Terra’s collapse is a harsh lesson for botched crypto VCs and gullible retail investors
- Many crypto VCs have found themselves losing traditional operational discipline.
- The funds began to invest quite widely, and without providing any real support to the platforms in which they invested.
- Venture capitalists need to refocus their energies and strategies following the recent meltdowns.
- Indiscriminately copying the choices of a venture capital fund is generally a losing strategy for the retail investor.
Now is not the best time to be a venture capitalist (VC) in crypto. Many of them have seen both the value of their investments and their reputations plummet, as the projects they actively promote, such as Earthfailed spectacularly, hitting the entire crypto industry.
In previous months and years, the fact that one or more venture capital funds had invested in a project was usually enough to send any corresponding token skyrocketing. Unlike those heady days, serious question marks now hang over the wisdom and insight of venture capital funds, which retail investors have often used as models for their own investment decisions (judging by the rallies after funding rounds).
However, figures working in the crypto industry say that in the aftermath of the current crisis, venture capital funds will increasingly focus on conducting rigorous research and due diligence in making their decisions. . And while the crypto market will likely remain volatile and unpredictable for the foreseeable future, there should be a gradual decline in VC risk-taking behavior over time.
Crypto VC funds take a reputational hit
Commentators agree that the reputation of crypto-focused venture capital funds has taken a hit in recent weeks.
“Over the past cycle, having a top VC on the caps table has become a sign of approval and a kind of self-fulfilling prophecy. Unfortunately, in an era of enormous risk activity and weak monetary policy, many of these venture capital firms found themselves losing traditional operational discipline such as risk management or portfolio construction practices,” said Anthony Georgiades, co-founder of NFT-focused. block chain pastel network and general partner of a venture capital firm Innovative Capital.
Besides the obvious fact that their investments have fallen sharply in value, VCs have fallen out of favor for other reasons over the past few months. For Dominic Williams, the founder and chief scientist of the DFINITY Foundationthis is partly related to how VCs have moved away from a more traditional model in which they only backed a single startup or project in a given area, which often encouraged funds to focus more of their support on the companies they have chosen.
“When they first started investing in crypto, they initially used the same approach and their involvement transferred fair status to the projects they invested in. than the hype, that all changed,” he said Cryptonews.com.
Indeed, for Williams, too many funds have started to invest quite broadly, including in competing projects, and without providing real support for the platforms in which they have invested. This arguably spread their resources too thinly, while there is also an argument to be made that at least some VCs rushed too hastily to invest in multiple projects, without doing due diligence.
On top of that, some crypto-VC funds act less like venture capitalists and more like speculative investment firms.
A recalibration of focus
Commentators say some investors chose not to manage their risk and steer their strategy during the recession, but instead attempted to go even “longer” in the market in a bid to push their finances back into the black.
An indication of this is provided by the fact that, even with prices falling more or less across the board since November, venture capital funding is significantly higher than it was a year ago.
“According Dove measurements data, the amount of capital invested in the space in May 2022 increased by 89% from $2.233 billion in May 2021,” said Mahesh Vellanki, managing partner at the crypto-focused venture capital studio. SuperLayer.
Additionally, in the first half of 2022, venture capitalists poured $17.5 billion into crypto and blockchain ventures, Reuters reported this week, citing data from the market data provider. PitchBook. This puts investment on track to surpass the record $26.9 billion raised last year.
That said, Vellanki interprets these relatively high numbers not as evidence of debauchery, but as evidence that savvy investors are “buying the dip” and acquiring stakes in discounted projects.
Regardless of how the current numbers may be read, most commentators agree that venture capitalists need to refocus their energies and strategies in the wake of recent meltdowns.
“VCs and hedge funds need to take a step back from the crypto hype machine, including announcements of bogus partnerships, the noise created by marauding armies of accomplices and social media trolls, and glowing coverage in paid industry reports and media, etc. and focus on the substance. Successful tech investors of the past focused heavily on technical understanding of the entrepreneur and the technical and product teams they built, but today most crypto investors don’t even look at the team” said Dominic Williams.
Similarly, Anthony Georgiades argues that from now on, more research and overall due diligence needs to be conducted to determine which projects are actually viable and necessary for the longevity of the ecosystem.
“As funds start to explode and go underwater, I think we will see a return to patient capital and increased due diligence approaches. Conditions will be more favorable to investors, forcing founders to exercise more operational discipline,” he said. Cryptonews.com.
Ultimately, this change will be positive for the industry as a whole, even if it took at least one venture capital fund to fail. Georgiades also predicts that companies will start investing in fewer projects, giving recipient teams more time to conduct proper research, make smart investment decisions, and provide tangible portfolio support.
Other commentators argue that venture capital funds should also increase the attention they give to startup and project teams, as high quality and highly experienced/skilled staff can make the difference between an interesting idea fails and one that succeeds.
“Early-stage venture capital firms should focus on supporting strong, high-integrity teams that seek out market opportunities that appear sustainable with a healthy economy. Later-stage VCs should definitely conduct responsible due diligence and focus on identifying key risk levers and determining whether the commercial or token economy makes sense,” said Mahesh Vellanki, who also advises VCs against the overcapitalization of projects and the creation of unhealthy growth.
Retail investors and future risk
As mentioned above, venture capital investment news has often moved the crypto market, with retail investors presumably following the lead of funds. Yet, for many observers, this is a dangerous strategy and may remain dangerous even as most crypto VCs tighten their games in the coming months.
“The danger of investing in a project that has raised significant funds from VCs and hedge funds is that they will have bought at a deep discount, and as soon as their vesting expires they will seek to secure the profits by disposing of a large part of their holdings in the markets. This situation is exacerbated if many of their investments have not worked out, as the pressure to sell tokens to get a return on their [liquidity providers] is increased,” said Dominic Williams.
Put simply, retail investors should remember that many funds employ a strategy where their profits come from only a few of the projects they invest in, with the rest essentially losing money. As such, indiscriminately copying a venture capital fund’s picks is usually a losing strategy for the retail investor.
“Venture capital funds have large portfolios in the expectation that only a few companies generate all of their returns while the others generate minimal or no returns. Also, venture capital funds don’t always generate great returns, and returns can be uncertain for years,” said Mahesh Vellanki.
Finally, venture capital funds are still likely to encounter risks, even in a future where they have significantly improved their investment models and strategies. It’s simply because no matter how much time they spend looking at flyers, white papers, and presentations, none of them have a crystal ball.
As Anthony Georgiades concludes, “Of course, as with all investments, there are risks, and unforeseen circumstances can cause some projects to fail when they otherwise would not. It’s not perfect science, but the return of core investment pillars like diligence, patience, portfolio construction, and risk management will be a net positive for the future of the industry.
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