Crypto investing has a different risk profile than traditional VC. Here are the questions that can save you a lot of trouble later.
The Web3 space attracts sophisticated investors who are often applying frameworks designed for a very different environment. Anonymous developers, community-driven governance, self-custodied treasuries, and novel token economics don't map neatly onto traditional due diligence. Here are nine questions worth adding to your process.
1. Why does this product need to be on a blockchain?
This is the most basic question and the one most frequently skipped. If a founder can't explain clearly why their product requires a blockchain rather than a conventional cloud host or software download, that's a red flag. Blockchain is powerful — but it isn't the right solution for every problem, and founders who can't make the case often haven't thought rigorously enough about their product.
2. Why this particular blockchain?
Over 1,000 blockchains currently exist. The choice of chain matters: transactions per second, block time, energy efficiency, developer ecosystem, and longevity all vary significantly. If the project is itself a new blockchain, the bar for "why does this need to exist" is even higher.
3. How might regulation affect this project?
Governments globally are taking increasingly active interest in crypto. Know the regulatory landscape of your potential investment — and be prepared for outcomes that range from favorable clarification to significant legal exposure.
4. Is the product secure?
Billions of dollars have been lost to crypto exploits. Has the code been audited by an independent third party? Is there a bug bounty program? Does the investment agreement include protections in the event of an exploit? These questions are table stakes.
5. Who are the competitors, and what's the unique value?
In Web3, a competing product on a different blockchain may not be a true competitor — chain loyalty is real. But the space attracts exceptional engineers, and a strong competitive position built solely on a smart contract will be challenged quickly.
6. Who is behind this project?
Anonymous teams are common in crypto. That doesn't make them inherently untrustworthy — but it raises the burden of diligence. Check past projects carefully. Look at social volume relative to investment. If the numbers don't match, it may warrant on-chain investigation. Watch for signs of "rugging" — where founders pump a project, take their profit, and quietly abandon development.
7. How does the project store its funds?
A hot wallet is a major red flag. A hardware wallet is acceptable. A Gnosis Safe multi-sig wallet suggests a team that understands operational security in Web3. The way a team handles its treasury tells you a great deal about how it will handle everything else.
8. What currency is the treasury held in?
A treasury held entirely in the project's own token is dangerously exposed to market volatility. Responsible projects hold a meaningful portion of their runway in stablecoins or fiat. Audit the treasury and establish guidelines before committing capital.
9. When can I expect a return — and what's the lockup?
Short lockup periods for founders are a significant warning sign. If the team isn't willing to be locked in alongside investors, ask yourself why. Phased lockups for both founders and investors protect everyone — and a team keeping more than 30% of the token supply for themselves warrants serious scrutiny. According to Chainalysis, up to one in four new tokens are outright scams. Diligence saves capital.
