6th Man Ventures: It’s time to develop applications rather than infrastructure

Translated by: Peyton

This week, we discuss the investment environment of cryptocurrency with Mike and Carl from 6th Man Ventures. We deeply analyze Solana ETF application, why cryptocurrency needs more applications, the potential of AI and DePin, the dilemma of cryptocurrency airdrops and many other topics. Please enjoy!

Background story of the establishment of 6th Man Ventures

Dan: Can you share with us the background story of the establishment of 6th Man Ventures? What important experiences in the cryptocurrency field prompted you to take this step in venture capital?

Mike: In late 2017 and early 2018, I entered the cryptocurrency field full-time. Before that, I worked in the media industry for several years and worked in the fintech field for nearly a decade. I founded a company in the Web 2.0 field. From a former baby boomer perspective, I found that fintech was often just new clothes for old things, while crypto was truly exciting and was creating entirely new systems. However, when I entered the space, I was not an engineer and was not sure what to do. Every question I answered led to more questions.

I started The Block and met many founders, entrepreneurs, and investors in the ecosystem. After running it for a few years, I realized that I was working in an ecosystem centered around money and money flows, but not participating in it. In 2021, I partnered with long-time college friend Serge Kassardjian to form 6th Man Ventures. Our investment philosophy is broad, not just focusing on a few core themes, but looking for opportunities under a wide range of mandates. Serge and I both worked in media and fintech and are internet natives since college.

Our goal is to support the creation of more cryptocurrency-based applications. Since our founding in 2021, we have primarily invested in the application layer. The inspiration to start investing came from our personal experiences investing in projects like NFT, NBA Top Shot (2020), and Bored Apes (2021). Through interactions with the on-chain community and seeing many developers, we decided to start investing. This process began to flourish in 2021, and we launched our second fund in 2022. Now, we are a registered investment advisor and institutional investor, often making first or second round investments in application projects across multiple blockchain ecosystems.Dan:So, Carl, what made you move from leading in the product space to wanting to play this role on the investment side?

Carl:That's a great question. The framework that I have been following since graduating from business school is that I aspire to achieve 10x growth in some aspect of my career every year, whether it is in terms of finances, connections, or skills. In the venture capital field, I found that I have the opportunity to play not just the 10x growth game every day, but the 100x growth game. We’re looking for the best and brightest founders every day, helping them grow the ecosystem, and working with them in the early stages of their startups. I find that incredibly exciting.

When I joined the venture world and started talking to Mike and others, I was surprised by how direct they were in responding to my questions. As a product manager with six years of experience, I always followed frameworks and theories and focused on the customer and the problem to be solved. This approach is particularly unique and beneficial in the venture world, and it helps me discover great opportunities and build long-term relationships with founders. It was this 100x growth game that got me into this space, and I have never regretted it. I absolutely love it.

People often ask me if I miss being an operator. But there are five people on the 6th Man Ventures team, and we are still builders and founders. We are working every day to expand our impact and improve our work. So even as an investor, I still wear the entrepreneur hat.

Solana ETF

Dan: Since there are five of you at 6th Man Ventures, I think you really need to get six! Before we get started on the podcast, we got some interesting news: VanEck announced that they have filed for the first Solana exchange-traded fund (ETF) in the U.S. None of us are regulatory experts, so I won’t push you to make any predictions. But broadly, Carl, what do you think this means for the industry as a whole? When the Bitcoin ETF was launched, everyone was talking about Ethereum. Now, with the launch of the Ethereum ETF getting closer, the question is who will be next? And it looks like Solana may be the answer. What does this mean for the Solana ecosystem?

Carl: I think this is a sign of the resilience that the ecosystem has shown. Solana has been hit hard by various issues, including regulatory challenges and the collapse of FTX. However, the developers and founders have continued to rebuild and move forward. This announcement is a testament to that resilience.

If you look at core blockchain-level metrics, Solana stands out. The number of transactions processed, the value exchanged on-chain, and the industry partnerships all indicate that Solana is on track to be approved. This is a recognition of the success that Solana has achieved.

Mike: Yeah, it’s changing so fast. In December 2022, there were still people joking that there were only 75 developers left on Solana. But within a month or two, a group of dedicated and resourceful people proved that this chain is not equivalent to FTX and SBF. There is a passionate local team building real technology and infrastructure. Now, Solana is one of the most widely used blockchains with real applications in various use cases.

It’s exciting to bring this story to a wider range of financial investors through ETFs. We have already seen a precursor to this interest from the institutional sale of FTX Legacy, which involved billions of dollars in SOL transactions. There is a huge interest in this asset.

6MV Investment Idea

Dan: You mentioned something interesting about the developer statistics. Those who are in the know know that this metric is not perfect because it only counts a subset of GitHub activity, which can be easily faked. For example, fixing a typo in a readme also counts as developer action, so it’s a low-quality metric. What statistics do you look at when making data-driven decisions? What metrics influence you the most when measuring ecosystem activity? Also, given that this industry is often subject to mimetic valuations, how important are fundamental drivers to the valuation of these assets?

Carl: This is absolutely critical. When investing in mature ecosystems like Ethereum or Solana, the main risk is whether the founding team can bring the right product to a growing market or create their own market. When we invest in early ecosystems like Sui or Aptos, we assess not only the founder and market risks, but also whether the protocol or blockchain can create ten times the value every year.

When evaluating investments in emerging ecosystems, valuations tend to be lower due to the higher risks involved. However, the founders in these ecosystems are often passionate. We look for clear cultural context and great founders. For example, in the Move-based ecosystem, we see a group of excellent developers inspired by Move, many of whom are transitioning from Web2 to crypto.

Key factors we consider include the culture within the ecosystem, on-chain transaction volume, and ease of development. If there are no tools available and developers need to build everything from scratch, the time to market will be longer. Teams raising funds need to consider this, especially in terms of funding reserves. It is much easier to iterate and test quickly on platforms like Solana or Ethereum that have strong developer tools.

Mike: In addition, when we evaluate Layer 1 ecosystems, we focus on the depth and breadth of developer and user adoption. Developing a sound and comprehensive economic system on Layer 1 is critical to sustainable development. If this is lacking, there may be no need to use that Layer 1. For example, Bitcoin has always been a store of value, but is now developing its ecosystem. For Ethereum and Solana, we see that they have broad and deep use cases and capital in various application areas.

Alternative L1 Layers

Dan: Carl, regarding Sui and Aptos, do you see signs that either ecosystem is overtaking the other? They are often compared together because both are application chains and both originated from Facebook's DM project with interesting background stories. From your perspective, do you see either ecosystem taking the lead?

Carl:That's a good question. It's like whether you are investing in Apple or Android. A lot of people call Sui the "Apple of blockchain", while Aptos takes a more neutral approach, with less things built by the foundation and more enabled by the ecosystem. Some developers prefer Aptos because the foundation focuses on enabling developers rather than building products themselves. Conversely, some founders prefer Sui because they like the technology and appreciate that the foundation is delivering real products, which helps accelerate the growth of the ecosystem.

Ultimately, it depends on the spiritual core of the ecosystem. Whether it is object-oriented or capital-oriented is secondary to the overall approach and philosophy that drives each ecosystem.

Ethereum’s Layer 2 Roadmap

Dan: You are absolutely right that there is a huge difference in the status of the foundation on the chain. Considering the teams that are building Ethereum, the Ethereum Foundation (EF) has been emphasizing the vision of the settlement layer and driving activity to move to Layer 2 to add value. When a team wants to build on Layer 2, with more and more options like Polygon’s Agglayer or the ZK Sync ecosystem, how do you deal with the challenge of choosing which Layer 2 to build on?

Carl: One of the most difficult things about Layer 2 selection in the Ethereum ecosystem is that there are so many options. A year ago, you might have chosen Optimism, Arbitrum, or StarkWare, but now there are more Layer 2s being launched. We are exploring this with some of our portfolio companies. When evaluating Layer 2s, we look at the breadth and depth of the economy — how many launch partners they have, capital in the core foundation, and time in operation. The worst-case scenario is being the only protocol on an L2, in which case you might as well launch your own app chain. The culture of the ecosystem is also critical because it is community-driven. For example, if you are in the social betting or casino space, Berachain may be a better fit. In contrast, heavy financial applications may be better suited to other Layer 2s. The key is to match the community with what you are building and find a "rocket ship" ecosystem with significant growth potential.

Mike: I would add that you should consider the incentives provided by the L2. While this should not be the main decision-making factor, it is important if you have limited financial resources. Incentives can accelerate your development, but there are also switching costs to consider. We see teams moving between different Layer 2s, or from Layer 2 to Layer 1, like the DePin project moving to Solana. It's about brand and ecosystem considerations. For example, Blast has a casino and gaming feel, while Optimism and Base focus on social finance. Arbitrum offers credible neutrality with its large financial reserves. The ease of moving assets between chains means that the importance of choosing a chain is decreasing. You want to be part of a community and ecosystem similar to your product to maintain liquidity and continuity.

Appchains and Composability

Dan: An interesting point that both of you mentioned is the trend from applications to appchains, and vice versa. Some of the DeFi veterans on Ethereum, such as MakerDAO, Uniswap, and Aave, have hinted or discussed launching their own chains. This trend raises the question of whether appchains are a natural maturity path or a product of Ethereum's design and scalability issues. Carl, do you think applications should develop their own appchains, or is this just because of their path dependency on Ethereum?

Carl: It depends on market expansion (distribution) and value capture. When considering which second layer (L2) network to launch on, we evaluate how it will help the project grow its user base and market impact. Once you have significant brand recognition, users, and liquidity like Uniswap or Maker, if the L2 network is not performing well, it can become a liability and increase costs for users. Customization is important, but capturing more value is also key. Rather than paying fees to an external validator network, it is better to have your own validator network to capture those fees.

Customized appchains allow for customization and greater control over fee structures. While composability is a superpower of cryptocurrency, its importance varies. In some cases, strong composability within an ecosystem may be sufficient, reducing the need for external composability. As ecosystems grow, they can support internal composability, leading to market expansion and capturing more value.

While the shift to appchains is expected, it is critical to achieve composability across appchains. Until we achieve global composability, migrating to more appchains will be disadvantageous to users. Enabling strong composability between some L2 network or application chain is critical to maintaining a seamless user experience.

It’s time to develop more applications, not infrastructure

Dan:We just got so caught up in this, so I want to unplug a little bit. As I was browsing your website, I clicked on the portfolio page and noticed that you don’t have an infrastructure tag. You can filter by all the existing sectors, such as AI, consumer, DeFi, developers, games, and currencies, but there is no infrastructure tag. What is your view on funding applications in the cryptocurrency space? Why do you choose to focus only on applications?

Mike:Yeah, I think the main reason is as I said in the introduction, Applications are an area that we have deeply understood and continued to focus on throughout our careers.I have always been either a developer or seller of applications and end products. Our mission is to get people to adopt and use these blockchains, and we think we can achieve this goal through large-scale use of end-user applications. These applications can be for individuals or enterprises. Now, we invest in projects that enable infrastructure, usually in the form of applications, like wallets. But we don't have super strong views on the application areas we like. We have seven or eight broad application categories, including payments, DeFi, games, and social. We look for things that are emerging and have a lot of room to grow. We know that every market is going to be very competitive. We are looking for founders who move quickly, have strong convictions, and have strong product and engineering genes in the founding team. We prefer people who understand these crypto ecosystems instinctively because that will be the initial source of motivation for you to attract the next layer of users.

Carl: One thing I would add is that we do invest in infrastructure. For example, we invested in Helius and Jito, which are very exciting projects. But our investments in infrastructure are not just for the sake of infrastructure itself. We see a lot of deals that are just infrastructure stacking. We have a lot of portfolio companies using Helius. Helius and their team are focused on enabling applications to exist and attracting millions of users to the cryptocurrency space. Jito also has a large consumer base. Our investments in infrastructure are from a consumer perspective. We do make infrastructure investments, but it's not for the sake of investing. We need to bring billions of people into the crypto space, and infrastructure alone can’t do that.

AI & DePin

Dan:The two most high-profile verticals in this cycle are AI and DePin. What do you think of these areas and how are they developing?

Carl:In the case of DePin, we have proven that we can build decentralized infrastructure for new networks. Teams like Helius and HiveMapper have shown how they can get people running hardware to create networks. However, the unsolved problem is how to build demand. Many of the top DePin protocols have impressive founders and teams, but relatively limited revenue.We are still in the early stages of building demand. For DePin, proving its demand is the first challenge.We are closely watching how the team can effectively achieve profitability and distribute value to token holders. In the AI×crypto space, we see a variety of deals. Successful teams focus on solving a specific problem and solve it well. The data layer remains open, providing opportunities for data collection, storage, and annotation. Filecoin and Arweave are the main decentralized storage providers, but neither has yet built a convincing solution for AI data use cases. Distributed storage has great potential for AI data.

Mike: Similar to DeFi, in the DePin space, simply imitating or referring to the valuation methods of other similar projects does not work well. Many DePin protocols with hardware are valued lower than those without hardware. We take a long-term venture capital approach and believe in long-term demand. We are optimistic about various DePin areas, but we take a long-term perspective of five to ten years for these investments.

Airdrops

Mike: For the idea of ​​airdrops, you have done an excellent research in this area. Carl, can you elaborate on why you conducted this analysis, how you organized the data, and what conclusions you came to?

Carl: When I joined the firm to lead our second fund, Mike wanted to bring a strong research ethos to the firm. We focus on areas where there are a lot of questions but a lack of data. Airdrops naturally became a focus for our research during this cycle. We wanted to answer two questions: How much supply should I airdrop, and to whom should I give it? We analyzed the data and found some interesting insights. Compared to the pattern of airdrops being issued broadly, the price 60 days after airdrops to the core group was much higher. Tokens airdropped to non-users experienced twice the sell-off volume as those airdropped to users. Airdrop size had no significant effect on price performance or volatility. We recommend skewing airdrops to core users and generally preferring smaller airdrop sizes.

We also found that many current airdrop methods are not as effective as they could be. For example, giving tokens to people who have never used your product is not an effective way to get them to use it. Instead, you should first make them customers. We also recommend keeping more tokens for future incentives, rather than giving away a lot at the outset.

Dan: Let’s expand on that a little bit. One interesting way to provide on-chain liquidity for your token is to use the DAO treasury to provide liquidity. The challenge is, where do you get the liquidity provider (LP) counterparty?

Carl: We haven’t thought deeply about this, but there is a lot of capital in crypto that is looking for returns. With the right incentives, others may be willing to provide LP counterparty. There are many ways to solve the liquidity problem besides just airdropping more tokens.

Mike: We’ll put a link to our report on the show. It’s a great read. The insights on targeting core users and airdrop size are particularly valuable. There are many other ways to get liquidity besides simply airdropping tokens to people. As a community building side, we need to think more creatively about these issues.

Cryptocurrency Token Unlocking Question

Translator's Note:Cliff (lock-up period) refers to the period of time before the stock or equity grant begins to unlock, during which no stock or equity will be unlocked. Vesting (unlocking period) refers to the gradual unlocking process in the stock or equity grant plan, that is, gradually obtaining all the granted stock or equity over a period of time.

Dan: This is also very interesting. You briefly mentioned the token unlocking report, which I haven't read yet, so I hope to hear a quick summary. Conceptually, when you join a traditional startup, your equity incentive usually includes a one-year lock-up period and a three-year unlocking period, a total of four years. In the cryptocurrency field, we have shortened this time significantly. For example, the recent EigenLayer has a total unlocking period of three years, with a one-year lock-up period and a two-year unlocking period. In the cryptocurrency field, you get a liquid asset, unlike traditional startups that need liquidity events to realize any value. How do you think about this dynamic and what are the findings of the token unlocking report for teams and investors?

Figure 1 Eigenlayer Vesting Schedule https://cryptorank.io/price/eigenlayer/vesting

Carl: We studied the effects of large changes in circulating supply on price and volatility. Not surprisingly, larger unlocking events often lead to significant price declines. Different motivations come into play when people acquire tokens, but some 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 large simultaneous unlockings, thereby reducing the time for price declines.

As you said, we do follow the traditional structure of a one-year lockup period and a three-year unlocking period. But in a startup, there is no immediate liquid market for shares. In crypto, blindly following this structure is not ideal. We recommend not having a lockup period to avoid major sell pressure events. Market makers can absorb a certain amount of sell pressure, but if all sell-offs happen at the same time, it will be too much to bear. Instead, consider starting to unlock after one year of joining, rather than unlocking a large portion at once.

Interestingly, when we look at the relationship between circulating supply and fully diluted valuation (FDV), protocols with less than 70% circulating supply have worse price performance and more volatility. Ecosystems with more than 70% circulating supply have performed better. The data suggests that releasing tokens faster actually improves price performance over time.

Dan: This is very interesting. I agree with your conclusion of having a one-year waiting period and then a one-year unlock. It becomes a self-fulfilling prophecy where the first to sell get the highest price and everyone talks about the upcoming unlock event, perpetuating the cycle. This is a great analysis.

Carl: One final tip for founders: Pay attention to who your investors are. Some investors’ goal is to get liquidity quickly and get out, while long-term holders like us are different. Aligning with the right investors helps reduce the likelihood of a large first-day sell-off. The reputation of the VCs you work with is critical, especially when it comes to token vesting.

Liquidity Investing vs. Venture Capital

Dan: Carl, you make a very insightful point. Another thought that comes to mind is that the cryptocurrency market is highly cyclical.You are long-term investors, sometimes even looking ten years into the future, especially in the DeFi space. What role does this play in your decision-making process?

Carl: Most venture funds have a portion of their capital in alternative investments, including liquid assets. Similarly, many of the major liquidity funds have side pocket accounts for venture investments.

Carl: Most venture funds have a portion of their capital in alternative investments, including liquid assets.

Carl: Different market cycles present different opportunities. While venture prices have become very high, indicating some interesting liquidity opportunities, we continue to invest in great teams at fair valuations, such as seed or pre-seed deals of $20 million or less, especially those with high-quality founders.

We remain opportunistic, taking advantage of liquidity opportunities as they arise, and increasing our venture investments when the market cools. However, our investments require potential billion-dollar visions. We focus on founders with big visions, even if their initial products are small. Valuations are important, but not at the expense of working with the right founders who are aiming to pursue billion-dollar opportunities.

Advice to Founders

Dan:Great. Last question, what advice do you have for entrepreneurs?

Mike:At the highest level, specific advice for crypto founders revolves around the unique nature of building a crypto company:

1.  Keep Calm: Crypto markets are financialized and more volatile than traditional technologies. As a founder, you need to project a calm demeanor to employees, investors, customers, and stakeholders, and mitigate the chaos around you.

2.  Action bias: Similar to the AI ​​space, crypto operates in a fast-moving innovation cycle. You need to launch products quickly, iterate, and respond quickly.

3.  Stick to your convictions: Focus on a specific problem. Successful investments often have a fanatical focus on breakthrough use cases, such as StepN’s “earn as you go” or Magic Eden as the go-to brand for cross-chain NFTs. Having a firm stance on your top priorities is critical.

Carl:I’ll 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 what you consider to be your life’s work, even if it’s not as popular in crypto.

2. Radical Innovation: Pursue ideas that are 10x better than existing solutions, not just 10% better. It’s hard to get funding for small improvements.

3. Simplicity over Complexity: In product design and communication, simplicity is key. People have limited attention spans, so simple messages ensure better communication.

4. Believe in Your Vision: While VCs and other stakeholders will offer advice, sometimes that advice can be wrong. As a founder, trust your instincts and own your decisions because you will need to face the consequences of those decisions.

Dan:In short, believe in something, we are changing the world, and join in. I loved it. Mike, Carl, this has been a great discussion. We will include your links and information about your company in the show notes, as well as the great research you have done. Gentlemen, thank you for coming.