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By James Wo, Founder and CEO of DFG
Now that we are well into the year’s first quarter, exciting developments in generative AI are drawing renewed interest and investment from some of the world’s most powerful companies and accelerators, creating a competitive landscape for innovative projects.
Some of the crypto-centered VCs that are still standing following last year’s market downturn have clearly changed their focus and funding roadmaps. Some funds are already taking a pragmatic approach, moving slowly in order to cut through the noise surrounding AI in order to avoid falling into another buzz-fueled investment trap. But after so much hype around other tech developments, how can VC funds be sure that AI is here to stay?
VCs that have remained on their feet now find themselves on uneven ground with no clear direction on what projects to back. With so many seemingly reliable platforms and sectors completely tanking, it can be hard to know where to steer funds in order to maintain healthy investment activity. Funds and accelerators should no longer be focused on early-stage bragging rights, but how can they adjust strategies for the year ahead?
Human after all
The advice to “do your own research” can seem empty or condescending, but sometimes clichés are the most appropriate advice. Nearly every crypto scandal has shown why we must be skeptical of a “golden goose,” and instead should treat projects with the same scrutiny given to other technologies and financial innovations.
But VCs aren’t immune to hype or getting caught up in the moment with industry-led trends, especially when they notice impressive funds backing projects that appear reliable. It’s also easy to get excited about emerging technologies in joining the blockchain industry, as most recently witnessed with generative AI projects and the possibilities they hold for crypto in powering platforms, aggregating data, and supporting trust infrastructure to audit investments.
Clearly, the trend is captivating investors as tokens utilizing AI technology are already outperforming Bitcoin. But adding new tech just for the sake of it can prove disastrous, just look at what happened with the hype around algorithmic stablecoins after the Terra collapse. Not to say that the same will happen with AI-focused crypto projects, but VCs should be mindful not to run head-first into new integrations.
The crypto industry’s garish “easy money” era is over, and it’s now more important than ever to make considered and strategic steps forward. Whether that means putting existing investment activities under the microscope or completely reassessing what sectors to support in the industry as a whole.
Finding ways forward
VCs and other institutions that have mobility and liquidity to invest in blockchain projects shouldn’t separate themselves from the industry. But this past year should raise some flags to reevaluate and reform investment strategies to continue avoiding projects that are no longer considered sustainable.
Like any retail investor, blockchain-focused VCs should be mindful of putting all their eggs into one basket.
Yes, funds that are outside of the industry may just pick one blockchain sector to explore, but organizations dedicated to accelerating blockchain and Web3 developments should know not to go all-in on one type of project. This also requires regularly checking in on portfolios for any changes in activity, progress gaps, and potential opportunities.
While diversification is key, VCs may want to take a step back and look at the big picture of which sectors they truly want to stand behind, whether DeFi, Web3, or any other application. Operating with a clear north star can help investors stay focused and not get distracted by shiny new projects that don’t actually align with their objectives.
Bearing this in mind, it may also be useful to explore underrepresented sectors and projects to examine the potential for great impacts. Women-led startups only secured 1.9 percent of all VC support in 2022, TechCrunch reported, indicating that funds are failing to champion true diversity in the projects they back. As a growing industry, blockchain and Web3-focused VCs can set a new precedent of inclusivity as to who gets to lead innovation.
Global legislative efforts also indicate that 2023 will be a landmark year for new blockchain regulations, with concerted efforts coming from the G20 and the United States. As new rules and legislation gets rolled out, it would be wise for blockchain-focused VCs to stay abreast of these new regulations proactively rather than being reactive when new laws are passed.
In the ever-shifting blockchain landscape, it can be hard for VCs to know who to trust and what projects actually have the potential to be revolutionary. For those funds that escaped 2022 with minor scratches or lightly touched by market fluctuations and platform meltdowns, strategies for the year ahead should only reaffirm a commitment to due diligence and goal-based investing. Ultimately, blockchain is not so different from any other industry, and it’s only long-term builders and those focused on big-picture changes that will succeed when the smoke clears.
About the Author:
James Wo is an experienced entrepreneur and investor in the digital assets space who founded DFG in 2015, where he oversees $1 billion worth of digital assets. He is an early investor in companies like LedgerX, Coinlist, Circle, and 3iQ. James is also an early investor in and supporter of the Polkadot and Kusama networks. He contributes substantially to the ecosystem through capital allocation, donations and actively supports the Parachain Auctions. Additionally, James serves as the Board and committee member of the Chamber of Digital Commerce at UAE Licensed Matrix Exchange.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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