Growth Hacking and Decentralized Finance

I raised $500 million USD in AUM by promising users 20% risk-free returns. What do I do now???

The Silicon Valley consumer tech scene popularized a development strategy often referred to as “growth hacking” or “blitzscaling”: scaling up your customer base very quickly, well past the point where your infra/product can really support it, and fixing the product ex-post once you have a large enough user base. This kind of “fake it till you make it” strat is deeply embedded in the Silicon Valley mythos. Stories abound of Uber handing out flyers to airport limo drivers, social networks marketing aggressively to college students, and so on. Successful hackathon projects often essentially build UIs, just functional enough to pass the demo. The devs in these cases are basically pre-selling the product as a concept. The product is generally not really there when the marketing begins, but it is also not particularly hard to build. If we learn that the demand is there, the product can surely be built. If there’s no demand, why bother?

Besides its focus on customer base over product, the “growth hacking” mindset also involves essentially ignoring margins and profitability, until the “blitzscaling” phase is over. It is considered acceptable — even glorified! — to lose massive amounts of money in the “growth” phase. This logic is based off the idea that, in consumer tech, network effects are king: there are huge returns to scale, and unit economics are much better when you are big than when you are small. Growth hack your way to being big, and your margins will fix themselves.

The growth hacking mindset is popular because it has had many notable massive successes! Among other examples, Facebook, Google, Youtube, were very highly used, but essentially unprofitable, for long periods of time before they became massively profitable.

But there are also a number of high-profile failures of growth hacking. The classic example is Moviepass. It turns out people like free movies. If you give basically free movies to users, you will get a ton of users very quickly! Once you stop giving movies away, you will probably lose most of your users. But it’s a good growth hack!

A number of other businesses sit at the fuzzy boundary, where it’s yet unclear whether there is a pot of gold at the end of the VC-funded rainbow: whether, when all the VC subsidy money is burned, the business actually has good unit economics. Uber, AirBnB, and the food delivery app wars are classic examples. Direct-to-consumer internet retail seems similar. The Chinese bike share boom, and to some degree the electric scooter sharing boom in the US, are other examples. It is not yet clear, once the growth hacking phase is over, whether the unit economics of these businesses actually make any sense.

Culturally, web3 and defi sits at the intersection of finance and tech. An interesting feature of web3, relative to traditional finance, is that “growth hacking” seems much more prevalent. You can imagine how this might have happened, culturally. Silicon Valley natives gets into web3, naively apply the “growth first product later” approach in consumer tech.

Growth hacking is particularly easy to do in finance. If you want to attract a lot of money very quickly, just use the Moviepass strategy: get your marketing guys to put on suits and ties, make a nice website, and promise depositors 20% risk-free yields!* You will very quickly get a giant amount of users and a giant amount of money!* As one example, I’ve previously written about yield farming as a form of growth hacking. There’s also a number of recent amusing examples of defi/CeDefi products which have essentially executed this strategy.

This strategy is pretty likely to succeed in getting you a lot of users and revenue. People like risk-free 20% returns! The problem, of course: after you’ve raised a ton of consumer money, how do you actually deliver on your promises to users?

The hard part of this strategy, of course, is actually delivering on your 20% promise. Finance, traditionally, has very different economics than consumer tech. Traditional finance — of the mutual funds, hedge funds, banks, variety — is essentially a numbers game. A large fraction of labor hours in tradfi time are spent thinking hard about margins, good trade execution, squeezing out a few more basis points than your competitors here and there. Margins are generally fairly thin, and everyone is fighting for the same couple of scraps.

It is also not clear in traditional finance that returns to scale are generically positive — they are in many cases constant, or perhaps slightly negative, for example in the case of investing strategies that have limited capacity. Delivering 20% returns is not easy for anyone. It is also not clear that delivering 20% returns is any easier for a big fund, than a small fund. This somewhat counteracts the whole point of growth hacking.

Finally, the consequences of reneging on your promises to users are quite different in consumer tech versus finance. If you promise to deliver a hot dog image recognition app to users, and you fail, users will not be able to automatically detect hot dogs in images. If you promise to deliver 20% returns, and accidentally lose all your users’ life savings, this is much worse than not having auto-labelled hot dogs.

The point here is not to absolve any bad actors in defi space of their responsibilities — if rumors are believed, some very bad things went down in the last defi crash. The point is just to highlight that, if you naively mapped reasonable behavior in consumer tech to finance, you can somewhat rationalize how we got into the strange position that a number of defi products, with no real strategy and embarrassingly poor infrastructure, were able to get so big and high-profile in the recent boom.

So to summarize, the growth hacking strategy evolved as a response to the unique returns-to-scale economics of consumer tech. It is unclear that the strategy will ultimately work in other businesses adjacent to consumer tech, like “sharing economy” platforms, and it is even less clear it is a good fit for most financial applications. Web3 ran the interesting experiment of running these growth hacking strategies naively in finance anyways, and this is potentially responsible for some of the the fallout from the recent boom.

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*Obviously, this is not actual building advice — don’t do this!