Where investors think they’ll start to see returns in blockchain

There’s no shortage of hype surrounding the blockchain industry. The distributed ledger technology is forecast to either upend or revolutionise businesses across financial services and beyond – and venture capital money is increasingly optimistic of its transformative potential.

More than $56m was invested in the space over the first three quarters of 2016 over 10 deals, not including investments into cryptocurrency-specific startups that also use distributed ledgers, according to FinTech Global data.

While big things are expected of the technology, it is still in its early stages and real world implementation is extremely limited. Beyond that, it’s still not clear where the real revenue-making potential is, nor where the greatest opportunity for returns lie for investors.

Speaking on a panel of VCs at Blockchain Week, Balderton Capital associate Colin Hanna highlighted the underlying conundrum of generating revenue through a decentralised technology. He said: “If you step back and think about the challenges here, a lot of decentralisation is about taking away the middle man.

“Typically, the middle man is the one creating value in a very quick and scalable fashion.

“When you’re looking at technologies that are fundamentally decentralised there is this conundrum of ‘is there going to be any player in any vertical that can create enough value to give us the returns that we need?’”

Applications will drive revenue

Investors believe that while it will be the applications that rely on blockchains that will drive real revenue and provide sizeable returns in the long run, rather than the underlying platforms, the nascent nature of the industry means investors are still supporting the base technology.

Consilium CEO Eddy Travia said the London-based blockchain investor and developer is “looking at the platforms that actually enable these applications”.

He said: “The applications themselves will, of course, take more time to grow and to reach their first reasonable milestones.”

Hanna concurs and said: “We’re still at the stage where it’s too early to say what houses we’ll be building on this foundation.”

Day One Investments co-founder and managing director Jack Saba highlighted the longer-term vision for the technology. He said: “Down the line this technology is going to enable new business models, and it will be interesting to see people create revenue in new ways we haven’t seen yet.”

He is, however, beginning to place bets on where the initial winners on the space will be.

“Early on it was about investing in the infrastructure because the technology was incredibly difficult to work with,” said Saba. “Now we’re moving away from the infrastructure or the foundations onto the houses.”

This shift to greater development of applications will be aided by growing awareness of the technology and its capabilities, as well as an increase in the number of blockchain-savvy developers. Travia highlighted this and said: “When you deal with blockchain there is a steep learning curve and that is the same with adoption.

“It’s still community-based because it takes a while for people to get their heads around.”

Winner-takes-all?

Winner-takes-all platforms offering big returns on early investment defined tech VC over the past 15 years and the internet era – but investors are divided as to whether the blockchain landscape will look similar.

“There can be a winner-takes-all platform,” said Hanna. “But when the platform is fundamentally decentralised then that platform itself is not necessarily going to be generating $100m in revenue every year, which is what we need to see for a $1bn exit to justify the investments that we make.”

Saba, by contrast, doesn’t believe there will be a winner-takes-all model in the space “because this technology is going to be applied to so many different industries”.

“There’re going to be platforms for specific uses,” he said. “They might intertwine. They might have cross chain applications, but different blockchains will have different use cases. I don’t think we’ll see one winner.”

The challenge for the blockchain sector in the near-to-short term is bringing about real-world implementations of the technology and applications. 

Travia suggested “property and PropTech” as a key area for implementation. He said: “there is no doubt in my mind that the technology provides a solution to a burning problem for the industry around how property changes hands.”

Corporates enter the fray 

Many corporate entities are experimenting with blockchain with consortiums such as R3 fostering greater cooperation in development. Insurance giant Aviva’s head of innovation and startup engagement Anthony Beilin claims the firm is currently running four pilot programs with the technology.

Saba sees the B2B space as the first sector where blockchain can begin to see these real-world implementations and real revenue.

“From the jump it will be business-to-business startups that have the ability to reach out to big corporations or other entities with a services that’s going to save time, money and create efficiency that are going to start generating revenue first,” said Saba.

In a similar manner to artificial intelligence or internet protocols, Travia suggested it will serve as the underlying pipes rather than a technology that users will interact with directly.

He said: “Blockchain could be the background technology when we are sending money or the back-office systems for banks and financial services where it doesn’t affect the user directly but saves costs for the large organizations.”

The challenge for the startups VCs are placing bets on will be successfully selling into these large organisations that are attempting to drive innovation internally. For those successful in doing so, incumbent firms could provide substantial revenue as well as potential exits for investors.

Copyright © 2017 FINTECH GLOBAL

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