Why do so many crypto startups fail?

Creating a successful startup is challenging at the best of times, especially in the crypto industry, where an estimated 95% of startups fail.

As the industry grew, there were thousands of crypto startups. According to business platform Crunchbase, at least 2,619 are operating in various stages of development as of 2024.

More than 24,000 have been listed on CoinGecko since 2014, but at least 14,039 have died since then.

Speaking to Cointelegraph, Robert Hoogendoorn, head of content at blockchain analytics platform Dapradar, said that the reasons for failure in crypto startups can be many, from lack of funds and investments to poor product market fit, faulty marketing or a technically flawed product. .

However, one of the fundamental reasons why crypto startups can fail is that building a successful startup is difficult regardless of the industry.

According to Explosive Topics, up to 90% of startups fail across all industries. In the first year, the average failure is around 10%, then it increases significantly.

“Now translate this general market data into crypto, and the challenges will be huge; the crypto market is very volatile, and we've just come out of the longest crypto winter.”

“There are various teams in Web3 building great products, and some of them have survived one or two bear markets. But there are also companies that have poor financial management or simply don't have enough money and have closed their doors.

Bear markets can also be deadly for crypto startups. The last bear market and crypto winter started in 2022. Five others preceded it, lasting from five months to two years.

During these cycles, Hoogendoorn says, “investors become risk-averse,” making it harder for businesses to get funding and stay afloat. Hoogendoorn also thinks, “Finding a product market fit in Web3 is not easy.

“Product development, marketing, cash flow; all these things have to be reinvented to work in Web 3.

“With this comes the speed of innovation; Web3 developments happen so quickly that the competition launches better products than you can in weeks. That's what makes Web3 exciting, but also very challenging for startups and founders,” he added.

At the same time, despite the high failure rate, Hoogendoorn thinks the future looks bright for some crypto startups, due to the increase in “the amount of talent moving into this industry”, better products, better user experiences and easier onboarding.

Related: VC Summary: Are VCs Returning to Crypto? February again suggests confidence

Hoogendoorn predicts that the high level of flexibility for crypto startups will demand more businesses in the long run, a natural life cycle that will see some tech startups rise to the top.

“As the industry grows, many startups have to close their doors, but some grow and PayPal, Uber or Doordash of Web3, offer new products that help consumers reach their goals with a smooth interface and simple user experiences,” he said. he said.

Market volatility and bullish cycles also affect crypto startups.

Crypto markets are notorious for their volatility, with extreme price swings helping investors make or lose wealth in lightning-fast fashion.

James Hallam, head of business development at the dYdX Foundation – an independent decentralized finance (DeFi) non-profit – says volatility and rampant speculation lead to unsustainable startups rather than solid business fundamentals.

“Above all, the success of crypto startups depends on the team's ability to execute their vision,” he said.

“Many crypto startups fail due to lack of clear direction, inability to navigate or adapt in a rapidly changing environment.”

From the late 1990s to the early 2000s, Internet-based companies were the subject of intense promotion and investment. The sector peaked at $2.95 trillion before dropping to $1.195 trillion.

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According to Hallam, these lessons can provide critical information for crypto startups to weather tough winters and bear markets.

“If teams can understand the lessons of history and prioritize product-market fit instead of succumbing to mass seduction, this will pave the way for a more resilient and innovative crypto industry,” he said.

“Crypto startups should draw on the historical experiences of Web2 companies that have faced the daunting challenge of launching new technologies while trying to optimize product markets,” Hallam added.

Lack of clarity and inexperience can also lead to crypto disaster.

Fraser Edwards, founder and CEO of decentralized data infrastructure provider Checked, believes that in addition to the previously mentioned reasons for crypto startup failures, the crypto market is still in an “experimental phase” as people figure out what works, often through trial and error.

Edwards told Cointelegraph that other issues that can cause crypto startups to fail include not focusing on solving real problems and neglecting to build revenue.

“There is still a lot of focus on building good technology but never thinking it will solve a real problem. Too often technology is built before market validation is done.”

“Many projects believe that marketing has a good logo and a set of influencers. There is no definitive strategy on basic activities like SEO, content production or effective PR.

Related: Where crypto can grow: Digital asset regulations around the world

According to Edwards, the lack of clarity around crypto regulations, especially in the US, and the uncertainty in the market are keeping clients and customers from using the technology; This creates chaos for startups.

Ever since Bitcoin's (BTC) 2008 white paper was made public, the legal status of the crypto industry has been the subject of debate, legal action, and no small amount of outrage from governments.

In the year December 19, 2023 A PricewaterhouseCoopers report found that 42 countries have discussed or adopted crypto regulations and laws by 2023. However, many still lack a clear regulatory framework.

At the same time, Edwards thinks that some of the failed crypto startups may have been too well created, with rogue pools and other scams contributing to a “significant shift” in crypto startups.

Carpet pulls happen when a startup begs for capital from investors only to quit and run away with the money. Often the rug in crypto involves selling tokens, which will eventually become worthless after the trade is terminated.

A lack of diversity can contribute to failures because there is “a huge amount of innovation, especially on the network.”

“That means you have entire ecosystems built on protocols and then replaced by better technology,” Edwards said.

“In this regard, many companies and offerings do not differ from the protocol they are built on,” he added.

In general, Edwards says one of the biggest challenges crypto startups face is that they often lack people with experience in the business world and the skills to create successful products.

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“Although this is improving every year, there are many projects that ignore business values ​​and ethics such as mission and vision, long-term simulation and network resource planning, punctuality and business objectives,” said Edwards. .

“The big reason that includes all of the above is that crypto is still a young industry, and it is not unusual to find people who have never worked in other industries. This means that they are not focused on income and sustainability.