Terra’s collapse is a hard lesson for sloppy Crypto VCs and gullible retail investors

• Many crypto VCs have experienced losing traditional operational discipline.
• The funds started investing quite broadly, and without providing any real support to the platforms they invested in.
• VCs need to refocus their energies and strategies in the wake of recent collapses.
• Indiscriminately copying the choices of a VC fund is generally a losing strategy for the retail investor.
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It’s 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 reputation plummet, as projects they actively promoted, such as Terrafailed spectacularly, hitting the entire crypto industry.

In previous months and years, the fact that one or more VC funds had invested in a project was usually enough to send corresponding tokens. In contrast to those heady days, serious questions now hang over the wisdom and acumen of VC funds, which private investors have often used as models for their own investment decisions (judging by rallies after funding rounds).

However, figures working within the crypto industry claim that in the wake of the current crisis, VC funds will increasingly focus on conducting rigorous research and due diligence in making their decisions. And while the crypto market is likely to remain volatile and unpredictable for the foreseeable future, there should be a gradual decline in risk-taking behavior by VCs over time.

Crypto VC funds are gaining a reputation

Commentators agree that the reputation of crypto-focused VC funds has taken a beating in recent weeks.

“During the last cycle, having a top-level VC on the board became a stamp of approval and a kind of self-fulfilling prophecy. Unfortunately, in an era of huge risk-on activity and low-money politics, many of these VC- ene found themselves losing traditional operational disciplines such as risk management or portfolio construction practices, says Anthony Georgiades, co-founder of NFT-focused blockchain Pastel network and General Partner in the VC firm Innovative capital.

Aside from the obvious fact that their investments have fallen sharply in value, VCs have fallen out of favor for other reasons in recent months. For Dominic Williams, the founder and chief scientist at DFINITY Foundationpart of this has to do with how VCs have moved away from a more traditional model where they backed just one startup or project in a given area, often encouraging funds to concentrate more support on their chosen investees.

“When they started investing in crypto, they basically used the same approach and their commitment transferred quite a bit of status to the projects they invested in. But as the crypto bull market started to ‘float all boats’ and product/market fit became less important. than hype, all that changed,” he shared Cryptonews.com.

In fact, for Williams, a few too many funds began to invest quite broadly, including in competing projects, and without providing any real support to the platforms they invested in. This arguably spread their resources too thin, while it is also an argument that it can be argued that at least some VCs rushed to quickly invest in several projects, without performing due diligence.

On top of this, some crypto VC funds have acted less like venture capitalists, and more like speculative investment companies.

A recalibration of focus

According to commentators, some investors chose not to manage their risk and pivot their strategy during the downturn, instead attempting to go even more “long” the market in an attempt to push the economy back into the black.

A certain indication of this is that, even with the price drop more or less since November, venture capital funding is significantly higher than a year ago.

“Accordingly Dove Metrics 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, a managing partner at crypto-focused venture studio Super team.

In the first half of 2022, venture capitalists also invested $17.5 billion in crypto and blockchain firms, Reuters reported this week, citing data from the market data provider PitchBook. That puts the investments on course to top the record of US$26.9 billion raised last year.

That said, Vellanki interprets these relatively high numbers not as evidence of waste, but as evidence that savvy investors are “buying the dip” and buying stakes in projects at a discount.

However the current numbers read, most commentators agree that VCs need to refocus their energies and strategies in the wake of recent collapses.

“VCs and hedge funds need to step back from the crypto hype machine, including fake partnership announcements, noise created by marauding armies of shills and trolls on social media, and glowing coverage in pay-to-play industry reports and media, and watched , and focus on substance. Successful tech investors of the past have focused heavily on the technical understanding of the founder and the technical and product teams they’ve built, but today most investors in crypto don’t even look at the team,” said Dominic Williams.

Similarly, Anthony Georgiades argues that from now on, more research and general due diligence must be carried out to find out which projects are truly viable and necessary for the ecosystem’s longevity.

“As funds start to inflate and find themselves underwater, I think we will see a return to patient capital and increased due diligence. The terms will become more investor-friendly, forcing the founders to show more operational discipline, he said Cryptonews.com.

Ultimately, this shift will be positive for the industry as a whole, although it has required at least one VC fund to step up. Georgiades also predicts that firms will start investing in fewer projects, giving grantee teams more time to properly research, make smart investment decisions and actually provide concrete portfolio support.

Other commentators confirm that VC funds should also increase the attention they give to the teams of startups and projects, since high quality and highly experienced/skilled personnel can be the difference between an interesting idea that fails and one that succeeds.

“Early-stage options companies should focus on supporting strong teams with high integrity that seek market opportunities that feel sustainable with good financials. Later stages, VCs should definitely perform responsible due diligence and focus on identifying key risk factors and whether business or token economics make sense, says Mahesh Vellanki, who also advises VCs against overcapitalizing projects and creating unhealthy growth.

Private investors and future risk

As mentioned above, news of VC investments has often moved the crypto market, with retail investors presumably following the lead of the funds. Still, for many observers, this is a dangerous strategy and could remain dangerous even if most crypto VCs tighten their games in the coming months.

“The danger of investing in a project that has raised significant funding from VCs and hedge funds is that they will have bought at a large discount and as soon as earnings expire, they will seek to secure profits by dumping a large portion of their holdings on the markets. This is exacerbated if many of their investments did not work out, because of the push to sell tokens to get a return on theirs [liquidity providers] is increased,” said Dominic Williams.

More simply, retail investors must remember that many funds use a strategy where their profits come from only a few of the projects they invest in, while the rest essentially lose money. As such, copying the choices of a VC fund is generally a losing strategy for the retail investor.

“Venture funds hold large portfolios in the hope that only a few companies generate all the returns while the rest generate minimal or zero returns. In addition, venture funds do not always provide a large return, and the return can be unclear for years, says Mahesh Vellanki.

Finally, VC funds will always encounter risk, even in a future where they have greatly improved their investment models and strategies. This is simply because, no matter how much time they spend looking at prospectuses, whitepapers and pitches, none of them have a crystal ball.

As Anthony Georgiades concludes, “Of course, as with all investments, there are risks involved, and unforeseen circumstances can cause some projects to break even when they otherwise wouldn’t. It’s not a perfect science, but the return on core investment pillars that diligence, patience, portfolio construction and risk management will be a net positive for the future of the industry.”
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Learn more:
– Mike Novogratz now admits that Terra’s model was unsustainable
– Big wallets exited anchor/UST while smaller fish continued to invest – Jump crypto

– How Tokenomics may change in the wake of the Terra collapse

– A strange coincidence – Big Terra backers break their silence on the same day
– The FTX proposal is a ‘low bid dressed as a white knight rescue’ – Voyager