I’m expecting to see a series of relatively high-profile acquisitions in the crypto and blockchain industry over the next 12 to 18 months driven primarily by the rise of Cash-Flush Business-Light entities (CFBLs).
What are CFBLs?
These CFBLs are entities whose primary cash flow generation has been from the sale of an inventory of tokens. CFBLs can be structured in a variety of ways (non-profit foundation, for-profit corporation, etc) and these differences affect the organization’s objectives but not necessarily their appetite for acquisitions.
Foundations, for example, might be less focused on adding revenue producing business lines and instead more focused on increasing manpower to support the network and/or on community signaling.
Incentives Matter: Why CFBLs will Acquire
As token inventory of CFBLs diminishes, incentives suggest that these entities will leverage their cash positions to acquire companies in order to help fulfill their objectives of building a functioning network with community traction and real-world use-cases.
There’s several incentives at play that will drive a CFBL-led acquisition spree:
· Cost is low: The actual economic cost of acquisitions to CFBLs can be astonishingly low due to their cash-rich treasury, token reserve inventory, and ability to use tokens as acquisition capital.
· Benefit is huge: acquisitions offer CFBLs a quick way to acquire manpower and revenue lines, and to drive strong community signaling.
· Organic growth is hard (“Buy vs. Build”): For CFBLs, the alternative to buying (acquisitions) is to build. Building is particularly hard in an industry with a talent scarcity and a rapidly shifting competitive and regulatory landscape. This increased risk to building pushes the incentives toward “buy” (acquire).
There’s a lot more to dive into there, so let’s take a closer look….
CFBL Cost-Benefit of Acquisitions
This is where things get particularly interesting so let’s jump straight into a hypothetical example to highlight the dynamics at play: Let’s consider a CFBL whose objective is to support a network that is currently valued at $10B. Let’s say this CFBL raised $3B cash in a token sale and also holds 10% of the network’s tokens on its balance sheet.
To sum up, we have a CFBL with $3B in cash and $1B in tokens on the balance sheet whose objective is to support a network currently valued at $10B.
Now let’s say this CFBL is considering a “big” $100M acquisition that will grab headlines. If so, there’s a considerable chance that such news would increase the value of a native token by 10%. If so, the acquisition is essentially “free” to the CFBL: they pay $100M cash off the balance sheet but, in this example, the value of the token reserve increased by $100M — perfectly offsetting the decrease in cash. Even better, the CFBL now “up” $100M of newly acquired assets on the balance sheet.
Even if news of the acquisition had a more modest effect on price to the tune of +5%, the acquisition is still highly advantageous: The CFBL would have added $100M of assets to the balance sheet, spent $100M in cash, and seen a $50M gain in the value of token reserves. Assuming the assets acquired are worth at least half of what the CFBL paid for them, the acquisition is a no-brainer.
The effect is even greater if we consider the opportunity for CFBLs to use their token inventory as acquisition capital (the way traditional companies use their equity as acquisition capital).
Organic growth is difficult
Aside from the obvious cost-benefit advantages, acquisitions also help solve a fundamental challenge for CFBLs: Organic growth is particularly challenging in the crypto industry where talented developers are scarce and there’s a noisy competitive landscape that diverts attention.
Acquiring a company’s resources and business lines and incentivizing newly acquired talent with vesting equity and/or tokens is one way to grow your team and resources quickly in an otherwise challenging market. Considering the torrid pace at which the crypto industry is evolving, this time savings can be critical to success.
Ultimately, given the incentives at play I’m expecting to see an acquisition spree from token-related entities that are Cash-Flush Business-light (CFBL) buying established companies that have manpower and/or real business lines.
In many ways, this is an interesting but odd realization of “the cloud” absorbing “the Earth”: Entities tied to what are effectively supra-sovereign crypto networks acquiring jurisdictionally-enforced ownership of “meat-space” companies.
Lastly, given the cost-benefit dynamics above, we should expect that CFBLs will be the least price-sensitive buyers in the market and therefore will have a high success rate in acquisition attempts (CFBLs are likely willing to pay higher valuations than other potential buyers).