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Plunge in crypto sets stage for Facebook and other tech giants to hire blockchain experts

CNBC CNBC
Kate Rooney | @Kr00ney 6 months ago
Plunge in crypto sets stage for Facebook and other tech giants to hire blockchain experts

The social media giant recently scooped up employees from start-up Chainspace, according to a report by Cheddar. Facebook confirmed to CNBC that it had hired a handful of employees but said it did not buy the company or its technology.

Chainspace is a crypto startup founded by PhD researchers from University College of London. Two of these founders are now listed as Facebook employees on LinkedIn. According to its website, the start-up is focused on "giving people ownership of their personal data" through a project called "DECODE."

In a note to clients last week, RBC analyst Mark Mahaney highlighted blockchain as a threat to Facebook and other major tech companies. The Internet is still at the "embryonic stages of a potential massive paradigm shift" to computing on public blockchains, according to Mahaney. That shift "could be a long term risk to Facebook's underlying business model," he said.

Mahaney categorized Facebook's move as an "acqui-hire" — a popular Silicon Valley term for when a company acquires a company only to recruit its employees.

"On the surface, it may appear that Facebook purposefully hired the technical team related to DECODE. But we don't believe this was the case," Mahaney said. "Our view is that this was simply an acqui-hire to expand Facebook's internal crypto team's expertise."

Facebook is on a growing list of tech companies testing out the blockchain space, with former PayPal executive David Marcus leading its charge. Amazon, IBM, Microsoft and J. P. Morgan are among others looking at use cases for the technology, which supporters call more transparent and more secure than existing data systems.

But like the internet, the best way to monetize it might not be obvious immediately. "Acqui-hiring" gives tech giants a way to quickly get blockchain experts that are already working together to find that use case, according to Satya Bajpai, head of blockchain and Digital Assets Investment Banking at JMP Securities.

"It will take some time," said Baijpai, who advises blockchain companies on early stage M&A. "But as the technology matures and becomes more relevant to more customers, you'll see a snowball effect with more public deals and partnerships."

Engineers and other entrepreneurs flocked to the blockchain and cryptocurrency space as prices hit record highs at the end of 2017. The flagship cryptocurrency bitcoin rallied to almost $20,000 at the end of that year.

There was plenty of venture capital money to get these companies off the ground in 2018. More than $2.6 billion was spent on deals for 301 companies last year, according to Pitchbook. That was more than three times the total blockchain and crypto deals completed 2017.

But the clock may have run out for venture funding, according to Bajpai. Bitcoin's price nosedived 80 percent since then.

Even at the peak of their fundraising, many of these companies still hadn't launched a real product. In the case of EOS, the company raked in $4 billion from an initial coin offering without having a live product. Those coins for the most part have struggled alongside bitcoin. The industry's market capitalization is around $121 billion, down from more than $800 billion at the peak.

Baijpai likened it to the dot-com years. Start-ups that had a convincing idea were able to raise venture capital money. But those that couldn't prove sustainability were shaken out in the process.

"In order for them to raise more capital, they need to show progress on customer adoption and revenue, which is where a lot of these companies fall short," Baijpai said. "If you don't do that, it's hard to go back to your investors and ask for more."

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