Report Shows Only 5% Of VC-Backed Crypto Firms Developed A Market-Fit Product

The crypto market was red hot in 2021, with venture capital firms pouring money into new projects at an astonishing rate. The particular rise of smart contracts and decentralized finance (DeFi) gave rise to a new band of companies looking to enter the crypto industry, even before fully understanding the nooks and crannies of the industry. 

However, just two years later, a new report by Lattice shows that only about 5% of these cryptocurrency and blockchain companies have actually ended up developing a product that has gained real market traction. 

The State Of Crypto Startups: Lots Of Funding, Little Traction

The recent report by Lattice, a crypto venture fund, shows that while crypto startups received massive funding over the past few years, most have failed to gain real traction or develop a Product-to-Market Fit (PMF). 

The report analyzed nearly 800 crypto companies that received $2.6 billion in investment throughout 2021. It found that overall, around 5% only made it to the viable product stage.

Of the remaining projects, 70% of companies are still stuck in development after shipping a product to mainnet while around 20% have packed up and shut down completely. 

The Lattice report also surveyed projects on different blockchains and crypto niches. Of all the blockchains, Ethereum was the most successful, as 4% of Ethereum-based projects were able to develop a PMF followed by Solana at 3%. BNB projects, on the other hand, were the most likely to shut down with projects having a 30% fail rate. 

The venture capital funding for Web3 projects was the highest at $977 million. DeFi, Infrastructure projects, and CeFi received $762 million, $639 million, and $237 million, respectively. However, funding didn’t necessarily translate into PMF. 

CeFi and infrastructure initiatives on the blockchain had the biggest growth, with 90% of infrastructure projects deploying a product to mainnet. Meanwhile, less than 75% of DeFi projects delivered a product to a mainnet.

Lots Of Competition, Little Differentiation

The crypto space in 2021 became saturated with similar companies competing for the same customers. Without a strong, differentiated product providing real value, user adoption and retention suffered. An example is the flurry of Web3 companies and new blockchain games that were being developed in 2021. 

Most of these games have failed to gain traction to develop a Product-to-Market Fit. However, a lack of real games did not stop gaming projects from launching tokens, with 70% of projects choosing to launch a token, most of which are desolate in terms of market cap at the moment.

Most of these projects also faced competition from projects well-established before the 2021 boom. For instance, a survey of the current top 10 DeFi tokens by market cap were all seeded in 2019. Another example is Axie Infinity, a blockchain-based game that had raised its seed round in 2019 and was already well-established in the blockchain gaming sector.

With such a low success rate so far, it’s likely more crypto startups will fail before mainstream adoption. However, the crypto industry is still in its early stages and many projects are still bound to thrive.