Crypto could solve venture capital’s due diligence problem

Venture capitalists battling with the difficulties of proper crypto firm due diligence should be looking at getting back to the basics — to “trust the chain,” a crypto-focused venture fund executive argues.

Speaking to Cointelegraph, John Lo, managing partner of Digital Assets at Recharge Capital — a $6 billion fund with crypto and decentralized finance (DeFi) projects in its portfolio — said that FTX shook the “confidence in this industry.”

“There will be a lot of soul-searching,” he said. According to Lo, due diligence has always been a problem in the venture space, even outside of crypto.

He said the action plan taken by crypto venture capitalists in response to the FTX collapse will be a crucial deciding factor for either an effective recovery or a deepening of the industry crisis.

However, Lo argues that the crypto industry provides the world with a step toward a solution — a public and immutable ledger — arguing:

“Crypto VCs specifically need to go back to crypto principles – trust the chain. We’re going to see a lot more businesses operate on-chain, and VCs rely on on-chain data to perform more thorough diligence.”

“We’re going to see better tools to distill and track on-chain data, in fact, we may even see entire on-chain businesses wrapped into NFTs [nonfungible tokens] and sold, optimizing arduous M&A processes,” he added.

The total funding raised in the crypto venture capital last year exceeded 2021, with $30.3 billion secured by crypto projects, Cointelegraph Research’s VC Database shows.

The last quarter of 2022 saw the lowest capital inflow to the industry in two years, with only $2.8 billion allocated across 371 deals, according to a Jan. 1 tweet from Alex Thorn, head of research at Galaxy Digital.

Q4 2022 was the slowest for crypto vc investing in 2 years, with only $2.8bn allocated across 371 deals.
in total, 2022 saw $30.8bn invested by VCs, compared to $33bn in 2021.
likely crypto vc will be muted for several quarters w/ rates, macro, & cryptoasset price headwinds pic.twitter.com/RaVGNBWzVa
— Alex Thorn (@intangiblecoins) December 31, 2022

FTX’s meltdown caused a negative sentiment across the industry, but the funding decline also reflects the macroeconomic scenario, Lo said.

“A high-interest environment does not bode well for risk-on industries. Venture usually lags, and we’re likely to see markdowns,” noted Lo. He believed as 2023 goes forward and the macroeconomic landscape stabilizes, the industry will regain stability as well.

“It is probably a good thing bad actors and bad practices are shaken out earlier rather than later.”

As the year progresses, Lo predicted the industry will see more capital deployments than inflows with an emphasis on on-chain products and services rather than tokens.

A number of challenges that surfaced during the bull market will likely be in the spotlight too, including user experience, wallets, user onboarding and compliance.

“Key narratives are forming regarding blockchain scalability, liquid staking, real-world assets, decentralized exchanges and platforms,” Lo stated.

“These optimizations after a frenzied period of experimentation will be key to growth, and as always, there are teams working in stealth on groundbreaking products yet to be seen,” he said, adding:

“Crypto is alive and well.”