Venture capitalists struggling with the difficulties of properly due diligence on crypto companies should go back to basics — “trust the chain,” claims the CEO of a crypto-focused venture fund.
Speaking to 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 this industry.”
“There will be a lot of soul care,” he said. According to Lou, due diligence has always been an issue in the entrepreneurial space, even outside of crypto.
He said that the action plan taken by crypto venture capitalists in response to the collapse of FTX will be a key determining factor for either an effective recovery or a deepening of the industry’s crisis.
However, Lo argues that the crypto industry provides the world with a step towards a solution, a public and immutable ledger, arguing:
“Crypto equity in particular needs to return to crypto principles – trust the chain. We’re going to see a lot more companies operating on-chain, and equity capital relies on on-chain data to do more thorough due diligence.”
“We will see better tools for distilling and tracking on-chain data, in fact, we may even see entire on-chain businesses wrapped in NFTs and sold, optimizing the painstaking M&A processes,” he added.
Total funds raised in crypto venture capital last year surpassed 2021, with $30.3 billion secured by crypto projects, according to Cointelegraph Research’s VC database.
The last quarter of 2022 saw the lowest capital inflow into the industry in two years with just $2.8 billion spread 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 $2.8 billion distributed across 371 deals.
in total, value capital invested $30.8 billion in 2022, compared to $33 billion in 2021.
crypto vc is likely to be muted for a few quarters with headwinds in exchange rates, macros and crypto asset prices pic.twitter.com/RaVGNBWzVa
— Alex Thorn (@intangiblecoins) December 31, 2022
The FTX crash has caused negative sentiment across the industry, but the decline in funding also reflects the macroeconomic scenario, Lo said.
“The high interest rate environment does not bode well for venture industries. Entrepreneurship tends to lag and we are likely to see a reduction,” noted Lo. He believed that as 2023 progresses and the macroeconomic landscape stabilizes, the industry will regain stability.
“It’s probably a good thing that bad actors and bad practices are shaken out sooner rather than later.”
As the year progresses, Lo predicted that the industry will see more capital investment than inflows with an emphasis on on-chain products and services rather than tokens.
A number of challenges that have arisen during market growth are likely to be in the spotlight as well, including user experience, wallets, user onboarding and compliance.
“Key narratives are forming around blockchain scalability, liquid stakes, real assets, decentralized exchanges and platforms,” Lo stated.
“These optimizations after a frenetic period of experimentation will be key to growth, and as always, there are teams working in secret on breakthrough products that have yet to be seen,” he said, adding:
“Crypto is alive and well.”