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Is blockchain startup R3 in play already?

cheetah chases gazelle

Two weeks ago Fortune published a negative story about enterprise blockchain company R3. In response, yesterday Forbes published an article which revealed revenue figures supplied by CEO David Rutter. The net effect of these articles may be to highlight R3 as a potential acquisition candidate.


The Fortune article quoted a former R3 staffer as saying revenues were “10X short”.

According to the Forbes rebuttal, sales through to April were 13% below budget though they didn’t provide a precise figure. That’s presumably January to April. The target for the year is just over $20 million, and Rutter expects to miss that by about 10%. So income will be 10% short rather than ten times off.

R3 is a startup, not a Fortune 500 company, so some revenue variability is likely. And enterprise software has long sales cycles which will be stretched because most projects involve consortia.

Rutter also revealed there are 32 commercial negotiations in the pipeline and 100 other projects being built using the open-source Corda platform.

The company has a subsidiary in the UK where accounts are on public record. The UK business incorporated in April 2016. Between then and December 2016 it earned £3.16m ($4.2m at today’s rate) in revenue and £100k in profit.

R3 is not immune to competition, but it’s fairing well. The main competitors are IBM and Hyperledger Fabric, the Enterprise Ethereum Alliance, and in banking JP Morgan’s Quorum, Digital Asset Holdings, and Axoni. This isn’t a statistical analysis, but the market leaders seem to be R3 and IBM, with R3 leading in finance and insurance, and IBM elsewhere.

In summary, revenue performance is not perfect but pretty healthy. Adoption of R3’s technology looks good.

Burn rate

Then there’s the cost side. The unfavorable Fortune article said, “the company styled itself as a technology startup but acted like a bank”. That has a ring of truth to it given the funding round of $107m announced in May last year. Though if you look at Silicon Valley startups, many of those have eye-watering burn rates.

While Rutter didn’t disclose a break-even date to Forbes, he stated the burn rate is sustainable into 2020.

Why open the kimono?

Rutter is an awkward position. He responded to the rumors in a blog post, but providing data to Forbes will be seen as more independent and reach a wider audience. On the other hand, it may make him appear like he’s on his back foot and that the Fortune article is doing damage.

His motivation could be as simple as putting the record straight. The Fortune speculation could slow down the revenue pipeline even more, and make attracting new staff harder.

Given R3’s recent $15m additional funding, one of the most likely drivers is to make sure the company’s valuation maintains an upwards trajectory.


There’s another side to all this. R3 is deep in the banking sector which is known for its gamesmanship. For the Fortune writer, this was a decent story, so there’s no fault implied there. But what were the motivations of his sources? Was it purely a couple of disgruntled former employees and some crypto-anarchists?

Whatever the motivations, it may have put R3 on the radar as an acquisition candidate.

Takeover speculation

Rutter’s comments should dispel concerns about burn rate. But even before his disclosures, the survival of R3 should not have been in doubt because one of the Fortune comments sounded at least partially likely.

The magazine quoted a former employee as saying “Executives were joking about getting bought out, saying ‘Look for the vultures in Q1 of next year, and predicting Oracle or IBM or Microsoft or Accenture will arrive with a buyout offer.” The employee’s addition that “it will be a fire sale” is more questionable.

Being approached with takeover offers by large companies is a good sign, not a contrary indicator. It doesn’t mean you have to accept the offers. And in fact, buying out R3 could be a little tricky. After all, they have at least 43 shareholders most of whom are banks.

The Fortune article’s placement of Oracle at the top of the list was curious because if Ledger Insights had to give a metaphor for R3, it would be a precocious Oracle.

Acquirer candidates

When you start considering potential acquirers it get’s interesting. Of the four already mentioned, the only one that R3 doesn’t already have a formal relationship with is IBM, which is one of their main competitors.

And there’s no lack of overlap there. The head of blockchain for Financial Services at IBM is Jesse Lund who was previously at Wells Fargo and as a result was on the R3 CEV executive steering committee. That’s not to mention R3’s CTO Richard Gendal Brown who was a long time IBMer.

It was easy to produce a shortlist of several other companies who potentially could be interested: Bloomberg, Thomson Reuters, Finastra, FIS Global, IHT Markit, Google, Amazon, HPE, SAP, Bain & Co, Intel, Infosys, Cap Gemini, LG, NEC, and Tata.

R3 has public relationships with all but three of these companies. The exceptions are Bloomberg, FIS Global, and IHT Markit. The latter is currently developing a blockchain service using competitor JP Morgan’s Quorum.

It would be surprising if R3 didn’t get approached way before Q1 next year. Lots of deep-pocketed potential acquirers and a desirable target does not make for a firesale.

Besides, R3 doesn’t have to sell. Every one of those potential acquirers is another possible investor.

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