22 March 2016

Blockchain: a market overview

Andrew Wingfield, Corporate Finance partner and associate Matt Clift, explore the potential of blockchain, the technology that powers the latest trend, bitcoin. This article first appeared on TMT News.

After something of a “reality check” regarding valuations of technology startups in Q4 of 2015, 2016 has seen venture capital investors and corporates once again exploring opportunities around blockchain, the powerful technology that underpins Bitcoin. 

In short, blockchain is a type of "distributed ledger” that enables the creation of easily updateable, secure, immutable, flexible and universally accessible digital records of asset ownership. And 2015 was the year that it rose to prominence, as investors began to wake up to its wide-ranging utilities beyond the world of cryptocurrencies. 

One of most interesting features of blockchain’s rise in 2015 was the type of businesses touting its potential. Traditionally focussed on payments infrastructure, startups are emerging presenting a wide variety of use-cases in diverse sectors such as trade finance, increasingly seeking demonste its potential to disintermediate and decentralise established institutions and services by developping streamlined processes that undercut incumbents’ roles at the heart of the consumer experience.  

And as blockchain has been gradually de-linked from Bitcoin, the stance of regulators – instinctively wary of the anonymity associated with cryptocurrencies – has cautiously softened both in the US and Europe, further boosting valuations in the sector.

To date, the majority of the money being invested into blockchain startups has been raised as either as part of paid-for “proof of concepts” (POCs) or early-stage "A Series" venture rounds based on the technology’s exciting promise. Serious money has been invested by both venture capital (VC) funds and corporates – recent closings by blockchain startups have included a $25 million in ItBit by a range of VC investors, and a $30 million investment in Chain by a diverse investor base including Visa, Capital One and Fiserv.

The investment Chain in particular exemplifies an interesting trend, with “old world” corporates – under pressure from both shareholders and consumers to innovate – seeking to acquire stakes in the most compelling blockchain startups as a hedge against the potentially disruptive effect their own businesses may suffer at the hands of these “Uber-style” insurgents. 

However, Blockchain-based startups are likely to face a tougher test to raise money in 2016, with investors focussing on their revenue-generating potential as some of the early “heat” comes out of the market. Early-stage startups seeking initial investment will find it difficult to make noise in a crowded marketplace absent the most persuasive POCs, whilst those who have secured funds but are now unable to show demonstrable revenues or significant scalability are likely to struggle to raise follow-on capital, with casualties likely.

We should also expect further diversification. As links between technologies such as the "internet of things" and blockchain become apparent, new revenue streams are likely to emerge. This has the potential to attract fresh investment from sectors previously less active in the space – such as insurance.

The rise of blockchain has been fast, and some of its potential utilities are only just beginning to be developed and monetised.  An array of backers has assembled to invest in this new technology, and although early optimism has given way to a healthy dose of realism, startups with genuinely solution-driven business models will find willing investment from both VC houses and established corporates, securing blockchain's position at heart of the new technological landscape.

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