Venture capitalists may be cautious when it comes to the crypto and blockchain industry due to a few bad actors. However, investing in well-run businesses within these sectors can still offer significant potential. To help venture capitalists make informed decisions, 12 members of Cointelegraph Innovation Circle have shared tips on what to consider when evaluating a crypto or blockchain company.
One tip is to look for traction outside the blockchain space, since adoption and relevance beyond the crypto and blockchain industry are crucial for success. Another suggestion is to evaluate standard business fundamentals such as creditworthiness, risk modeling, vetting standards, and regulation.
Risk management should also be considered by VCs, particularly in decentralized finance projects. Audits, internal control processes, and stress-test results can provide insight into a company’s risk management capabilities. In addition, examining the backgrounds of the founders can reveal whether the team has a strong value proposition and a track record of success.
The team members’ backgrounds and experience is a vital aspect of any project. A strong team with significant experience in credible institutions is more likely to lead a project on a great path. Community and user engagement are essential factors in a blockchain project’s success, so VCs should also assess engagement levels to gain valuable insights into the project’s potential.
It is also essential to pay attention to subtle language cues used by potential investees, as they may reveal the true state of a deal. Furthermore, understanding how the ledger is managed can provide insight into potential errors or hidden costs associated with a project.
Differentiation from traditional technology is important to consider when investing in a blockchain or crypto project. VCs should evaluate whether the technology offers real-world solutions that are a significant improvement over existing technologies.
Finding a project that solves a real problem and utilizes blockchain technology as the best solution is key to making a wise investment. Additionally, understanding the market and ensuring there is an unmet gap that a project can fill is crucial for long-term viability.
Lastly, it’s vital to look for companies supported by real yields, since generating consistent profits is fundamental for sustaining a business. VCs should thoroughly assess projects’ financial projections and determine whether sustainable revenue streams drive their token utility.
By considering these factors, venture capitalists can make educated decisions when investing in crypto and blockchain companies, and avoid falling prey to bad actors within the industry.