain project running on media hype are short-lived, even the top companies with top media coverage can seldom sustain the price over a longer period. ?Listing of a token on exchanges drives volume and it does matter for the price of a coin. However, we have even seen the Binance and Coinbase effect either not give a boost or wane quickly. Companies like BenQi and AMP etc. are perfect examples of being listed and dumped with no ability to sustain price. In 2022, accruing value to the protocol must be the primary goal of the project leadership, which creates the ecosystem with media coverage and exchange listings being the outcome. Chasing exchange listings and media coverage at the expense of value to the protocol is a misguided game from the past which will not sustain today. If you see a project like that, run for the hills!

Inability to Pivot

Pivots in the old economy occur frequently, some are more successful than others. It is however difficult for blockchain companies to conceive and execute one, specifically if it involves roadmaps, communities, tokenomics, founder issues, etc. That does not mean it is impossible to pivot, multiple blockchains have successfully done this, times communities provide valuable feedback and lead this pivot as organizations and companies cannot make centralized individual-owned decisions. Several protocols have associated commercial entities which could pivot their products and services built on the association or foundation etc. who are reluctant to make pivots due to lack of experience and drag the entire ecosystem downwards with them. There is material business, execution, financial, and leadership risk entailed — many companies do not make it through these radical changes and end up in the blockchain graveyard.

Delays and Slippages

In the Blockchain world, a certain delay is accepted as a normal part of doing business. There are controllable and uncontrollable delays attributed to community engagement and behaviors. Delays with protocols, create credibility issues and slow down the growth of the ecosystem while increasing costs and not accruing enough economic value to the protocol and token. For example, Cardano and Ethereum got away with not having smart contracts for years. But that was 2018, they had a cult following and limited competition- no other Layer 1 can afford that luxury today. Routine delays also negate the fist-mover advantage and erosion of investor confidence taking a toll on the community. The costs continue to rise, and tokens continue to dump reflecting sentiments while the vicious loop of landing transactions on their “mainnet” continues to get more expensive. Project teams under this pressure, cut corners and costs to deliver quickly resulting in compromises around decentralization, security, and stability extending the doom loop.

Lack of Clear Value Proposition

If a project or a company is too generic claiming to do too many things or just be a “me too” player, it will face challenges. Generic protocols and companies do not attract good developer ecosystems and technical talent, good companies understand specific challenges of web 3.0 and solve those through focus and momentum in the community. A few red flags I have observed working with several blockchain companies range from project leadership not clearly articulating their value proportion beyond high-level vague statements or just bad-mouthing other more accomplished companies for it. Inability to attract good technical talent will typically result in hiring newcomer developers into established commercial or non-profit legal entity headcount and trying to train them. When these symptoms get visible, community energy wanes over time and it is time to rethink the long-term viability of the project.

Poor Leadership

Poor leadership results in bad strategy, inefficient operations, and terrible execution. I have seen poor leaders blame investors, developers, communities, etc. Many leaders come from deep technical, mathematical, investing, or marketing backgrounds and lack strategy and operations skills which makes them more reactive and follow others in this space as opposed to taking on tough decisions upfront. I have seen many executives being terrific community leaders but off base with other things, which creates inefficient operations leading to poor morale, ad hoc ism, and team dissatisfaction. Many of these leaders will cash out on their tokens and move on throwing the project or organization to another clueless soul from the community. In the pre-2018 era, you could get by with a community leader- today companies need leaders with some strategy and operations experience who can lead by influence and keep the project flying on the track with a community deeply engaged in decisions. Red flags around poor leadership start with multiple high priorities, unavailable executives, multiple meetings rescheduled (internal and external), rising temporary help in the organization and deadlines constantly missed etc. If these are familiar, you might be backing the wrong horse.

Firefighting Culture

Once an organization or Blockchain project has commenced its downward spiral, internal teams are in constant firefighting mode percolating upstream and downstream pressure. Bandwidth is sparse and used for dousing fires while increasing the disconnect with communities, often delaying communication with them or delivering on their incentives, etc. Community and user sentiments show early warning signs, usually brushed aside by leaders who are busy creating more work, and unexplained delays compound with time. Root causes for this firefighting disconnects stem from poor leadership, and the inability to prioritize, and please all stakeholders while overcommitting resources. A red flag to watch is the issue being communicated as a lack of bandwidth, rather than ad hoc leadership – time to rethink, a matter of time this an organization will languish.

Web 2.0 Mindset

Growth and scale are measured differently in Web 2.0 and Web 3.0. Many blockchain companies failed because they could not find the right focus helpful to the community which can create a real impact. Scale in Web 2.0 is linear while it is exponential in Web 3.0, the baggage from the old economy is a death sentence for new economy organizations which march to a different beat with communities, investors, users, validators, and other participants in the ecosystem.

Web 2.0Scale = focused problem-solving x urgency x width of problem occurrence. However, in Web 3.0, Scale = Width of project/protocol appeal x urgency x possible needs x wider community reach. If you see these definitions of scale working the other way, the blockchain project is likely not going to scale.

Metrics, Measurement, and KPIs

Having clearly defined goals, and objectives are paramount. Web 3.0 has its own metrics deviant from old economy measures like DAU, MRR, ARR, churn, CAC etc. Blockchain companies must measure what matters i.e., TVL (Total Value Locked), value accrual rate, staking participation rate, staking yield rate, work activity, aggregate revenue flow to validators, community engagement, the developer commits, etc. The absence of a disciplined process or method to track this real-time will cause value leakage, this issue when coupled with other aspects like poor leadership, old economy baggage, and living in the past will create focus on wrong priorities and commence a slow death spiral which typically gets visible only after significant damage is done.

Security, Litigation, Regulation, etc.

These failures are event driven. The sheer immaturity of the regulatory landscape creates ambiguity and uncertainty for organizations who are caught unaware and have limited avenues to respond, and litigation prevails. Security issues can be addressed through discipline, rigor, and depth of testing, many companies are guilty of these shortcuts leaving their value in the hands of fragile bridges, etc. There are organizations that have survived the worst of security breaches and litigation but if you see people and companies violating the obvious procedures, they are eventually heading for trouble.

Other Notable Reasons

I have a few other observations on common causes of failure which I will not elaborate on. A few notable items are e.g., adopting an older open-source business model, hiring old economy executives, over-indexing on media coverage, community not growing at a steady rate, internal capabilities to drive adoption are limited, poor tokenomics, etc.

Concluding Thoughts

Web 3.0 will have a massive impact on how the internet operates and creates value. However, the market cannot and will not accommodate all the 18,000 (and growing) blockchain organizations. Many have already failed, and others will continue to, the reasons will vary but root causes can always be traced to poor leadership, living in the pre-2018 era, and departure from value-creating actions (most times Web 2.0 baggage). Web 3.0 might take several years to become mainstream, while many blockchain organizations will scale- so will the blockchain graveyard.