Venture capitalists grappling with the difficulties of proper crypto firm due diligence should focus on going back to basics – “trusting the chain,” according to the chief executive of a crypto-focused venture fund.
In an interview with Cointelegraph, John Lo, head of digital assets at Recharge Capital — a $6 billion fund with crypto and decentralized finance (DeFi) projects in its portfolio — said FTX has shaken “confidence in the industry.”
“It’s going to be a lot of soul-searching,” he said. According to Lo, due diligence has always been an issue in the venture space, even outside of cryptocurrencies.
He said the action plan adopted by crypto venture capitalists in response to the FTX collapse will be a major 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 towards a solution, a public and immutable ledger, saying:
“Crypto VCs specifically need to get back to crypto principles – trust the chain. We’re going to see a lot more businesses operating on-chain, and VCs relying on on-chain data to do more due diligence.”
“We will see better tools for distilling and tracking data on-chain, in fact we may even see entire chains of chains packaged into NFTs and sold, optimizing the difficult M&A processes,” he added.
Total funds raised in crypto venture capital last year exceeded 2021, with $30.3 billion secured by crypto projects, Cointelegraph Research’s The VC database is displayed.
According to a Jan. 1 tweet from Alex Thorn, head of research at Galaxy Digital, the last quarter of 2022 saw the lowest inflow of capital into the industry in two years, with just $2.8 billion committed across 371 deals.
Q4 2022 was the slowest for crypto vc investing in 2 years, with only $2.8 billion allocated to 371 deals.
In 2022, venture capital firms invested a total of $30.8 billion, up from $33 billion in 2021.
crypto vc likely to be muted for several quarters with rate, macro and crypto asset price headwinds pic.twitter.com/RaVGNBWzVa
— Alex Thorn (@intangiblecoins) December 31, 2022
The FTX collapse caused negative sentiment across the industry, but the decline in funding also reflects the macroeconomic scenario, Lo said.
“A high interest environment does not bode well for venture industries. Venture usually lags and we will likely see markdowns,” noted Lo. He believed that as 2023 moves forward and the macroeconomic landscape stabilizes, the industry will also regain stability.
“It’s probably a good thing that bad actors and bad practices shake out sooner 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 emerged during the bull market are also likely to be in focus, including user experience, wallets, user registration and compliance.
“Key stories are being created around blockchain scalability, liquid staking, real-world assets, decentralized exchanges and platforms,” said Lo.
“These optimizations after a frantic period of experimentation will be key to growth and as always there are teams working in secret on disruptive products that are yet to be seen,” he said, adding:
“Crypto is alive and well.