How to build a Web3 business

Bear Market Edition

I. ⚔️

Building a business is hard.

Building a Web3 business in the crypto winter, at a time when hearing the words "Web3" & "Crypto" are making most people question your sanity is exponentially harder.

A lot of liquidity has left the scene since a stable coin with a 18 Billion dollar market cap went to 0, and whatever hope remained- left after Sam Bankman Fried ominously tweeted,

If you're still in Web3, congratulations.

You've stayed long after most people who were here for the number-go-up jpegs & dog coins have left. You’re either here because your business has been through a previous crypto cycle and you know what you’re doing in this one, or you’re just really bad at reading the room.

I’m betting on the former.

But then again, if it’s your first Web3 business and you’re in your first crypto winter…. are you ok? (I know, you’re not.)

Or are you questioning whether it’s even worth it? (Spoiler alert: It is!)

Today’s topic is especially important because very few are out there talking about building a web3 business right now. In the bull market, you’ll see thousands of essays from twitter coaches offering similar advice. Fortunately, those coaches have pivoted to what the current thing is right now, which means I’m all you’ve got.

This essay will focus on Web3 "businesses", which means it won't focus on Web3 use-cases that don't qualify as a business but are still great products that should be built. There are many ways to build a business, so most of this advice is abstract. Some of the points mentioned below are based on Jason’s excellent essay, so if you’re starting any business, not just in web3, head over & read that.

It’s also important to keep in mind that there’s also a lot of luck involved, which means you can do everything wrong and still be successful, or do everything right but still fail. Having said that, I still think this is going to be the most important essay you’ll read this week, and if you just take care of the things mentioned in the essay, you’ll be better positioned and waste a lot less time.

We start with a question, a question that you must ask yourself anytime you start any business.

II. 🎯

Is your business solving a problem?

It's a simple question, but one that is surprisingly ignored by most first-time Web3 founders. Nothing, not even incentivised token distribution, can solve for the lack of a problem.

A problem must exist, and you have to solve it with your product or service. If the answer to this question is no, you don't have a business.

Most web3 founders fall into the trap of building “On-Chain X” where X is a currently popular product, thinking people will just switch over to the new product because it’s on-chain, but what problem is it solving by being on-chain? Would you yourself use your own product if no one else did?

It’s likely the case that you won’t. You don’t have a problem.

The easiest way to find a good problem to solve, is to start by solving your own problems. If you're not 100% happy all the time (in which case, do share your secret sauce, we could all use a sprinkle), you're facing a lot of problems in your day to day life.

Some are minor inconveniences, but some may be things that you know other people are facing as well. This is especially valuable when you're working with other people as it makes discovery of the problem space more constrained.

If two of you independently stumbled on the same problem, chances are, it definitely exists.

Coinbase was founded in 2012 when Brian Armstrong realized that he couldn’t buy Bitcoin as seamlessly as he wanted to. The price of one bitcoin was only $6 when Coinbase was founded with only one feature - buy Bitcoin through bank transfers. Today, it’s one of the most successful crypto exchanges in the world.

The problem existed, but he also knew that a lot of people would face this problem - which means, he’d find a market.

Once you find a problem, you need to find a market.

How many people have this problem?

This can be a rough estimation, but ideally, you want 100k organisations or 10M people to have this problem. They should either experience this problem right now, or ideally, in the future, but it’s better if a non-insignificant portion of them have this problem right now.

Let’s do the math because 10 million people might seem like a large number.

If you just assume that 1% will be the conversion rate and that 10 million people are searching for a solution to the problem on Google - approximately 1% of these visitors, or 100k people, will land on your website.

1% of that traffic will convert to being users, which means you'll have 1000 users from 10M impressions.

Ideally, if these users are also paying you $10-$100 a month, you're making over $100k to $1M a year. It takes a long time to get 10 million impressions, even in a big market, so you have to make sure you’re solving a problem in a market that has the potential to grow to that size.

For organisations who can pay you $1000 or more, you don't need as many impressions, and thus 100k organisations trying to solve a problem is a great market.

You won't get 10M impressions starting out, and it usually takes a long time to get there. You also want to be in a growing market, which means you have to anticipate the growth of a problem from a few users to millions, early.

For example, Bitcoin is the first permissionless, decentralized, censorship resistant store-of-value while also being magic internet money that can be sent from anyone to anyone around the world.

It is a necessity right now, solving an important problem for millions in hyper inflationary economies. It is a hedge against inflation now, and could be indispensable in the future if you believe that those in power would eventually abuse their power & borrow against future stability to keep printing money.

If you do believe that those in power are humans just as capable of being flawed as any human being, Bitcoin is the answer.

Thus, Bitcoin is solving a problem that might eventually be a problem for billions of people. While current use-cases of speculation and investment exist, it is, at its core, one of the greatest inventions of our time.

Then there are DeFi protocols, which, the one that's widely successful, will form the backbone for permissionless finance in the cyberspace.

Are 10 million people searching for DeFi protocol right now? Probably not. But when the market bounces back, they will, and eventually, even in bear markets, the space will have 10 million daily users.

Does your business have the potential to solve a problem for 10M people? It doesn't have to do that today. The problem may not exist for that many people today, and that's a good thing - it means there's less competition, but it also means you have to be right about the prediction you're making.

It has to be a contrarian prediction, otherwise alternatives would already exist. The market you're trying to serve can't be too small right now, either, unless you're okay with slow growth.

A lot of smaller, niche NFT marketplaces dedicated to art or music are making less than 100K USD a month right now. It's solving a problem - helping buyers and sellers of NFTs get connected with each other, but without the hype cycle of the bull run, their percentage cut on the volume is exponentially low than what they had likely imagined.

With teams of less than 30 people, they can get by and still profit. When billions of people are trading NFTs, they'll thrive.

In the bull market, every business will likely be “powered by Web3” in the same way that most companies are “powered by AI” now. But in the long run, all companies will be Web3 & AI. Web3, as a buzz word, won’t save your product and might even be detrimental in the bear market - so think carefully about what you’re problem using Web3 to solve - and whether that has the potential to exist for millions of people soon.

Do your research, and do it well.

III. 🔍

If the problem exists in a big market, or if you’re in a growing market, do the people who have the problem care enough to solve it?

There are many problems that people are just okay with tolerating.

They understand that the problem exists, and are very much aware of the consequences of not solving it, but it may still not be not a big enough problem. It's, maybe, seventh or eighth on their priority list of problems and they can only focus on the first few.

You could well aware that you might need to buy a new hardware wallet to store your NFTs, but if you have a crazy ex that’s stalking you, we both know what’s at the top of your priority list.

Here’s another one -

All transactions on the blockchain are public. This means that if someone knows your wallet address, they can trace all your transactions, which is a significant privacy concern.

The market here is substantial and growing – it’s all the users of blockchain-based platforms.

Do people care?: Yes, people do care about this issue. Privacy is a critical concern. However, it’s there on their list of concerns, but it’s not at the top.

Anonymity and privacy tools like Tornado Cash on Ethereum, ZCash and Monero exist to solve this problem. However, these tools are not widely used by all users due to their complexity, cost (gas fees), or simple lack of awareness or priority. Despite the solutions being available, the problem remains because it hasn’t yet become a top priority for most users.

It's a similar story for those building a decentralized discord or decentralised Twitter. While people care and want those things, they will happily give away their data to Instagram and Twitter for their distribution, content and network effects.

If you're building a decentralized discord, this isn't meant to discourage you. I think that is super necessary to build.

Just understand that if you raise VC funds for it, that means you want to show growth & fast growth - which isn't likely happening unless it solves more problems than just censorship resistance.

No government is trying to ban your friend's third football league community. The bigger problem they're facing is consistent indifference from the opposite sex. (which may be a better problem area to focus on)

IV. 🐻

If the problem exists, in a big enough market, and people are willing to pay you to solve it, you need to consider if they'd be willing to do the same during the bear markets.

Web3 is still cyclical across most verticals. The bull market is when there's a lot of attention and the growth you can achieve during this phase usually masks all problems.

It is in the bear market that most businesses face the tune of reality. Unless it's a zero interest rate environment, investors wouldn't save you unless you show them something that’s worth saving.

The whole market exponentially & rapidly shrinks in size, which is unique to the web3 space. In any other business, a market shrinking is a radically terrible thing to happen. In web3, it’s the norm.

For example, if you charge users to pay per-seat in your business, the average customer value goes down rapidly in the bear market - because many web3 teams will do layoffs. If you’re in any marketplace business, you’ll see 70% of the volume gone. People leave, and it’s normal for them to do that instead of riding it out.

There's a bad but easy solution to this - save during the bull markets and be prepared for the bear. That's a bad solution because it's easy to overdo it, you never know how bad it's going to get and saving capital instead of focusing on scale during the best years of your business isn't a productive use of capital.

It's far more efficient to focus on building a defensible moat during the bull market, while expanding into areas that are resistant to market downturns. For example, if you're building a web3 wallet, it makes more sense to build out a custodial wallet for small businesses and sell to these customers in the bull market, knowing they'll be resistant to market conditions in the bear market.

If you've built a domain name service, expand to enterprise web3 domain names which could be less resistant to churn, despite having longer sales cycles. Whatever is not based on speculation is ideal to build out during this time.

Or, you can hedge against the fall by building tools that help people short the markets. If you've built a NFT marketplace, build a borrowing protocol that helps people short the NFTs when they crash in value during the bear.

A good heuristic here, is to try to serve & build for users who aren't just there because it's the bull market. This is why companies built during the bear market thrive, because they always remain useful regardless of market conditions.

The bull market only amplifies the leverage they already have.

V. 🪙

Tokens are not your friend. Specially in the bear market, you have to be very careful if you’re planning on using tokens in your business.

If the greatest utility of your token is that holders are holding to sell it at a higher price, then you have a problem. This also applies to businesses doing a token-raise and locking tokens for VCs. You won’t know when it’s really the bull market again and having tokens unlock during the bull may destroy all your momentum and the sell pressure might cripple you during the best time of your business.

Tokens, when used wisely, can act as a lever propelling your business to new heights of both distribution and utility. Early believers of your project will get wealthy as a by-product of your execution, but this only works if holders getting wealthy is not the only reason for your token’s existence.

Think carefully about the incentives, about the tokenomics, and more importantly about the problems that issuing a token solves & the problems that it causes.

It’s possible to be lazy and still be successful by skipping this step, but being aware of all the paths in the idea maze and knowing your way around every edge case is more useful than leaving it to luck and the markets.

If you skip this step, it’s more likely that you’ll be stuck in the maze which you didn’t thoughtfully examine - and your own customers & supporters, the people you hail as a “community” will crown you as their Girardian scapegoat for wasting their time and funds.

Here’s Balaji Srinivasan on the idea maze -

“A good founder is capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the “movies/music/filesharing/P2P” maze or the “photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions.”

VI. 🚀

The final and most important thing you need to build a Web3 business is conviction.

If you're here reading this, you likely have it. One cannot have conviction unless one has a strong opinion on what the future would like, and one cannot have strong opinions about the future unless one does their research.

However, it may also be the case that you're naively too optimistic.

I always believe optimism is better than pessimism, and this whole publication is dedicated to that sentiment. However, Bright Mirror isn't about naive optimism, but rather, rational optimism.

Being too optimistic leads you to do the same thing that the pessimists are experts at doing - nothing.

To build a business in Web3, you can't just assume that you will succeed if everyone rolls their eyes or call you insane whenever you mention Web3.

The culture has to change, and you must do your part. You cannot side-step that by naming NFTs as "digital assets" just because a vocal minority is always complaining about NFTs and how they destroy the environment.

The silent majority never get to understand the benefits of Web3 (permissionless ownership, decentralization, democratization of access, composability, transparency, privacy, pseudonymity etc.) if you succumb to the tyranny of the vocal minority and don’t do your part.

How do you do your part?

By solving a problem.

The harder the problem is, the less competition you'll have, the more value you'll be able to deliver. For certain kinds of hard problems, you can take years trying to just get started, and if you’ve truly explored why it is hard - you can peacefully sleep at night knowing that if there’s a competitor trying to do the same thing - they’re about to discover why it’s taking you so long.

It’s always useful & more rewarding to have a bias towards ambitious projects and try to solve hard problems.

Building an collectable NFT project whose primary purpose is to "deliver value to the holders" is fundamentally unserious and lazy if that's all you're aiming to do, and you’ll likely fail at even doing that.

Building an NFT project that helps bootstrap a decentralized science research facility without misaligning incentives such that initial supporters aren't simply looking for an exit - because the facility provides enough additional value - is what's useful, but what's even more useful is when that R&D delivers something tangible to everyone on Earth making the whole world a better place.

Nothing’s stopping you from engaging in the culture war, but at the end of the day, no one really cares who you are or what you support.

Nobody really cares about your politics. Only thing that matters is what you build.

If what you build helps people, that’s great. If it doesn’t, keep trying till it does.

Building a Web3 business is hard.

But if you do it right, it’s going to be worth it.