CoinWired Report:
Compiled by Peyton
This week, we discussed the cryptocurrency investment landscape with Mike and Carl from 6th Man Ventures. We delved into topics such as the Solana ETF application, the need for increased cryptocurrency applications, the potential of AI and DePin, and the challenges of cryptocurrency airdrops. Enjoy the insights!
Background Story of 6th Man Ventures
Dan:
Could you share with us the background story behind founding 6th Man Ventures? What pivotal experiences in the cryptocurrency field prompted you to venture into risk investment?
Mike:
At the end of 2017 through early 2018, I transitioned full-time into the cryptocurrency space after several years in media and nearly a decade in fintech, founding a company in the Web 2.0 space. As a Gen-Xer, I found fintech often rehashed old concepts in new guises, but cryptocurrency was genuinely transformative, creating entirely new systems. Entering this field, I wasn’t an engineer and was unsure of my path, each answer leading to more questions.
I co-founded The Block and encountered numerous founders, entrepreneurs, and investors in the ecosystem. Over years of operation, I realized I was involved peripherally in a money-centric ecosystem without being truly engaged. In 2021, I partnered with long-time college friend Serge Kassardjian to establish 6th Man Ventures. Our investment philosophy is broad, not narrowly focused, exploring opportunities under wide-ranging mandates. Serge and I have backgrounds in media and fintech, dating back to our early internet days.
Our goal is to foster the creation of more cryptocurrency-based applications.
Since our inception in 2021, we’ve primarily invested in the application layer.
Our initial investment inspiration stemmed from personal experiences with projects like NFTs, NBA Top Shot (2020), and Bored Apes (2021). Engaging with blockchain communities and witnessing numerous developers led us to embark on investments. This trajectory flourished from 2021, culminating in our second fund launch in 2022. Today, we operate as registered investment advisors and institutional investors, typically engaging in early-stage investments across various blockchain ecosystem application projects.
Dan:
Carl, what prompted your transition from a product leadership role to aspiring to play this role in investment?
Carl:
That’s a great question. Since graduating from business school, I’ve pursued frameworks that aim for tenfold growth annually in aspects of my career, whether financial, networking, or skills. In venture capital, I found the opportunity not just to play a tenfold game daily but a hundredfold game. We seek the brightest, sharpest founders daily, assisting them in ecosystem development and collaborating with them in their early entrepreneurial stages. I find this incredibly exhilarating.
What surprised me upon entering venture capital and conversing with Mike and others, with six years of product management experience, was their straightforward feedback. I always adhered to frameworks and theories, focusing on customers and problems to solve. This method proved uniquely beneficial in venture capital, helping me uncover vast opportunities and cultivate long-term relationships with founders. It’s this hundredfold game that drew me into this field, and I’ve never looked back. I absolutely love it.
People often ask if I miss the operational days. Yet, at 6th Man Ventures with five team members, we remain builders and founders. We strive daily to expand influence and refine our work. Hence, even as investors, we wear the entrepreneur’s hat.
Solana ETF
Dan:
Given that 6th Man Ventures has five members, it seems you really need to round out to six! Before we started the podcast, we received some intriguing news: VanEck announced they’ve filed the first Solana Exchange-Traded Fund (ETF) application in the United States. We’re not regulatory experts, so I won’t push you for predictions.
But broadly, Carl, what does this signify for the industry? When Bitcoin ETFs launched, Ethereum was the talk. Now, with Ethereum ETFs approaching, the question is who’s next? Solana appears to be a likely candidate. What does this mean for the Solana ecosystem?
Carl:
I believe it signifies the resilience exhibited by this ecosystem. Solana has weathered significant challenges, including regulatory hurdles and FTX’s collapse. Yet, developers and founders continually rebuild and push forward. This announcement is a testament to that resilience.
If you look at core blockchain metrics, Solana stands out significantly. Transaction volumes processed, the value exchanged on-chain, and industry partnerships all indicate Solana’s potential for approval. This is recognition of Solana’s achievements.
Mike:
Absolutely, the pace of change is remarkable. As recently as December 2022, jokes circulated about Solana being reduced to merely 75 developers. Within a month or two, a dedicated and astute group disproved that notion, distinguishing this chain from FTX and SBF. A passionate local team is building genuine technology and infrastructure. Today, Solana is one of the most widely used blockchains, applied across various use cases.
The prospect of bringing this story to a broader financial investor base via an ETF is exciting. We’ve seen signs of this interest through institutional sales inherited from FTX’s legacy, involving billions in SOL transactions. This asset has garnered immense interest.
Investment Philosophy of 6MV
Dan:
You mentioned some intriguing insights into developer statistics. Those familiar with this data know it’s imperfect, as it only accounts for a subset of GitHub activity, easily manipulated by actions like correcting spelling errors in README files, thus being a low-quality metric.
In making data-driven decisions, what statistics do you focus on? Which metrics have the greatest impact on your assessment of ecosystem vitality? Moreover, given this industry’s susceptibility to mimetic valuation, how critical are fundamental driving factors to asset valuations?
Carl:
This is absolutely crucial. When investing in mature ecosystems like Ethereum or Solana, the primary risk lies in whether founding teams can push the right products into a growing market or create their market. When investing in nascent ecosystems like Sui or Aptos, we assess not only founder and market risks but also whether protocols or blockchains can create tenfold value annually.
When evaluating investments in emerging ecosystems, valuations are often lower due to higher risks. However, founders in these ecosystems are typically passionate. We look for clear cultural backgrounds and outstanding founders. For instance, in ecosystems based on the Move language, we’ve seen a group of excellent developers inspired by Move transitioning from Web2 to crypto.
Key factors we consider include ecosystem culture, on-chain transaction volumes, and development ease.
If tools aren’t readily available, and developers need to build everything from scratch, time to market for products will be longer. Teams raising funds must consider this, particularly in terms of reserves. On platforms like Solana or Ethereum with robust developer tools, rapid iteration and testing are much easier.
Mike:
Additionally,
when assessing Layer 1 ecosystems, we focus on the depth and breadth of developer and user adoption.
Developing a robust and comprehensive economic system on Layer 1 is crucial for sustainability. Without it, there might be no justification for using that Layer 1. For example, Bitcoin has always been a store of value tool but is now developing its ecosystem. For Ethereum and Solana, we see extensive and deep usage across various application domains and capital.
Alternative L1 Layers
Dan:
Carl, regarding Sui and Aptos, have you seen any signs of one ecosystem surpassing the other? They’re often compared because both are application chains originating from Facebook’s DM project, with intriguing background stories.
From your perspective, have you noticed either ecosystem taking a leading position?
Carl:
That’s a good question. It’s akin to investing in Apple versus Android. Many refer to Sui as the “Apple of blockchain,” while Aptos takes a more neutral stance, with less foundation-built and more ecosystem-enabled. Some developers prefer A我们进行了空投研究是为了了解这一市场趋势，并为我们的投资决策提供更多数据支持。我们分析了超过400个代币空投项目，并收集了多个指标，包括空投数量、空投目标、空投金额、代币流通量等。通过对这些数据进行综合分析，我们得出了以下结论：
1. 空投数量呈指数级增长，尤其是在2021年。
2. 大部分空投项目的目标是增加代币的流通量，吸引更多用户参与和持有。
3. 空投金额在过去几年中有所下降，这可能是由于市场竞争的增加和空投项目数量的增加所导致的。
4. 一些高质量的空投项目，如Uniswap和Aave的空投，对代币的市场表现产生了积极影响。
总体而言，空投作为一种营销手段在加密货币市场中仍然非常流行，但随着市场的竞争加剧，项目方需要更加创新和差异化的空投策略来吸引用户和投资者的注意。When I joined the company to oversee the second fund, Mike wanted to bring a strong research spirit to the company. We focused on areas with many questions but limited data. Airdrops naturally became our research focus in this cycle. We wanted to answer two questions: how much supply should I airdrop, and who should I airdrop to? We analyzed the data and discovered some interesting insights. Compared to the pattern of widespread airdrops, the price after 60 days of airdropping to the core group is much higher. Tokens airdropped to non-users experienced twice the amount of selling compared to tokens airdropped to users. The size of the airdrop has no significant impact on price performance or volatility.
We recommend a bias towards core users and generally smaller airdrop sizes.
We also found that many current airdrop methods are not as effective as they should be. For example, giving tokens to people who have never used your product is not an effective way to attract them to use it. Instead, you should first make them customers. We also suggest reserving more tokens for future incentive measures rather than giving away a large amount at the beginning.
Dan:
Let’s delve deeper. An interesting way to provide on-chain liquidity for your tokens is to use the DAO treasury to provide liquidity. But the challenge is, where do you get the counterpart side from liquidity providers (LPs)?
Carl:
We haven’t thought deeply about this issue yet, but there is a lot of capital in the cryptocurrency space seeking returns. With the right incentives, others may be willing to provide the counterpart side for LPs. There are many ways to address the liquidity issue besides simply airdropping more tokens.
Mike:
We will include a link to our report in the show. It’s a very insightful article worth reading. The insights about targeting core users and airdrop sizes are particularly valuable. There are multiple ways to obtain liquidity besides simply airdropping tokens to people. As part of community building, we need to think more creatively about these issues.
Cryptocurrency Token Unlocking Issues
Translator’s Note:
Cliff refers to the lock-up period, which is a period before the unlocking of stocks or equity grants, during which no stocks or equity grants will be unlocked. Vesting refers to the gradual unlocking process in a stock or equity grant plan, where all granted stocks or equity are gradually acquired over a period of time.
Dan:
This is also interesting. You briefly mentioned token unlocking reports, which I haven’t read yet, so I would like to hear a quick summary. Conceptually, when you join a traditional startup, your equity incentives usually include a one-year lock-up period and a three-year vesting period, totaling four years. In the cryptocurrency space, we have significantly shortened this time. For example, the recent EigenLayer has a total vesting period of three years, with a one-year lock-up period and a two-year vesting period.
In the cryptocurrency space, you have a liquid asset, unlike traditional startup companies that require liquidity events to realize any value. How do you view this dynamic, and what are the findings from token unlocking reports regarding the team and investor perspectives?
Carl:
We studied the impact of significant changes in circulating supply on price and volatility. Not surprisingly, larger unlocking events usually lead to significant price drops. Different motivations come into play when people receive tokens, but some people will sell immediately.
We recommend limiting the increase in circulating supply to no more than 1% at any given time. Daily or weekly unlocking can prevent massive simultaneous unlocking, reducing the time of price drops.
As you mentioned, we do follow the traditional structure of a one-year lock-up period and a three-year vesting period. However, in the startup world, stocks do not have an immediate liquid market.
Blindly adopting this structure in the crypto space is not ideal. We recommend no lock-up period to avoid major sell-off pressure events.
Market makers can absorb a certain level of selling pressure, but they cannot handle it if all selling happens at once. Instead, consider starting the unlocking process after one year of joining, rather than unlocking the majority at once.
Interestingly, when we observed the relationship between circulating supply and fully diluted valuation (FDV), we found that protocols with circulating supply below 70% performed worse in terms of price and had greater volatility. On the other hand, ecosystems with circulating supply exceeding 70% performed better. The data suggests that faster token release actually improves price performance over time.
Dan:
That’s very interesting. I agree with your conclusion of setting a one-year waiting period followed by a one-year unlocking period. It becomes a self-fulfilling prophecy that the first sellers can get the highest prices, and everyone is talking about upcoming unlocking events, perpetuating this cycle. It’s a great analysis.
Carl:
One final advice for founders: Pay attention to who your investors are. Some investors aim for quick liquidity and exit, while long-term holders like us are different. Aligning with the right investors helps reduce the likelihood of mass sell-offs on listing day. The reputation of the venture capital firm you partner with is crucial, especially in terms of token ownership.
Liquidity Investing vs Venture Investing
Dan:
Carl, your insights are enlightening. I have another idea in mind, which is that the cryptocurrency market is highly cyclical.
You are long-term investors, sometimes even looking at the market ten years ahead, especially in the DeFi space. How does this play a role in your decision-making process? If we examine the interaction between the liquidity market and the venture market, it seems that the venture market heats up due to overvaluation, while interesting opportunities exist in the liquidity market. Do you see this as an important indicator of the market cycle phase?
Carl:
Most venture funds have a portion of their capital allocated to alternative investments, including liquidity assets. Similarly, many major liquidity funds also have sidecar accounts for venture investments. Different market cycles present different opportunities. While venture investments have become very expensive, indicating interesting liquidity opportunities, we still invest in exceptional teams at fair valuations, such as seed or pre-seed deals of $20 million or less, particularly those with high-quality founders.
We maintain an opportunistic approach, taking advantage of emerging liquidity opportunities and increasing our venture investments when the market cools down. However, our investments need to have the potential for billion-dollar visions. We focus on founders with grand visions, even if their initial product scale is small. Valuation is important, but not at the expense of partnering with the right founders who are aiming for billion-dollar opportunities.
Advice for Founders
Dan:
Great. One final question, what advice do you have for entrepreneurs in the crypto space?
Mike:
At the highest level, specific advice for crypto company founders revolves around building the unique nature of crypto companies:
1. Stay Calm: The crypto market is financialized and more unstable than traditional tech. As a founder, you need to maintain a calm demeanor towards employees, investors, customers, and stakeholders to mitigate the surrounding chaos.
2. Bias for Action: Similar to the AI field, cryptocurrencies operate in a rapidly changing innovation cycle. You need to launch products quickly, iterate, and respond rapidly.
3. Stay Committed: Focus on a specific problem. Successful investments often have a fervent focus on breakthrough use cases, such as StepN’s “earn as you walk” or Magic Eden as the preferred brand for cross-chain NFTs. Having a strong stance on the top priority is crucial.
Carl:
I’d like to quickly add a few points:
1. Stay Passionate: Be passionate about your work. Passionate founders perform better because they have more energy and drive. Focus on the work you consider a lifelong mission, even if it’s not as popular in the crypto space.
2. Thoroughly Innovative Ideas: Pursue ideas that are 10x better than existing solutions, not just 10% improvements. It’s difficult to attract funding with small improvements.
3. Simplicity Trumps Complexity: Simplicity is key in product design and communication. People have limited attention, so simple information ensures better communication.
4. Believe in Your Vision: While venture firms and other stakeholders may provide advice, sometimes that advice may be wrong. As a founder, believe in your instincts and take responsibility for your decisions, as you’ll have to face the consequences of those decisions.
Dan:
In summary, believe in something, we are changing the world, join in. I love it. Mike, Carl, it’s been a fantastic discussion. We will include your links and information about your company in the show notes, along with your excellent research. Thank you both for joining us.
