- Cryptocurrency and blockchain start-ups are winding down as the market mania fades, making their highly skilled engineers free agents.
- Facebook recently hired a group from the blockchain start-up Chainspace, which RBC analyst Zachary Schwartzman says was a way to improve the company's crypto expertise.
- There’s likely to be more similar “acqui-hires” as start-ups consolidate and tech giants dip their toes into the blockchain space, JMP Securities’ Satya Bajpai says.
The drop in cryptocurrency prices is meaning job losses for some, but it may carve out an ideal hiring opportunity for tech giants.
Some blockchain start-ups, regardless of having talented teams of engineers, haven't been able to prove a use case and are struggling to fund operations as the price of cryptocurrencies nosedives. Employees are slowly becoming free agents, which is good news for companies like Facebook.
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 internet analyst Zachary Schwartzman 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 Schwartzman. That shift "could be a long term risk to Facebook's underlying business model," he said.
Schwartzman 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," Schwartzman 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 Bajpai, 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.
Bajpai 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," Bajpai said. "If you don't do that, it's hard to go back to your investors and ask for more."