Too Many Venture Capitalists are Focused on the Wrong Startups and Priorities
This article originally appeared in Fast Company on January 19th, 2023. Read the original here.
The collapse of the cryptocurrency exchange FTX is leading to a lot of soul-searching in the startup and venture capital ecosystem. With the full extent of the scandal still coming to light and a domino effect playing out across the crypto space, one thing is clear to me: Too much money is going into Web3 startups that are not going to address large-scale challenges like climate change, feeding a growing population and treating mental health problems.
There’s a lot of VC money going into crypto startups. VCs invested $18.3 billion in crypto and blockchain startups just in the first half of 2022 alone. That is almost three times as much as they did in the entirety of 2020. It was also on the way to exceeding 2021’s record $32.4 billion, according to an analyst at J.P. Morgan; however, this now seems unlikely since funding in the space plunged in the third quarter.
So what can VCs learn from the FTX debacle? Here are a few easy lessons that I think VCs should be thinking about to protect their limited partners from the fallout:
INVEST IN MUST-HAVES
Don’t invest in Web3 projects that aren’t going to improve people’s lives. Instead, focus on breakthrough technology and science that can solve our greatest challenges. These must-have solutions create enormous value. The world is facing climate change, rising global consumption of all goods and services, and an aging population. We need technology to address climate change, make the transportation sector cleaner, and improve people’s well-being. Focus on breakthroughs that the world will need this century.
ASK THE HARD QUESTIONS
Earlier this year, VCs were rushing to invest in the crypto sector as quickly as possible, which makes me wonder whether many of them were doing their due diligence before making deals. Make sure you know everything about the company before you offer a term sheet to assess the level of risk you are taking on. Look for any conflicts of interest and how previous rounds of capital have been spent.
INVEST IN THE FOUNDER
One of the most important steps you can take is conducting due diligence on the founder. Make sure you only invest in founders who are capable of personal growth and accepting responsibility when their choices go afoul. The lack of responsibility exhibited by FTX founder Sam Bankman-Fried in recent weeks is alarming and serves as a reminder to investors to be on the lookout for red flags.
This one is pretty obvious, but it didn’t happen at FTX. Investors apparently allowed the company to be run by a group of people who all knew — and dated — each other. Strong leadership is critical to ensure that founders stay focused on the company’s mission. Founders and investors often complain about board meetings, but board meetings provide valuable interactions for the strategic leaders of a startup. Your job as a VC is not done when you write the check. Make sure you’re providing critical feedback. At my company, we believe that capital is the least important thing we provide our portfolio companies. Stay engaged with your portfolio companies, and be an active voice on their boards.
I remain a long-term optimist in the power of venture capital and startups to transform our world for the better. However, that requires VCs to allocate capital to the right companies. There are a number of lessons to be learned from the FTX implosion, but I think not wasting money on things that don’t improve people’s lives is the most important one.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation and agriculture.
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