Spartan Group Co-Founder: ‘In Crypto, There Is No Free Lunch’
When Melody He first heard about Bitcoin, she was not impressed. Living in Singapore at the time – a country with no hyperinflation and no real problems with money – she did not appreciate its utility.
The next time she heard about Bitcoin was from a founder who would build a payment system using Bitcoin as a currency of exchange and settlement, to reduce cross-border exchange rate costs. Ms. He realized that Bitcoin could be not only an asset class but also a foundation for other applications to build upon.
This discovery led her to web3. She then co-founded Spartan Group, a distinguished investment and advisory firm in web3 currently managing $500 million in assets.
Ms. He previously worked at Goldman Sachs Hong Kong, where she specialized in numerous financing and M&A transactions, including the Baidu IPO.
The Spotlight is an exclusive interview series between Coin98 Insights and industry builders about hot topics in the market.
- Spartan Group is a distinguished investment and advisory firm in web3. Can you tell us about its establishment?
Melody He: I met the two other co-founders of Spartan, Casper Johansen and Kelvin Koh, when we worked at Goldman Sachs in Hong Kong. We have known each other for perhaps more than 20 years.
When we first met, Casper and I worked in the investment banking division, specializing in taking companies public. In those positions, we looked at the equity story and packaged that story in a way that could communicate to institutional investors and the public markets.
Meanwhile, Kevin came from the equity research division, where you look at a company from a different side - from the outside. How is a company valued? In various market environments, whether macro or micro, what might the stock price be?
The three of us came together because of our curiosity for crypto. We believed this creative mechanism could bring innovations that disrupt capital formation and liquidity in financial markets. Then, we decided to establish Spartan Group in 2017.
We try to bring some good parts of traditional finance to crypto, establishing a transparent and standardized way to evaluate tokens
At Spartan, we do two things: the first is investment, and the second is consulting and helping projects design tokenomics and distribution mechanisms. We try to bring some good parts of traditional finance to crypto, establishing a transparent and standardized way to evaluate tokens.
Read more: Head of Mocaverse: ‘We believe the project's NFT holders are also its co-founders’
- With the current legal framework in web3, do you think it would be better if projects launched in the West or Asia?
Melody He: We have been campaigning for founders to move to Asia, including Singapore. As a founder, I don't think you want to constantly worry about whether your token is defined as a security; you don't want regulators to keep knocking on the door, you don’t want to get sued one day. You want to devote your whole attention to building the project.
But we must admit that the US has the most creative minds. Many hardcore researchers and developers are still based there. For example, we are taking a keen interest in AI in blockchain, with businesses and founders pouring into this field. And most AI research comes from the US and China, two countries that are not very friendly to crypto.
Therefore, I would be happy if more founders move to Asia, but it depends on what you are building. Moving is easier if you’re building consumer applications than building core infrastructures.
- Overall, how do you think regulations will affect the industry's future?
Melody He: When it comes to regulation these days, I guess we're mostly talking about whether a token is defined as a security or not.
Compared to most other financial markets, the US currently has the strictest and simplest way of classifying tokens as securities. But the good news is that the ETH ETF has just been approved, and I think it has had a bigger impact on the whole industry than when the Bitcoin ETF was approved.
Bitcoin is in a very different league with its high level of decentralization; its inventors have kept silent for more than a decade. Meanwhile, with the ETH ETF approved, at least layer 1s and layer 2s have a pathway to know where they’re at with regards to their decentralization level. If they achieve the same level of decentralization and utility as Ethereum, then they are probably safe.
With the ETH ETF approved, at least layer 1s and layer 2s have a pathway to know where they’re at with regards to their decentralization level
In Singapore and Hong Kong, the definition of tokens as securities is clear, as long as the projects don’t pay dividends. However, developing markets have not yet come to a place to determine this, so they will mainly follow the regulations of the US and some Asian countries such as Hong Kong and Singapore.
- What are the criteria for Spartan to invest in a project? Is there any difference in investing in an Asian and a Western project?
Melody He: At Spartan, people always come first. Is this founder truly passionate about solving problems over the long term? Is the problem big enough and is their approach to solving it reasonable and unique?
During a market cycle, most crypto funds probably invest in one or two projects a week, especially in the early stages. But at Spartan's advisory side, we're very selective about who we work with. We work with four or five projects a year, at their token issuance.
Therefore, I spend a lot of time with founders, sometimes it takes at least ten meetings before I agree to work with someone. On our advisory side, choosing only one wrong partner can lead to a huge opportunity cost. Not only all your efforts, but also your reputation, money, and human capital, is wasted.
Asian and Western projects are very different, depending on the founder's background and experience.
For example, we’re investing in a layer 1 project with a Chinese founder. He is practical in recruiting, talking with partners, and developing product features.
Perhaps initially the project will be more about security than decentralization or the founder will have to give away a lot of income to be able to scale. Meanwhile, Western builders are perhaps more focused on decentralization and whether the technology works.
But like I said, the most important thing for us is backing the right founder. It doesn't matter whether they are Asian or Western, as long as they understand who their users are and have the expertise and local knowledge to drive product adoption.
If a founder is from Asia and his product serves Asian users, he will be better able to solve the problem than a Western entrepreneur who comes to Asia and tries to build a product for users here.
Melody He: I’ve worked with various Asian founders, especially those who don't have degrees from Western universities, and I find the hardest chasm for them is communication. How can you clearly articulate your vision and access large funds in the US or Europe?
If you’re a grassroots founder, you have to hack it to overcome this problem. You must prove you can build an international community. This is of course difficult, because of cultural barriers, because you are here.
My suggestion is that you convince the people around you first, three or four of the most reputable local VCs. These are the ones who can amplify your capabilities with big VCs in the West. In crypto, cross-border VC connections like this are common. It is easier to access local VCs than to go directly to the big ones in the West.
You convince the people around you first, three or four of the most reputable local VCs. These are the ones who can amplify your capabilities with big VCs in the West
- You have worked with various projects, can you tell us the common reasons why projects fail?
Melody He: There are numerous reasons but the most common is investing a lot of money into something you think will see mass adoption, but it does not. A product's initial adoption may come from hype or subsidies rather than sustainability.
I recently talked with a team member about a great product with a large user base. I asked what the project charges and he said the product is free. So the users and product market fit come from the fact that it's free. I believe if this project starts charging fees, people will leave because the project has no substance.
Thus, as a founder, you should take a step back to think if there is a real business model behind the product you are offering.
- Recently there has been a tendency for project launches with high FDV (fully diluted value) and low float. What do you think are the reasons?
Melody He: It's not easy to give a straightforward explanation for this phenomenon.
Upon launching tokens, most projects do not have a product that matches their valuation. For example, there are projects with $20 million valuations that do not generate revenue. So why does the market value them so highly?
Exchanges do not like high float. People believe that the more liquidity a token has, the more liquidity a project needs to support its valuation. If you have $20 million worth of tokens floating out there, you might need millions of dollars to support that liquidity, whether the price goes up or down.
Most projects do not have capital to support liquidity, especially newly launched projects. Therefore, exchanges and market makers suggest using this method to control the initial float, helping the projects transition into a high liquidity state more easily.
Thus, it is not that the projects started with tokenomics designed with high FDV and low float; the market shifted to that. We cannot just blame the projects.
There are a lot of projects that don't want to lock tokens, they want to have free flow. I chatted with two co-founders of Solana, Anatoly and Raj, and they said they wanted to unlock the tokens 100%. “We want people to hold our tokens because they believe in the project, not because we lock them,” they said.
It is not that the projects started with tokenomics designed with high FDV and low float; the market shifted to that. We cannot just blame the projects
I think there is currently a market force that makes founders more cautious about their initial project valuation. And this is a good sign.
It’s like a pendulum swing. We went from a state of 100% token unlock at the time of ICO to a state where everyone forced projects to maintain an initial low float. And now we have begun to swing in the opposite direction. Hopefully, with continued effort, we will find the right balance.
- In your opinion, what are the fundamental factors driving development in this cycle?
Melody He: I found the last cycle quite interesting, with various new ideas like NFTs, metaverse, and gaming. This cycle is much more boring, most projects are mainly focused on infrastructure and scalability. We're seeing a bit of SocialFi, such as Farcaster, but it's still not taking off.
The only thing I find somewhat new is people building decentralized infrastructure for data marketplaces. But in the last cycle, people were much more excited about creative NFT projects. We have yet to see that atmosphere again in this cycle.
I think the reason is that there was also a lot of garbage that got funded in the last cycle. Many not-great entrepreneurs came in and raised a lot of money, then did nothing. This made people less willing to invest again because they have not seen successful examples.
You can tell a good story and get funded. But if in two or three years you can’t build anything with the money you raised, then there's probably nothing there.
So I think we are still waiting for the best founders to step in and become our heroes, bringing back that NFT excitement.
Pudgy Penguins already made a comeback, along with Bored Apes and Azuki. Games are another distinguished segment, with Axie Infinity being the biggest breakout name of the last cycle. If they can cross the chasm and become a consumer household brand, more capital will come into the space.
- In your opinion, what is the driving force to promote the mass adoption of crypto in the future?
Melody He: I think we've made a lot of progress since the last cycle and are moving in the right direction. Bitcoin ETF adoption as an institutional-grade asset means we will see more IPOs of crypto companies. And this is an exit for businesses.
Mainstream Wall Street not only wants to invest in tokens but also in profitable legitimate businesses listed on public markets. Currently, we only have Coinbase, we need more to bring capital into the market and build products around crypto. That's in terms of financial applications.
On the consumer side, crypto-powered payments are proving powerful. Additionally, in the gaming segment, gamers see the long-term value that digital items and collectibles bring to them. This is a great way to increase people's awareness about crypto.
There is also the social network segment with decentralized identities where you can own your data and switch platforms while maintaining your connections on social media. Once we have a few successful cases, the mainstream will take notice and more developers will come and build on this data and user base.
TON built on Telegram is a great example of a web2 company launching a token. They went through many ups and downs. In the past, Telegram was subpoenaed and banned from launching TON tokens; they had to refund money to the investors, which was a big embarrassment.
There was no exit for Telegram at that time. The company's founder is a Russian-born entrepreneur living in Dubai, and with the SEC's monopoly on regulation, it's unlikely they would allow a Telegram IPO. But Telegram kept trying and now we have TON. One of its applications, which permits the launch of memecoins, is attracting numerous users.
Crypto mass adoption may come from large web2 companies finding their way into web3. They can launch tokens, and leverage their user base to build new products and services in crypto.
- As you mentioned, launching memecoins on Telegram's TON blockchain is a method to attract users. However, is this a sustainable strategy or is it purely speculative?
Melody He: Memecoins are highly speculative but they are also a culture native to Web3. I think people like to talk about memecoins and they bring people together. It’s like viral marketing, a tool in a toolbox to attract attention and users.
Many people will ask the question, what's after memecoins. I think memecoins can become a top funnel for other projects, or the money raised by memecoin projects can be used to build new products.
This is what we all hope for. That people don’t just trade memecoins and leave, but the ones who make money from the launch of memecoins will be able to build something.
Several Spartan team members (not me) trade memecoins and learn about the founders behind them. They like the vision of these founders and continue to support the projects.
If you are a founder, memecoins can be a powerful tool if you know how to use them. If you are an investor, you must realize that 99% of them are not good
If one in ten memecoin founders continues to build, then that is good. At least they get funded and have solved half the problem, which is attracting users. So why aren’t these founders given the capital and opportunity to try to build something else?
If you are a founder, memecoins can be a powerful tool if you know how to use them. If you are an investor, you must realize that 99% of them are not good.
- Do you have any specific advice for retail investors?
Melody He: Firstly in crypto, if you see something that's too good to be true, it's too good to be true. For example, if you see a popular project that meets all the criteria, maybe it is not suitable for you, don't believe it. There is no free lunch.
Secondly, I suggest you choose an area you are most interested in and research deeply, maybe games, NFTs, or DeFi. You can't invest in ten different segments in crypto, it's even hard for me to keep up with all the new developments in this space.
If you can go to conferences, meet, and talk directly with the project founders, I think this is the best way to know if this is a project with good potential. Don't just read Twitter.
Another thing you should be very careful about is security issues, such as phishing emails and scam airdrops on Twitter. The most devastating thing in crypto is losing your money.