Crypto could solve venture capital’s due diligence problem – VC exec

Venture capitalists struggling with the challenges of proper due diligence of crypto companies should consider going back to basics – to “trust the chain,” claims a crypto-focused venture capital executive .

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

“There will 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 crypto.

He said the course of action adopted by crypto venture capital firms in response to the collapse of FTX will be a crucial deciding factor for an effective recovery or a deepening of the industry crisis.

However, Lo argues that the crypto industry offers the world a step towards a solution, a public and immutable ledger, arguing:

“Crypto VCs specifically need to get back to the principles of crypto – trust the chain. We’re going to see a lot more companies operating on-chain, and VCs rely on on-chain data to perform deeper due diligence.”

“We’re going to see better tools to distill and track on-chain data, in fact, we might even see entire on-chain companies wrapped in NFTs and sold, optimizing arduous M&A processes,” he said. added.

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

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 January 1 tweet from Alex Thorn, head of research at Galaxy Digital.

The collapse of FTX caused negative sentiment across the industry, but the drop in funding also reflects the macroeconomic scenario, Lo said.

“A high interest rate environment doesn’t bode well for venture industries. Venture capital generally lags and we’re likely to see markdowns,” Lo noted. He believes that as 2023 progresses and the macroeconomic landscape stabilizes, the industry will also regain stability.

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

As the year progresses, Lo predicted that the industry would see more capital deployments than inflows, with a focus on on-chain products and services rather than tokens.

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

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

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

“Crypto is alive and well.”