12 FACTORS VCS SHOULD FOCUS ON WHEN VETTING CRYPTO AND BLOCKCHAIN COMPANIES

Last updated: June 20, 2025, 03:58 | Written by: Changpeng Zhao

The world of crypto and blockchain is a whirlwind of innovation, disruption, and, let's face it, a fair share of hype. What factors do you think VCs should focus on when vetting crypto/blockchain companies? Here are the points which came to my mind as well as my esteemed colleagues' and we shared them withFor venture capitalists (VCs) navigating this exciting yet often turbulent landscape, separating the wheat from the chaff is paramount. 12 factors VCs should focus on when vetting crypto and blockchain companies cointelegraph.comThe allure of potentially massive returns can be strong, but the risks are equally significant.Highly publicized failures and instances of misconduct have understandably made VCs wary.However, dismissing the entire sector based on the actions of a few would be a missed opportunity. 12 factors VCs should focus on when vetting crypto and blockchain companiesWell-run crypto and blockchain businesses offer real potential, and the key lies in thorough and discerning due diligence. The market has shifted greatly in the last few years and VCs are asking a lot more questions before they agree to invest funds, especially in projects like crypto that by nature can be quite volatile. This article in Cointelegraph gives a few perspectives of what questions investors should ask if they are interested in crypto projects. Here areThis means going beyond the surface level and applying a rigorous framework to assess the viability and long-term prospects of these ventures.It's not just about understanding the technology; it's about understanding the business, the team, the community, and the regulatory environment. Venture capitalists may be wary of the crypto and blockchain industry at the moment, and it s not without reason. However, the highly publicized bad actions of a few shouldn t keep VCs from spotting the real potential that well-run businesses in the sector can offer.What separates a flash-in-the-pan project from a truly transformative company? Venture capitalists may be wary of the crypto and blockchain industry at the moment, and it s not without reason. However, the highly publicized bad actions of a few shouldn t keep VCs from spotting the real potential that well-run businesses in the sector can offer.As with investments in any indusThis article will explore 12 critical factors that VCs should focus on when vetting crypto and blockchain companies to make informed investment decisions and unlock the sector's true potential.

1. VCs should look for the same fundamentals they d watch for elsewhere: creditworthiness, risk modeling, vetting 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.The Team: Expertise, Experience, and Execution

The cornerstone of any successful venture, regardless of industry, is the team behind it. Posted by u/Cointelegraph_news - 1 vote and no commentsIn the rapidly evolving world of crypto and blockchain, a strong team is even more crucial.VCs should meticulously examine the founders' backgrounds, the experience of team members, and their collective ability to execute the project's vision effectively. Venture capitalists may be wary of the crypto and blockchain industry at the moment, and it s not without reason. However, the highly publicized bad actions of a few shouldn t keep VCs from 12 factors VCs should focus on when vetting crypto and blockchain companiesLook beyond impressive credentials and delve into their track record of building and scaling successful businesses.Consider:

Technical expertise: Does the team possess the necessary technical skills to develop and maintain the blockchain technology?
Business acumen: Do they understand the market, the competitive landscape, and how to build a sustainable business model?
Industry experience: Have they worked in the crypto and blockchain space before?Do they understand the nuances and challenges of this industry?
Leadership qualities: Are they effective communicators, problem-solvers, and decision-makers?Can they attract and retain top talent?

Don't underestimate the importance of a team's ability to adapt and iterate. Best practice to look at investing in web3 companies, great comments by industry leaders on what to consider looking at a project. I like the quote of GermanThe crypto and blockchain landscape is constantly changing, and a team that is rigid and unwilling to evolve will likely struggle.

2.Whitepaper and Tokenomics: A Clear and Convincing Vision

The whitepaper is the foundational document for any crypto or blockchain project.It outlines the project's goals, technology, tokenomics, and roadmap.VCs should scrutinize the whitepaper carefully to assess the project's viability and potential.Key considerations include:

Clarity and feasibility: Is the whitepaper clearly written and easy to understand?Does the project's vision seem realistic and achievable?
Problem-solving: Does the project address a real problem or need in the market?Is the proposed solution innovative and effective?
Tokenomics design: How are the tokens distributed?What is the token's utility?Are the tokenomics designed to incentivize long-term participation and growth?
Roadmap and milestones: Does the project have a clear roadmap with specific milestones and timelines?Are the milestones ambitious yet achievable?

A well-written whitepaper demonstrates that the team has a clear understanding of the problem they are trying to solve and a well-defined plan for achieving their goals. Solo Bitcoin miner wins the 3.125 BTC lottery, ApPoorly designed tokenomics can doom a project from the start, so pay close attention to this aspect.

3.Community Engagement: A Thriving and Supportive Ecosystem

The crypto and blockchain community is a vital component of any successful project. 1. Factors that VCs Should Focus On When Vetting Crypto and Blockchain Companies The article discusses 12 factors VCs should focus on when vetting crypto and blockchain companies. The most important factor is the team behind the company. The author explains that the team must consist of people who can execute their vision effectively. TheA strong and engaged community can provide valuable feedback, support, and advocacy.VCs should assess the project's community engagement by looking at factors such as:

Social media presence: How active is the project on social media platforms? tldr; 12 members of Cointelegraph Innovation Circle share tips for a VC considering investing in a crypto and blockchain company. VCs should look for the same fundamentals they d watch for elsewhere: creditworthiness, risk modeling, vetting standards and audits, and government oversight.How engaged are the followers?
Community forums: Does the project have active community forums where users can ask questions and provide feedback?
Developer activity: Is there a vibrant developer community contributing to the project's code and ecosystem?
Community sentiment: What is the overall sentiment of the community towards the project? The Web3 space remains a tremendously attractive field for VCs and investors. But as the market matures, what are main factors to consider when vetting a blockchain project? Glad to share my insights in thisAre they positive and supportive, or are there signs of discontent?

A strong community can be a powerful asset, but it's important to distinguish between genuine engagement and artificially inflated metrics. VCs should look for the same fundamentals they d watch for elsewhere: creditworthiness, risk modeling, vetting standards and audits, and government oversight. Regulation and marketLook for evidence of genuine interaction and participation.

4.Technology and Innovation: A Differentiating Factor

In a crowded market, it's crucial for crypto and blockchain projects to have a technological edge.VCs should evaluate the project's technology and innovation by considering factors such as:

Novelty and originality: Does the project offer a unique solution or approach to a problem? When considering crypto and blockchain investments, VCs must examine founders' backgrounds, team members' experience, and community engagement. As with any investment, due diligence is keyIs it truly innovative, or is it simply a copycat of existing projects?
Scalability and performance: Can the technology scale to handle a large number of users and transactions?Is it efficient and performant?
Security and reliability: Is the technology secure and resistant to attacks?Has it been audited by reputable security firms?
Open-source or proprietary: Is the code open-source, allowing for transparency and community contributions?Or is it proprietary, offering a competitive advantage?

Avoid falling for buzzwords and hype. Due diligence when vetting crypto and blockchain companies comprises considering both traditional business factors and unique imperatives. Read more atFocus on the underlying technology and its ability to deliver real value.

5. 12 factors VCs should focus on when vetting crypto and blockchain companies Due diligence when vetting crypto and blockchain companies comprises considering both traditional business factorsMarket Traction: Real-World Adoption and Use Cases

A compelling technology is not enough. Once upon a time VCs were very eager to fund innovative sounding startups, even if they weren t doing much due diligence to make sure the investment had potential. The market has shifted greatly in the last few years and VCs are asking a lot more questions before they agree to invest funds, especially in projects like crypto that by nature can be quite volatile. This article inA successful crypto or blockchain project needs to demonstrate real-world adoption and use cases.VCs should look for evidence of market traction, such as:

Number of users: How many active users does the project have?Is the user base growing?
Transaction volume: How much transaction volume is the project generating?Is the transaction volume increasing over time?
Partnerships and integrations: Has the project formed partnerships with other companies or organizations? 💰 Venture capitalists (VCs) play a vital role in fueling the growth and development of the crypto and blockchain industry. 🚀 However, investing in thisIs it integrated into existing systems or platforms?
Real-world applications: Is the project being used to solve real-world problems?Are there tangible benefits for users?

Traction outside the blockchain space is particularly important. Here, 12 members of Cointelegraph Innovation Circle share tips for a VC who s considering investing in a crypto and blockchain company. Traction outside the blockchain space. Blockchain won t change the world; what we do with it will. We need to focus on adoption and relevance beyond the crypto and blockchain space.The technology's relevance and adoption beyond the core crypto community are key indicators of long-term sustainability. Due diligence when vetting crypto and blockchain companies comprises considering both traditional business factors and unique imperatives. Venture capitalists may be wary of the crypto and blockchain industry at the moment, and it s not without reason. However, the highly publicized bad actions of a few shouldn t keep VCs from spotting the real potential that well-run businesses in theDon't just focus on the technology; focus on what it *does*.

6. What factors do you think VCs should focus on when vetting crypto/blockchain companies? Here are the points which came to my mind as well as my esteemed colleagues' and we shared them with Cointelegraph: crypto cryptocurrency blockchain cryptonews VCNews vcs vc vcfunding cc Cointelegraph Innovation Circle Lauren Perry Sara Montini Annelie SenekalRegulatory Compliance: Navigating the Legal Landscape

The regulatory landscape for crypto and blockchain is constantly evolving and varies significantly across jurisdictions.VCs need to assess the project's compliance with all applicable regulations.This includes:

Securities laws: Is the token considered a security?If so, has the project complied with all applicable securities laws?
Anti-money laundering (AML) regulations: Has the project implemented AML procedures to prevent money laundering and other illicit activities?
Data privacy regulations: Does the project comply with data privacy regulations such as GDPR?
Tax laws: How are tokens taxed in different jurisdictions? 💬 Our co-founder German Ramirez joined other crypto and blockchain veterans on Cointelegraph Innovation Circle and shared his insights on the main factors to consider when vetting aHas the project addressed the tax implications of its operations?

Non-compliance with regulations can lead to significant legal and financial risks.VCs should seek legal counsel to ensure that the project is operating within the bounds of the law.

7.Financial Stability: Creditworthiness and Sustainability

Just like any other business, crypto and blockchain companies need to be financially stable to survive and thrive.VCs should assess the project's financial health by looking at factors such as:

Burn rate: How quickly is the project spending its funds?Is the burn rate sustainable?
Revenue streams: Does the project have sustainable revenue streams?How reliant is it on token sales or grants?
Cash reserves: How much cash reserves does the project have?How long can it operate with its current cash reserves?
Financial projections: Are the project's financial projections realistic and achievable?

Understanding the project's financial situation is crucial for assessing its long-term viability.A project with a high burn rate and limited revenue streams may be at risk of running out of funds.

8.Security Audits: Protecting Against Vulnerabilities

Security is paramount in the crypto and blockchain space.Vulnerabilities can be exploited by hackers, leading to loss of funds and reputational damage.VCs should ensure that the project has undergone thorough security audits by reputable firms.These audits should cover:

Smart contracts: Are the smart contracts secure and free from vulnerabilities?
Infrastructure: Is the project's infrastructure secure and protected against attacks?
Data storage: Is user data stored securely and protected from unauthorized access?
Access controls: Are access controls properly implemented to prevent unauthorized access to sensitive information?

A clean security audit report is a good sign, but it's important to understand the scope and methodology of the audit.Look for audits that are comprehensive and conducted by experienced security professionals.

9.Governance and Decentralization: Balancing Control and Autonomy

Decentralization is a core principle of many crypto and blockchain projects.However, too much decentralization can lead to lack of direction and accountability.VCs should assess the project's governance structure to ensure that it strikes the right balance between control and autonomy.Key considerations include:

Decision-making process: How are decisions made within the project?Is the decision-making process transparent and democratic?
Power distribution: Is power distributed fairly among different stakeholders?Are there checks and balances in place to prevent abuse of power?
Community involvement: How is the community involved in governance?Do they have a say in the project's direction?
Updates and upgrades: How are updates and upgrades to the technology implemented?Is there a clear process for proposing and approving changes?

A well-defined governance structure is essential for ensuring the long-term sustainability and success of the project.

10.Risk Modeling: Identifying and Mitigating Potential Threats

Investing in crypto and blockchain companies involves inherent risks.VCs should conduct thorough risk modeling to identify and assess potential threats.This includes:

Market risk: The risk that the value of the token or project will decline due to market conditions.
Technology risk: The risk that the technology will fail or become obsolete.
Regulatory risk: The risk that new regulations will negatively impact the project.
Security risk: The risk that the project will be hacked or compromised.
Execution risk: The risk that the team will fail to execute its vision.

Once risks have been identified, VCs should develop strategies for mitigating them.This may involve diversifying investments, implementing security measures, or seeking regulatory guidance.

11.Vetting Standards and Audits: Independent Verification and Transparency

Independent verification and transparency are crucial for building trust and confidence in crypto and blockchain projects.VCs should look for evidence that the project has undergone independent vetting and audits.This may include:

Code audits: Audits of the project's code by reputable security firms.
Financial audits: Audits of the project's financial statements by independent accounting firms.
KYC/AML compliance audits: Audits to ensure compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Data privacy audits: Audits to ensure compliance with data privacy regulations.

The results of these audits should be publicly available for review.Transparency is key to building trust and demonstrating accountability.

12.Traction Beyond the Blockchain Space: Real-World Problem Solving

While innovative blockchain technology is exciting, sustainable success hinges on real-world problem-solving.VCs should prioritize projects demonstrating utility and adoption beyond the core crypto community.Look for evidence that the technology is:

Solving a tangible problem: Is the project addressing a clear pain point for businesses or consumers?
Improving existing processes: Is the technology making processes more efficient, secure, or cost-effective?
Creating new opportunities: Is the project unlocking new markets or creating new business models?

Focus on adoption and relevance beyond the crypto niche.Blockchain won't change the world on its own; what we *do* with it will.Projects with real-world applications and tangible benefits are more likely to achieve long-term success.

Conclusion: Navigating the Crypto Landscape with Due Diligence

Investing in crypto and blockchain companies can be a rewarding but also risky endeavor.By focusing on these 12 key factors, VCs can improve their chances of identifying promising projects and avoiding costly mistakes.Remember to look beyond the hype and focus on the fundamentals: a strong team, a clear vision, a thriving community, innovative technology, real-world traction, regulatory compliance, financial stability, security, good governance, risk management, transparency, and a problem-solving approach beyond the insular crypto world.The crypto and blockchain landscape is constantly evolving, so continuous learning and adaptation are crucial.With a disciplined approach and a keen eye for detail, VCs can unlock the true potential of this transformative technology.In essence, successful vetting involves a blend of traditional business acumen and a deep understanding of the unique challenges and opportunities presented by the blockchain space.Don't be afraid to ask tough questions, challenge assumptions, and seek expert advice.Your due diligence today can lead to significant returns tomorrow.Ultimately, the best investments are those that solve real-world problems and create lasting value.