According to a VC executive, due diligence has always been an issue in the venture capital market, but crypto offers a solution: a public and irreversible record.
Venture capitalists struggling with the problems of thorough crypto business due diligence may consider going back to fundamentals — to “trust the chain,” according to a crypto-focused venture fund executive.
In an interview with Cointelegraph, John Lo, head of digital assets at Recharge Capital, a $6 billion firm that invests in crypto and decentralised finance (DeFi) initiatives, said that FTX rattled “trust in this market.”
“There will be much soul-searching,” he said. Due diligence, according to Lo, has always been a challenge in the investment market, even outside of crypto.
He believes that crypto venture capitalists’ response to the FTX collapse will be a critical deciding factor in whether the industry recovers well or worsens.
However, Lo contends that the crypto business offers the world a step toward a solution in the form of 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’ll see better tools to distil and track on-chain data; in fact, entire on-chain firms may be wrapped into NFTs and sold, optimising onerous M&A processes,” he added.
According to Cointelegraph Research’s VC Database, the total financing raised in crypto venture capital last year surpassed 2021, with $30.3 billion secured by crypto businesses.
According to Alex Thorn, head of research at Galaxy Digital, the fourth quarter of 2022 witnessed the industry’s lowest capital inflow in two years, with only $2.8 billion allocated over 371 agreements.
The FTX meltdown affected the entire business, but the funding drop also reflected the macroeconomic condition, according to Lo.
“A high-interest environment is not good for high-risk industries. Venture typically lags, and we can expect markdowns “Lo made a remark. He thought that as 2023 progressed and the macroeconomic landscape stabilised, the industry will as well.
“It is probably a good thing bad actors and bad practices are shaken out earlier rather than later.”
Lo anticipates that the industry will see more capital deployments than inflows as the year advances, with an emphasis on on-chain products and services rather than tokens.
A number of issues that arose during the bull market are also expected to be highlighted, including user experience, wallets, user onboarding, and compliance.
“Key storylines around blockchain scalability, liquid staking, real-world assets, decentralised exchanges, and platforms are emerging,” Lo said.
“These optimizations following a frenetic time of testing will be critical to growth,” he said, adding: “As always, there are teams working in stealth on innovative products yet to be seen.”
“Crypto is alive and well.”