Discover the multifold reasons behind the high failure rate of crypto startups and how challenges such as funding, market fit, and volatility impact their success. Gain insights from industry experts on navigating the turbulent waters of the crypto market.
Launching a prosperous startup poses formidable challenges, particularly in the realm of cryptocurrency, where an estimated 95% of ventures meet their demise.
The crypto landscape has seen a proliferation of startups as the industry has evolved. According to Crunchbase, as of 2024, there are at least 2,619 entities operating in various phases of development.
A multitude of cryptocurrencies has also emerged, with over 24,000 listed on CoinGecko since 2014. However, a significant number, at least 14,039, have ceased to exist since then.
In a conversation with Cointelegraph, Robert Hoogendoorn, the head of content at DappRadar, highlighted the myriad reasons behind the failure of crypto startups. These encompass a dearth of funding and investments, misalignment with market demands, flawed marketing strategies, and technical deficiencies.
Nonetheless, Hoogendoorn underscores that the arduous nature of building a successful startup transcends industry boundaries.
According to findings by Exploding Topics, the failure rate for startups across nearly all sectors can reach up to 90%. Initial failure rates hover around 10%, escalating significantly thereafter.
Hoogendoorn emphasized the amplified challenges within the crypto sphere, citing its high volatility and the recent protracted crypto winter.
He pointed out the dichotomy within the Web3 landscape, where while numerous teams have managed to weather bear markets, others succumbed due to financial mismanagement or insufficient capital.
Bear markets have historically proven detrimental to crypto startups. The most recent downturn commenced in 2022, marking the onset of the sixth such cycle, lasting between five months and two years.
During these periods, Hoogendoorn noted, investors tend to adopt a more risk-averse stance, exacerbating the challenge of securing funding and sustaining operations. Additionally, he highlighted the difficulty in attaining product-market fit within the Web3 domain.
“Product development, marketing, cash flow; these things all need to be reinvented to make it in Web3.”
“Moreover,” he added, “the rapid pace of innovation in Web3 means competitors can swiftly launch superior products, intensifying the competition and posing significant challenges for startups and founders alike.”
Despite the high attrition rate, Hoogendoorn remains optimistic about the prospects of select crypto startups, attributing this to the influx of talent into the industry, which promises to yield superior products and user experiences.
He foresees a scenario where, amidst the high turnover rate, certain startups ascend to become dominant players akin to tech giants like PayPal, Uber, or Doordash, offering innovative solutions and seamless user interfaces.
Market volatility and hype cycles exacerbate challenges for crypto startups
Crypto markets are notorious for their volatility, characterized by drastic price fluctuations that can either bolster or undermine investor fortunes in a matter of moments.
James Hallam, head of business development at dYdX Foundation, a decentralized finance (DeFi) nonprofit, highlighted how volatility and rampant speculation often lead to startups grounded on unsustainable hype rather than sound business fundamentals.
“The success of crypto startups hinges crucially on the team’s ability to execute their vision,” he stressed.
He drew parallels with the dot-com bubble of the late 1990s and early 2000s, where the sector's astronomical valuation plummeted as investors retreated, precipitating the collapse of numerous companies.
According to Hallam, understanding these historical precedents is vital for crypto startups to navigate through market downturns and hype cycles.
“By prioritizing achieving product-market fit over succumbing to hype, crypto startups can lay the groundwork for resilient and innovative ventures,” he remarked.
Lack of clarity and experience compound challenges for crypto startups
Fraser Edwards, co-founder and CEO of decentralized data infrastructure provider cheqd, underscored the experimental nature of the crypto market, characterized by trial and error as stakeholders seek viable solutions.
Edwards identified a range of factors contributing to startup failures, including a lack of focus on solving tangible problems and neglecting revenue generation.
“There's often a preoccupation with building cutting-edge tech without validating its market viability,” he observed.
He criticized the prevalent belief that marketing merely entails having a flashy logo and influential figures to promote tokens, highlighting the absence of coherent strategies in essential areas such as SEO, content creation, and PR.
Moreover, Edwards highlighted the regulatory ambiguity surrounding crypto, particularly in the United States, which fosters market uncertainty and inhibits adoption.
He noted that while significant progress has been made in shaping crypto regulations globally, many jurisdictions still lack a clear regulatory framework.
Edwards also acknowledged the prevalence of scams within the crypto space, contributing to the high turnover rate among startups.
Rug pulls, in particular, involve startups soliciting investments before vanishing, leaving investors with worthless tokens.
Furthermore, he highlighted the challenge of differentiation in a rapidly evolving ecosystem, where newer protocols often supersede existing ones.
“Many offerings fail to differentiate beyond the protocol they are built upon,” he remarked.
Overall, Edwards emphasized the dearth of experienced professionals within the crypto industry, highlighting the importance of business acumen and a focus on sustainability.
“Despite improvements, many projects still lack essential business values and strategies,” he concluded, “due in part to the industry's relative youth and the absence of seasoned professionals with diverse backgrounds.”