12 Factors VCs Should Focus on When Evaluating Crypto and Blockchain Companies

Venture capitalists may be wary of the crypto and blockchain industry at the moment, and for good reason. However, the highly publicized bad actions of a few should not prevent VCs from discovering the real potential that well-run businesses in the sector can offer.

As with investing in any industry, conducting thorough research and asking smart questions can help VCs ensure they are backing reputable companies poised to make a positive (and profitable) impact on the market. Here, 12 members of the Cointelegraph Innovation Circle share tips for a VC considering investing in a crypto and blockchain company.

Pull outside the blockchain space

Blockchain will not change the world; what we do with it will. We need to focus on adoption and relevance beyond the crypto and blockchain space. So my tip is to look for any kind of traction outside of the blockchain space. – German Ramirez, THE RELEVANCE HOUSE AG

Standard business basis

VCs should look for the same basic things they would look for elsewhere: creditworthiness, risk modeling, due diligence standards and audits, and government oversight. Regulation and market dynamics are likely to change the status quo, and more players will enter the space with new ideas. Some have spent years anticipating this (as we have), working with regulators to create a workable path forward. —Nathan McCauley, Anchorage Digital

Risk management

Looking at the infamous FTX balance sheet, it surprised me that VCs seemed to “overlook” that the assets were not risk-weighted – a lesson we should have learned from the global financial crisis of 2008. A minimum for decentralized finance projects will specifically be verification of audit reports, internal control processes, risk management (counterparty risk, leverage, liquidity and so on) and stress test results. -Amber Ghaddar, AllianceBlock

The background of the founders

Given the recent high-profile failures of FTX and Alameda, Celsius and Terra (LUNA), review the background of the founding team with a fine-toothed comb. Then look at their value proposition. Hopefully they don’t plan to be the last of a thousand decentralized exchanges on that particular chain. Also look at the total value locked up and the actual revenue coming in from transaction gas fees and other sources. – Zain Jaffer, Zain Ventures

Team members’ background and experience

In any project, one of the most important aspects is looking at the team. Who are the team members and what is their background and experience? After all the bad players we have seen in the last year, it is especially important to keep a close eye on the team. A strong team with quite a few years of experience in credible institutions, as well as a worthy mission and vision, can lead a project on a great path. – Ayelet Noff, SlicedBrand

Community and user engagement

VCs should look for teams that have a track record of delivering results, as well as a strong vision and a clear roadmap for how they plan to achieve their goals. Look further at the project’s community and user engagement. Community is an important factor in the success of a blockchain project, and assessing engagement levels can provide valuable insight into the potential for success. – Tammy Paola, Zerocap

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Subtle language cues

Look for subtleties in the language used by potential businesses to find clues. For example, “We are in deep talks with BDE Ventures” is basically a way of saying that they don’t have a signed term sheet yet and there is no deal as of now. But entrepreneurs are good at making things sound like a “sure thing” when they really aren’t. Pay attention, ask more questions and don’t be afraid to ask what something really means. – Brian D. Evans, BDE Ventures Ventures

How the ledger is managed

At a minimum, the crypto blockchain must update the current ledger state correctly. It is basically an accounting service for the end user. The project’s technical team must be able to explain exactly how errors can be introduced, any hidden costs, whether and how the work can be double-checked by users and whether the accounts will be accepted by the public, businesses and authorities. – Stephanie So, Geeq

Differentiation from traditional technology

Look at the actual technology and evaluate it based on its actual or potential real-world use versus the hype. Does it have differentiation from traditional technology? – Joe Roets, Dragonchain

The answers to these two questions

Thoroughly research the purpose of the project by answering two very important questions. First, is the project going to solve a real problem that people desperately need to figure out? And secondly, is blockchain technology the best way to solve this problem and/or is a solution unattainable without it? If the answers to both questions are “yes,” that’s a good sign. – Bogomil Stoev, Seasonal Tokens

If the project fills an unmet market gap

Understand the market, its sectors and the different target groups that different products or services address. VCs should also conduct extensive research to ensure that the products or services a company offers actually address a market gap that is not already being filled. Many projects are not sufficiently differentiated, which challenges their long-term viability and place in the ecosystem. -Anthony Georgiades, Pastel Network

Support of real returns

Look for companies that are backed by real returns. At the end of the day, generating consistent profits is fundamental to keeping a business viable for the long term. VCs should think critically about each project’s financial projections and assess whether there are sustainable revenue streams that drive its token utility. – Wolfgang Rückerl, ENT Technologies AG

This article was published through the Cointelegraph Innovation Circle, a researched organization of top executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.

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