Three former crypto VC partners discuss: Where to find killer applications for WEB3?

Author: Yuan, Shenchao TechFlow

In July, former Spartan Group partner Jason Choi announced the co-founding of the crypto venture club Tangent with former DeFiance Capital executive Wangarian, and former Multicoin Capital partner Mable Jiang also joined as an advisor.

In a recent episode of The Blockcrunch Podcast, the three former crypto VC partners discussed the establishment of Tangent, their views on killer applications, how to evaluate outstanding founders, the sectors and fields they are currently focusing on, and their predictions for the bear market and the next cycle…

For instance, Mable believes that the next wave of crypto explosion may occur in the B2C application space, which requires an appealing UI or frontend that can aggregate various other protocols, with the core narrative being to capture more users. The podcast provided many insights and reflections, summarized by Shenchao TechFlow volunteer Yuan.

Leaving Crypto Fund

Darryl Wang: At the end of 2021, I found myself wanting to make more frequent cryptocurrency investments in traditional funds. I realized there were several pain points that VCs or Crypto VCs might not be able to solve.

So Jason and I started building an investment entity that could truly address these pain points—Tangent. To do this, we needed to sacrifice the number of bets and focus our portfolio, ensuring we could sit down and address every aspect of the companies we invested in, ultimately helping founders solve early-stage problems that needed urgent attention.

I see Tangent as a service or product, rather than a fund. My philosophy is to market my services to founders as an entrepreneur and see if they are interested in what I offer, rather than saying: I’m interesting, here’s my money, do you want it? When I try to conceptualize Tangent, I think this is its main distinction from other VCs.

Mable Jiang: Working at Multicoin Capital was very interesting; my colleagues were all very smart, and even now I still feel I can learn a lot from everyone.

One of the main reasons I left Multicoin was that I wanted to work at StepN. Multicoin was actually very focused on investing in protocol-level things but didn’t do much related to consumers or anything B2C.

I really like Tangent's business model. It doesn’t force you to participate in something; you only need to invest when you feel you can truly make an impact. Basically, everyone at Tangent is a founder, and everyone’s expertise, resources, and experiences are different. So, we can tailor our approach and truly help different projects grow.

Jason Choi: I want to work more closely with founders. But currently, it’s becoming increasingly difficult to do this in large/venture funds. The only way for me to really build close relationships with founders and truly get involved is to concentrate the venture portfolio, but building an institutional fund around it is very challenging. Therefore, we combined the flexibility of DAO hiring with the rigor of fund investigation to establish Tangent. So, we created this investment group: everyone is a friend, partner, or someone we trust and respect greatly.

The Next Killer Application

Mable Jiang: It may not be something that is completely crypto-native or entirely on-chain. Web2.5 is actually quite cool and can attract one or two million new crypto users, and StepN is an example of that. In 2020, I was more focused on fully on-chain and DeFi super applications—a project that could handle everything. But I clearly realized that all the composability factors in DeFi determined that it might not be the case.

Now my view on Super Apps is: having an appealing enough UI or frontend. Then we can actually aggregate various other protocols, regardless of who provides the protocol layer; there may be many different teams working on the backend protocol layer.

Sectors and Fields of Focus

Mable Jiang: StepN is a partially blockchain-driven social entertainment product, and many things are unrelated to cryptocurrency; it just leverages the advantages of blockchain—a simple account system.

Focus Points:

1. Improve blockchain utilization.

2. DeFi protocols do not need to exist independently. Exchanges may still treat order books as standalone products, but basically, most well-known companies will do simple lending/AMM themselves.

3. Be able to leverage the traffic of the app and provide DeFi products to those who have not participated in DeFi.

Darryl Wang: With the collapse of Luna, I believe there is a greater need for decentralization now than ever.

Focus Points:

1. Highly adoptable stablecoins. The health of an industry needs to be assessed through the adoption of its products.

2. Decentralized assets. The way to earn money in games can essentially be decentralized; you can create a virtual economy and then start using it, distributing virtual assets.

Jason Choi: Stablecoins are really interesting. On one hand, you could say the collapse of Terra was due to a lack of regulation, while USDC is technically regulated; on the other hand, when USDC's market cap reaches one trillion dollars and permeates the entire crypto market, if regulators suddenly want to ban such products, then basically all DeFi would be banned.

Focus Point: Strong decentralized stablecoins.

Crypto Vertical Fields

Jason Choi: Back in DeFi Summer, I saw projects starting to verticalize. For example, 1inch built its own AMM—Mooniswap as an aggregator, but no one really used it, and we haven’t really seen successful examples of vertical integration. To me, this contradicts the argument that "composability is one of the best things about cryptocurrency."

Founders' motivations are almost all about verticalization and building their own application stack layers, rather than spilling value to others; they start building their own new banks, and they are basically isolated from each other, as if recreating Web2.

Mable Jiang: Whoever owns the traffic can leverage it to do many things, including providing these protocols themselves.

Smart Contract Wallets

Jason Choi: Argent is a smart contract wallet based on StarkNet that recently launched a gasless wallet recovery solution without the need for a mnemonic phrase, allowing users to access Dapps within the app itself. Metamask may be the most valuable product in all of cryptocurrency today. Almost everyone uses Metamask.

Darryl Wang: I think people haven’t started using smart contract wallets more because users are still accustomed to using computers rather than mobile devices for Web3-related activities. Currently, there needs to be a secure mobile product that users can confidently use to break this situation. As the number of new protocols increases, developers will focus more on security, concentrating on onboarding Web 2 participants into Web 3. In the next cycle, we will see more solutions that genuinely help improve adoption rates.

Mable Jiang: The large-scale adoption of Web3 account login systems is actually very important. I am very optimistic about smart contract wallets; I even think that the reason on-chain order books haven’t taken off in this cycle is that the barriers for traditional users are still too high, so the ability of smart wallets to lower the entry barrier is key.

The smart contract wallets of the next cycle will be very interesting. Key management solutions like Torus may also have a place. Since most smart contract wallets this cycle are built on Ethereum, the gas fees are too high, and people have started to gradually forget about smart contract wallets. But if we want to help users access blockchain wallets in a non-custodial and simple way, smart contract wallets are almost the only choice.

On-chain identity credentials are also worth paying attention to. Not only Project Galaxy, but many other projects are also working around this.

If we want to enhance user experience, whether on-chain or off-chain, building this infrastructure will also be very important.

GameFi & NFTFi

Jason Choi: I am optimistic about identity solutions and games that can attract players from outside the circle, and I am also interested in NFTFi. Both Darryl and I are loyal fans of Sudoswap, which is an AMM designed specifically for NFTs, and compared to existing NFT exchanges, it is an outstanding design.

Putty Finance allows you to buy put options on NFTs, essentially serving as NFT insurance. We previously invested in a project that tried many ideas similar to NFTFi, and they are expanding into other verticals.

How to Choose Founders

Jason Choi: In terms of filtering founders, first, while we do have an application form, we prefer founders who come with endorsements. When someone we have worked with or an investor we co-invested with recommends a deal to us, it is usually a very positive signal, and we will prioritize it on our list.

Secondly, we actually have a scoring system with different weights that evaluates founders based on several metrics. We have backtested it with many deals completed at Defiance and Spartan.

Darryl Wang: I value two points the most:

1. Whether the founder has a unique ability to solve the team’s problem.

2. Valuation investment; as a fund, margin of safety is our top priority.

Mable Jiang: I am willing to support founders who are willing to work very hard continuously while understanding how to promote their projects to the public clearly.

Solana is a great example; they did a lot of hard work in the early stages, but I believe they only really took off after they learned how to market. Effort and promotion are both essential.

Thoughts on the Bear Market

Darryl Wang: The next few months will be a very challenging period. Ethereum's drop from 4000 to 1000 in the past few months caught many institutional funds off guard, with either significant capital withdrawals or exiting the market. And in the subsequent Ethereum merge narrative, many funds were also put on hold, waiting to build positions after a larger macroeconomic recession.

First, I believe that when attention starts to return, it will drive crypto-focused funds to flow in from other parts of the world; secondly, we need to look at inflation data and GDP data to see if the world will fall into recession or if we can achieve a soft landing by the Federal Reserve. I am not a cryptocurrency expert, so my views may not align with the audience.

Mable Jiang: It’s worth noting that everyone is discussing the Ethereum merge, which may be the only very hot topic these days; the Ethereum merge and market interest rates, and new funds have not flowed in.

Consider over-the-counter (OTC) trading and see if there are more active SAFT sell orders starting to appear. If this happens, I think it could be a good baseline to start considering preparations for the next cycle.

Carefully consider valuations, as they can effectively measure the popularity of a project.

Jason Choi: This will be a very challenging two years, especially for founders trying to raise funds; it will be difficult to get a piece of the pie in this market, especially if you don’t have strong endorsements. For those founders who have already launched tokens, their funding depends on the secondary price of the tokens.

Predictions for the Next Cycle

Jason Choi: In 2019, I tried to predict that the TVL of DeFi would be 1 billion dollars, but the peak in the past few years seems to be around 180 billion. Therefore, if I have to make another prediction, in the next five years, there will be one trillion dollars of TVL across all applications.

Darryl Wang: I believe the market cap or FDV of GameFi-related projects will reach 100 billion.

Mable Jiang: Three thoughts:

• The next cycle may see some social entertainment applications attracting around 50 million users who will interact with the blockchain and engage through Web3 accounts.

• Founders may pay more attention to UI and UX, as good UI and UX can attract a large number of users.

• The next wave of explosion will occur in anything B2C, with many opportunities arising in Asia, but this is a long process. Looking back at the Web 2 wave, although many innovations always happen in North America, especially the United States, there are few applications that come out; Asian founders are actually very good, and they excel at thinking about operational models and other factors.