Crypto could solve venture capital due diligence problem: VC exec

Venture capitalists struggling with the difficulties of proper due diligence of crypto companies should try to go back to the basics: “trusting the chain,” argues a crypto-focused venture fund executive.

Speaking to Cointelegraph, John Lo, head of digital assets at Recharge Capital, a $6 billion fund with cryptocurrency and decentralized finance (DeFi) projects in its portfolio, said FTX has shaken “confidence in this industry.”

“There will be a lot of soul searching,” she said. According to Lo, due diligence has always been an issue in the venture capital space, even outside of cryptocurrencies.

He stated that the action plan adopted by cryptocurrency capitalists in response to the collapse of FTX will be a crucial deciding factor for an effective recovery or a deepening of the crisis of the sector.

However, Lo argues that the cryptocurrency industry provides the world with a step towards a solution, an immutable public ledger, arguing:

“Crypto VCs specifically need to go back to crypto principles: trust the on-chain. We will see many more companies operating on-chain, and VCs are relying on on-chain data to perform deeper diligence.”

“We will see better tools to distill and track data on-chain—in fact, we may even see entire on-chain companies wrapped up in NFTs and sold, streamlining arduous M&A processes,” he added.

Total funding raised in crypto venture capital last year surpassed 2021, with $30.3 billion secured by crypto projects, Cointelegraph Research’s VC database shows.

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

FTX’s collapse caused negative sentiment across the industry, but the decline in funding also reflects the macroeconomic backdrop, Lo said.

“A high-interest environment does not bode well for risky industries. Firms are usually lagging behind and we will likely see downsides,” Lo noted. He believed that as 2023 progresses and the macroeconomic landscape stabilizes, industry will also regain stability.

“It’s probably a good thing that bad actors and bad practices are weeded out sooner rather than later.”

As the year progresses, Lo predicted that the industry will see more capital outflows 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 the spotlight, including user experience, wallets, user onboarding, and compliance.

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

“These optimizations after a frantic period of experimentation will be critical for growth and, as always, there are teams working on the sly on yet to be seen game-changing products,” he said, adding:

“Crypto is alive and well.”