What do investment funds check before deciding to invest in a startup?

For investments, the technology sector offers many potential unicorn projects. However, it is crucial to vet any project, as I know from my own experience that not everything is what it seems. Investing in startups can prove worthwhile, but only under certain conditions. 

Navigating the startup landscape

As new companies and projects sprout up at every turn, there is an overwhelming amount of potentially good startups on the market at any time. The majority of them can be found in the finance and technology sectors. Not surprising, as we can all acknowledge that developers can improve upon both industries in many ways. Moreover, new technologies can pave the way for better financial solutions, whereas open finance can benefit technology startups.

Bringing the two segments together is a massive undertaking. Although I am a fan of neobanks and mobile-only financial services, it is only a smidgeon of what could be achieved in the future. For investment funds, that makes navigating the landscape all the more difficult. Without any industry standard or "good practices" to go by, it can be difficult to make investment decisions. 

At their core, investment funds need to perform rigorous checks of any project they want to invest in. Startups need to make a compelling case to attract investment including the return on investment, analyzing hard data, the business plan, and the overarching narrative. Additionally, they need to have a unique idea that is business-ready and a transparent investment structure. As a startup, it requires a lot of upfront work for something that may or may not happen, but that is the landscape these days. 

In the end, investment funds want to make money by investing in startups. To do so, they must put the proverbial thumbscrews on companies who think they have to make big things happen. If startups cannot answer the questions above properly, I wouldn't invest, no matter how much I like the project. A similar approach may be necessary for the cryptocurrency market, as there is still too much "grey area" to attract investment funds.

Crypto startups need to answer tougher questions

As a fan and member of the cryptocurrency industry, seeing so many projects complete seed and private funding with ease surprises me. Not because the projects aren't worthwhile. But because they seemingly can avoid answering the tough questions. Compared to regular startups, crypto projects seemingly have very few tough questions to answer. What may be a standard checklist for startups outside of crypto is not the norm in this exciting industry just yet.

In the current landscape, any "checks" between market participants are virtually non-existent. There appears to be a lot of "blind trust" in an industry where transparency should be the norm, yet it isn't always the case where startups and business processes are considered. We can only hope to see this change in the future. There is no point in investing in startups that do not check all of the right boxes. 

The same train of thought applies to exchanges and exchange protocols or DEXes. Reliability checks are often an afterthought, as everyone wants to list coins that can provide ample trading volume. Everything else appears to be less important, even though I think the focus on security and auditability needs to improve. 

It is, in my opinion, a matter of time until the crypto industry embraces the thorough standards startups in any other segment have to live up to. Without such strong checks, I fear the industry will never lose the image of "too many scams" and "a lack of reliable projects". 

The importance of audits

Any startup in the crypto industry that wants to make an impact can opt for a code audit. There are multiple firms capable of performing this task. However, I find the work by HashEx rather impressive, as they have produced numerous analysis reports on projects either in development or live on a blockchain right now. Moreover, this company's portfolio keeps growing regularly, confirming many startups trust the service they provide.

HashEx has completed over 300 audits of projects such as SafeMoon, CoinBurp, xSigma, and BondAppetit. Once having fixed the vulnerabilities detected or in case no such vulnerabilities are found, these projects can offer their code to a broader audience. For investors, it makes no sense to entrust money to anyone or any project that has not gone through a peer review. Despite smart contracts being open source, very few people actively look at their code until something goes wrong. It is time to change that narrative for the better.

Solutions like code audits are an important first step in the right direction. However, Crypto startups need to acknowledge there is a need for an extra layer of legitimacy. I would love to see all blockchain-based contracts undergo an audit, with at least 80% of them being audited more than once. Establishing a base layer of trust is essential to bring in a mainstream audience, including investment funds and other entities. 

Closing thoughts

Even though I’m still incredibly bullish on cryptocurrencies, DApps, and decentralized finance, something needs to change in this industry. The lackluster attitude to security and accountability continues to baffle me, even though there have been more than enough security incidents over the years to warrant a more cautious approach. 

One can only hope to see the industry embrace audits because they feel it is the right thing to do. Auditing providers like HashEx, CertiK, and others play a crucial role in this industry. Innovation and security need to go hand-in-hand, as they are not mutually exclusive aspects. Any crypto startup catering to investment funds needs to do what is right, no matter the cost.