As the bear market marches on and now that money isn’t free, profitable business models are back in style. By in style, I really mean required. And by required, it really means…fly or die.
To that end, since I believe that crypto and Web3 are not excluded from the other financial laws of gravity as everything else in the business world, the refocus on a protocol’s business model comes into greater scrutiny, especially from the investor’s standpoint.
Gone are the days of dilutive mechanisms for “network effects”, counter productive airdrops, Candy Crush marketing and operations. It wasn’t fashionable to say until now, but man I’m glad the storm has washed most of that away. In the very least, it’s highlighted the contrast for those projects who continue to play the old song that “worked” in the 2020-2021 era.
Those have become a great counter signal, a filtering metric to remove any and all projects that use those tactics. Its also a good lesson in being careful what you promote, because when the economic environment forces you to discontinue the “free money” business strategies, it leaves you in a room full of very angry and disgruntled “customers”.
Its a lesson in choosing your customers, because things inevitability go sideways from the original business model and you have to adapt. What I’ve watched over the past 18 months is the downsides of the wide net approach. Better said, the clear downsides to paying your customers to use your product.
It sounds so silly now that we’re in this economic environment, but in 2020-2021, it seemed that everyone was doing it under the misguided auspicious conclusion that this is how crypto networks are built. To be honest, I willingly accepted the premise thinking this is the approach to capture market share, to then… well I don’t recall much discussion after that.
We were different, decentralized… enlightened. Have fun staying poor.
That is, until capital cost something again, and now you’ve trained all of your customers to expect to be paid to use a service.
The fallout has been pretty incredible, and from what I hear in private conversations is many protocols are in a place where a turn in their business model is not feasible. Gravity is an equal opportunity claimant, no one is exempt and payment is due now.
I know I may sound bleak, but I’m setting the stage for my larger point:
Going forward, I think its more imperative to make concerted efforts to choose your customers.
From a higher level, this may mean right-sizing the business and focusing on a much smaller market segment. There’s something to be said for a focused business that serves 30 customers very well, while being appropriately sized for both operators and investors to capture that value. Meaning, reshoring outstanding tokens and eliminating products or services that are not accretive. It sounds obvious to some, but for those in the Web3 world dilution was (and continues to be) a scourge.
Instead of the shotgun approach of throwing a new business out into the wild and wait for users to come, I sense that more focused and even bespoke offerings will cultivate customer relationships that are relatively more valuable than whatever 10,000 semi-interested users could ever be.
It may even mean not being a public facing protocol at all. The better question to ask going forward is, why have a token?
For instance, the DAO (decentralized autonomous organization) now seems to me to be an idealistic approach that doesn’t scale to smaller and more focused businesses. Its direct democracy on the internet, while in the real world that form of government has shown to be inefficient over time. Its no wonder the corporate structures we have today, and the governmental structures we have in the US, were developed to address those inefficiencies. That’s in part of what I mean by being “non-public”. I’m now in the camp that the DAO experiment has run its course and has failed for most applications.
If I were to build a Web3 business today, I personally would not include a DAO, and I’m not convinced I would need a token either. The beautiful thing about what Web3 offers is the optionality that tokenizing ownership can offer. So to that end, my business would have a private token, just like a private corporate share, with all of the additional security and economic features that tokens offer. Yet I personally would not make it as public or liquid as most tokens we see today.
Returning to your customers, many of the problems the space faces today is a direct result of “training” your customers on what to expect. These were clearly bad lessons to teach, as everyone, including me at times, came to think that this space was so novel that many economic laws didn’t apply; yes, we can have our cake and eat it too.
It was an artificial time that cemented very poor lessons to many, many users. I was caught up in some of it, willing to overlook all of the lessons I learned the hard way in fundamental investing, to have that all come back around when money wasn’t free anymore.
Now I watch protocols who were once being financially rewarded for violating economic principles, have to contend with “customers” who were very used to being paid by that business. It could be a consequence of the public nature of it all, from the discussion channels and X, but man if that isn’t what violent drug withdrawals look like, then I don’t know what is.
My overall point is the lessons we can take from this time is being more discerning on who you would like to serve with your business. Serving a customer who benefits from your products, finds value in them to pay for them, is a clear part of the recipe. My contention is that this group of customers may not need to be so large. Maybe you can make a focused and functional product offering that serves 30 high quality customers, instead of those same 30 getting diluted within the next 10,000 low-connection customers.
Maybe its a call for a “luxury” segment within the industry, very much akin to the auto markets.
The argument could be, well, why not get those customers and all the others? I just don’t believe that’s a realistic strategy, especially when it enters into the value of your brand.
Here’s a good example I’ve been thinking about for the past few months: AirBnB.
In the zero-interest rate days days of 2021, it seemed to me that AirBnb exercised no discernment on who they allowed on their platform to service their customers. Money was cheap and many people purchased houses to rent as an investment.
It raises the key question on who exactly are AirBnB’s customers? Meaning, is it the user of the platform (home owners) or is it the end user of the service (the renters)? I’m not convinced they knew exactly, or cared frankly, as business was good.
What we’re seeing today is the net effect of that lack of focus, as many home owners are discovering the difficulties of the hospitality industry, which has bled into many unhappy renters with suboptimal experiences. Overall, the brand has taken a beating, in part, because the business model was incentivizing as many users as possible with little discernment, all under one brand. I sense there’s much more pain to come from the unwinding of the marginal home buyers on the platform, but thats for another day.
My argument for the Web3 space is both for a profitable business model (which few have) while also refocusing on who exactly do you want using your service. For the Web3 purists this may seem heretical. Crypto is permissionless, open source, immutable!
I get it.
But value, like energy, can only be kept, transmitted and used in specific ways. Most importantly, its finite. If any part of the business model is structured incorrectly, value naturally escapes. The inverted business models that are prevalent throughout the space, in some respect, is an opportunity for those who are focused on building a business that can capture and cultivate that value.
The flip side is true too, as we’ve all seen. Those that operate outside of the economic bounds that we live by, will naturally find themselves drained and diluted.
Its a reaction to the finite resources that running any business requires, and like AirBnb, without some degree of exclusivity you risk your most valuable customers to the dilution of the lowest value-adds.
You can be McDonalds, or a 15-table high end restaurant with focused service, but not both.
Some will most certainly opt for the volume business, while others skew for a focused business. The space needs both. Yet it also requires a business model in which customers pay in some fashion for the services you provide. I’m not certain how the sector deals with protocols with inverted business models without mechanisms of bankruptcy and M&A, but I think we’re about to find out.
Will