Revenue is Your North Star: How to Build Profitable Web3 Companies
Photo by Vitaly Gariev on Unsplash
If I ask you, I'm sure you can mention up to 3 companies you knew 3 years ago, but have folded up by now. Well, that's the reality of the business world.
This is also the case in Web3. Some once-vibrant protocols with millions of raises have bitten the dust. Indeed, there are often different reasons for such occurrences.
But most times, the bottomline is that the companies ran out of funds.
As a Web3 builder who has launched a technical content studio and is on his way to building companies with crypto consumer products, I've always considered this.
How can you build a consistently profitable Web3 company that will outlive generations like Walmart?
In this blog post, I'll share a few things I've experienced, accompanied by research from serial founders. Trust me, this is an article you should bookmark.
Money is the Centre of Gravity
Some builders often shy away from money talks, but they don't do that for long; money has a way of quickly sliding reality checks.
Your idea might be to be the next “FHE-enabled cross-chain AMM protocol.” Whatever technical solutions you want to provide, know this fact: money is the center of gravity.
Knowing this early, and not later in the game, is a lifesaver. Once you know that your company depends on it, it will reshape your perception of product building…
And at the end, you will realize the need for profitability. A company must be able to cater for itself; for such to happen, you must be profitable.
You might want to ask, “But John, what if I raised some millions of dollars? Should I still care about profitability that much?”
The straight answer is “yes,” and I will explain. When you raise money, you are particularly securing runway. This means you'll spend what you raise to build useful products that people will want to pay for.
What you raised won't sustain your company for life—far from it. As we mentioned, it only secures a runway for you.
So whether you raised or not, you should think about profitability from day one.
In the rest of this article, I will use the words “profit” and “revenue” interchangeably. Yes, they are technically different in finance, but let's interchange them for ease of communication.
Why Revenue is a Good North Star
I believe the reason some Web3 startups will never hit product-market fit is that they are less concerned about revenue. Revenue is your North Star to finding product-market fit.
Helps You Find Product Market-fit
This is the first thing you should know: people only pay for what is really useful to them.
When you launch a Web3 protocol, many will use your product mainly to have a “feel” of it. If you run quests, some will only use your product because they want to complete quests and be rewarded.
In some instances, some—especially close frens—will use your product to encourage; not really because they find it useful.
So, how do you move from passive users to securing active users? These are the steps:
talk to customers
find their pain points
provide paid solutions to those pain points
When you do this, you can secure loyal, active users. Here is my point: people paying to use your product is proof that you have built what the market wants – and revenue search led you here.
Helps You Hire Only High-performant Talents
Secondly, revenue-mindedness will help you hire only high-performing talents.
I have noticed that many startups splurge their funds on hiring many people, most of whom are not even carrying out critical tasks in the startup.
You'd spend all your fortune on talent while the startup isn't making money back, and that's how some run out of funds.
Take Telegram, for instance. It only has about 30 cracked engineers worldwide, and the working product. Meanwhile, some of its competitors have 2500 staffers.
The question is: how come a founder runs a social medium with 30 employees, and another runs the same with 2500?
Well, it shows the former has learned to work with self-led, highly-skilled, high-performant talents.
And only a founder who is revenue-driven will learn to work with such lean staff to build global products.
Helps You Avoid Fake Work
Much of your work as a founder revolves around leading your team to build great things and spearheading the media awareness of those great things.
So, there is a public outlook to your work. When founders discover this, they tend to be overly conscious of many things, some of which might not be relevant.
First of all, they might start hiring not based on merit but on appealing to some social “Tech Twitter Standard” to look cool.
Secondly, you might be tempted to start attending every conference. You want to increase your product’s social awareness and close deals, which are good.
But you might be doing that unnecessarily, increasing your burn rate. In particular, you might eventually be attending conferences that you know might not really benefit your startup.
The definition of fake work here is adjustable to several circumstances that are not fruitful to your product.
You should keep this rule in mind: anything that does not generate revenue for your startup directly or in the long term is fake work.
Two Case Studies: Code Arena and Uniswap
Let's examine the business models of two Web3 companies in different terrains to better understand this discourse.
Code Arena
Code Arena is a popular bug bounty platform on Web3, and security researchers are more familiar with it. The news of Zellic acquiring the platform was quite a shock to many in the industry.
Why will a platform put itself up for acquisition? If you're familiar with M&A a bit, you'll agree there can be one thousand and one reasons.
However, according to unverified news, Code Arena hired quite a lot at one point. Their revenue did not increase much.
Even after laying off a bit, the platform has to give itself up.
PS: I respect the Code Arena team; this is only a business model analysis.
Uniswap
If you've been building in Web3 for quite some time, you should have used Uniswap at one point or another. I believe every founder has something to learn from them.
In the beginning, Uniswap only charged the protocol fee as that is the actual product. However, it later discovered that this was not enough for it to fly.
Even Hayden admits that such a current business model is not sustainable, and then announced interface fees in late 2023.
By August 2024, Uniswap had already recorded about $50 million in revenue. That, my friend, is how a business is built.
This way, the business will be free from financial pressure and be buoyant enough to grow its ecosystem.
Learning the Principle of Default Alive
YC partners have an important principle they instill in founders who pass through them: the principle of Default Alive.
Indeed, the startup journey is much more serious and concerning than people see on TV. Running a business can have some moments.
The principle of Default Alive states that you should do whatever you can to stay in business in tough waters – just don't die!
You should know this as a founder who wants to build very profitable Web3 products. I always emphasize having a year's runway in your reserve.
That said, you should read my blog on how D2D content can help your company and push you to earn more revenue.