Through the front door of R3's New York City offices.
Michael del CastilloIt’s easy to hate on R3. The blockchain startup founded in 2013 to reimagine the way banks connect has raised a total of $122 million venture capital, with over 200 members.
Contrary to some of the crypto-anarchist visions of overthrowing traditional financial institutions using technology similar to the blockchain thatpowers bitcoin, David Rutter, R3’s founder and CEO, set out to change the system from within.
Leveraging a deep Rolodex of contacts from his time as CEO of ICAP Electronic Broking LLC, Rutter quickly gathered a consortium of global competitors, each with something to lose from blockchain’s promise of a world without banks, and each with some something to gain if they worked together.
In a financial industry of entrenched interests and upstart underdogs, Rutter is neither David nor Goliath—which, it turns out, isa great way to make enemies.
Weeks before the consortium,which includesCredit Suisse, BBVA and State Street, was scheduled to launch the enterprise version of its Corda distributed ledger platform, a number of anonymous sources werereportedas claiming the company was running out of money and would soon be on the auction block.
Instead of celebrating the imminent launch of Corda Enterprise, a pay version oftheopen-source software designed to cutout middlemen in a wide range of business processes, Rutter went into damage control.
He composed an email to his 180 employees reassuring them that their jobs were safe, and a previously scheduled interview withForbesturned into an unprecedented handing over of financial documents, ranging from revenue forecasts for 2018 that fall short of targets—but not nearly by as much as previously reported—to the salary of Rutter himself.
The new information does more than paint a picture of the inner-workings of one of the most heavily funded startups in the space; it offersa peek into the difficult—and expensive—fight to change the way businesses do business.
“There’s too many variables in the equation to put my hand on a Bible right now and say this is what’s going to happen,” said Rutter as he shuffled through a stack of papersduring an interview from R3’s New York offices. “But what I can say, very importantly, is that we are performing to plan.”
At least, in part.
A budget document given toForbesshows that R3 actually failed to meet its revenue goals through April 2018 by 13%. According to Rutter, the company has targeted slightly more than $20 million in revenue for the year, and based on projects in the pipeline, he expects to make up some of that lost ground,missingthat target by about 10%. While not an ideal place to be,a previous report based on anonymous sources had pegged the missed financial target at “10x” less than the goal, which would have been significantly worse.
Further, those losses were partially offset last year when, Rutter says, the company exceeded its target revenue by 11%, though he declined to share the actual end-of-year numbers.
Also seen in the April 2018 budget document, the company spent approximately 60.3% of its costs on compensation and 39.6% on organizational costs, with a burn rate that Rutter believes is sustainable into 2020. In spite of the 13% loss from these costs, the actual amount spent is less than the budgeted loss expected and approved by the board of directors in December.
Also of note on the Aprilbudget document, R3 showed 169 employees, a number that has grown to more than 180 today. The salary of one of those employees has proved particularly controversial: David Rutter. In responseto allegations from one of those previously mentioned anonymous employees, who claimed Rutter’s salary was “outrageous,” R3 took the unusual step of providingForbeswith part of the results of a compensation analysis on key R3 executives.
Assembled by a compensation benchmarking firm, the report showed thatout of42 CEOs at financial technology firms of a similar size as R3, Rutter's pay wasamongthe lowest. Then, following a board-approved pay increase of 75%, the report shows Rutter entered a pay grade in the bottom 25 percent of his peers.
Then there’s what Rutter calls “the $200 million question." In spite of having raised what was at the time the largest fundraising round ever in blockchain, early ambitions under a different investment strategy were even larger.
Until that time, Rutter says, he was the sole owner of the company, via approximately $2 million he’d invested through R7, a “family company” split into seven parts between Rutter and his relatives, and a personal, direct investment.
In multiple media reports, R3 has been faulted for being unable to closethat original $200 million deal, and instead settlingfor $107 million in its initial Series A. So, seeking to shed a different light on those early days, R3 released two additionaldocuments to Forbes, “So we can kill this once and for all," said Rutter. R3 managing director Charley Cooperdescribed the documentsas comingfrom “the first time the company discussed a Series A in any formal setting."
According toRutterand Cooper,the $200 million investment prospect was first pitched in May 2016 to 42 founding banks, who were in turn offered 90% ofanR3 subsidiary. In this early vision for the company, the funds would in turn pay for both the subsidiary and the rest the company that R3 owned.
“The banks looked right through it and said no way. ‘We want a piece of the parent company R3 LLC,’”Rutter recalled. “So that got defeated on about my second call and was forever laid to rest.” Except, that is, among some members of the press, whostill seethe number as evidence of a shortcoming in the company's ability to raise capital.
So how much of that $122 million is really left, and is R3actuallyheading for an auction block? Importantly, Rutter acknowledged that R3 is not yet profitable but declined to give the precise burn rate or the an exact date when the company would need to become profitable.
However, based on a $98.2 million capital infusion in May 2017 and $5 million each confirmed for the first time for this report from market solutions firm CLS,Singapore real estate firm OUE and Japanese IT services provider TIS, further deductions can be made. Speaking to ForbesRutter said the firm has "funding under almost any scenario through next year.” Taken together, the recent capital infusions and Rutter's statement show theaverage burn rate could be has high as $3.65 million if the money runs out in January 2020 and as low as $2.63 million per month if the money runs out at the end of that year.
“We are burning money every month,” Rutter acknowledged. “We watch cash very closely, our board is aware of it, and we’re running according to plan. So if we execute well and our demand is exactly what we think it is, then we may never raise money again.”
To stretch out those resources though, and to turn a profit before additional capital might need to be raised, R3 is among several competing platforms racing to launch their enterprise solution for broader public use. While Corda Enterprise is scheduled to go live on July 11, blockchain consortium Hyperledgerhas plansto launch at least three competing enterprise grade solutions this year, and the Enterprise Ethereum Alliance last month released details about its own client specification.
In that race to adoption and profitability, R3 scored a victory earlier this week when blockchain insurance consortium B3i, with members including AIA, AIG, Allianz, Liberty Mutual Insurance and Swiss Re, announced it had pivoted away from using Hyperledger Fabric and shifted to Corda. However, the project still isn’t generating any revenue, according to Cooper, and is in just the earliest stages of transitioning.
In total, Rutter says32 commercial negotiations are under way, with more than 100 others being built using the open-source version of Corda.In what Cooper believes is a promising sign, the number of Corda developers actively committing to the code base hasincreasedover the past year based on Github data, while those on Hyperledger Fabric havefallenbyalmost half and those using ethereum-based Quorum, originally developed by JPMorgan, have almostceasedto exist.
But even with what Rutter calls a “massive pipeline” and a seeming increase in interest among certain developers, he says, the negotiating cycle for enterprise software is longer than retail applications. As a result, there’s no guarantee those deals will close anytime soon.
“If there’s more demand we’ll have to raise money,” hesaid, concluding:
If there’s less demand we’ll cut expenses.
Editor's Note: This article was amended to include previously unconfirmed investments.
