This article was published in the September/October 2018 issue of Middle Market Growth, a weekly newsletter published by Association of Corporate Growth (ACG). It is reprinted here with permission.
Many believe blockchain will be part of the next major technology revolution. There continues to be interest in initial coin offerings, which began making headlines in 2017, but many technologists are focusing on blockchain applications that do not involve cryptocurrency at all. This trend is creating opportunities for startups and their financing sources—including a number of blockchain-focused venture capital funds—as well as individuals seeking to reinvest cryptocurrency gains.
While M&A deal flow remains relatively low in this sector, it is expected to increase, especially among corporate strategic acquirers seeking to obtain blockchain innovation and expertise rather than develop it in house.
Energy applications for blockchain technology are one active area of growth. Although adoption in the sector lags behind the financial services industry, it is estimated that globally there are more than 122 companies and 70-plus active projects focused on energy blockchain applications. That's nearly twice the number in January 2017, according to Greentech Media. Those figures do not include traditional utilities, distribution system operators or transmission system operators, which may also be working to implement blockchain projects.
Of those 122 organizations, the majority work in the transactive energy space, where they use blockchain technology to facilitate peer-to-peer transactions and decentralized energy exchanges. Other companies provide project development, middleware and other services to connect blockchain platforms to applications.
Investor interest in energy-focused blockchain companies has increased dramatically. From mid-2017 to early 2018, blockchain companies related to the energy industry raised $322 million through traditional venture capital as well as ICOs. To date, the largest ICO was held by Envion, which raised more than $100 million in the first quarter of 2018 to fund the development of its modular data centers that plug directly into renewable energy power plants.
Further adoption of blockchain technology is subject to a number of challenges. The technology is still in its early stages and in the energy industry, functional commercial-scale applications are limited. Most of the activity has occurred at the startup level. Most larger, more mature companies are still in the process of identifying whether blockchain technology makes sense for their business models and, if so, where.
When blockchain technology is eventually adopted at the enterprise scale, there will inevitably be interoperability challenges, both between existing systems and the proposed blockchain solution, and between blockchain databases themselves. Various industry-based consortia have emerged to help develop standards to help facilitate enterprise adoption.
Finally, regulators tend to move slowly, and their stance on blockchain is still unknown. It's unclear how they'll view replacing paper-based records, or whether they'll see certain actions such as participating in a blockchain standards consortium or developing a permissioned blockchain—as running afoul of competition laws.
As the energy sector pushes to digitize further, it seems likely that blockchain technology adoption will continue. And as investor interest and startups fuel blockchain innovation, some of these startups will likely become acquisition targets, especially for large strategic acquirers.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.