What should startups consider before implementing blockchain technology?

Tony Gu, Founding Partner of NGC

As blockchain technology continues to attract a wide range of organisations from long-standing enterprises and multinational corporations to ambitious startups, business leaders need to be savvy and do their research before they dive in and make a splash in the unknown waters of this emerging technology.

It is important to note that similar concerns and questions were being asked by entrepreneurs 20 years ago: “What should startups consider before implementing internet technology?” Or 10 years ago: “How can I best implement mobile technology?” Regardless of the era or the emerging tech, the answer to all of these questions remains the same: It entirely depends on the business strategy of each startup.

However, this can bring additional questions to the fore as the word “strategy” tends to be thrown around and as a result, may cause confusion. Here we define it in a simple and meaningful way in the context of “where to play” and “how to win.”

    Where to Play and How to Win Using Blockchain

A startup needs to remain agile as it adapts to the changing environment by constantly rethinking and reminding itself of where its business focus should be. Blockchain as a disruptive technology is bringing many changes to the world, and it has created many opportunities for established businesses, entrepreneurs, and consumers alike.

Despite this, startups should consider their business objectives and position in the market before implementing blockchain as just another technology. It’s important to look at how blockchain can actually help you achieve your business goals, and we’ve found that startups find the most success while addressing one of the following three scenarios.

1. Tackling Business Problems with Blockchain

This refers to a startup’s existing business, including its customers, suppliers, partners, and competitors. The startup needs to figure out how blockchain technology can help the business better acquire customers, grow revenue, and reduce cost.

For example, if a gaming company is looking to improve customer retention and loyalty, it might consider putting in-game virtual items (e.g. special cards or powerful weapons) onto blockchain so that the items can be transferred to other games or future versions of the game. This is exactly what the leading game company Netease did for its latest blockbuster games, “Justice Online” and so far, the company has seen great success.

Another example could be a restaurant booking platform that uses blockchain to tokenise its loyalty points and make them interchangeable with Bitcoin, or other tokens, similar to loyalty points from other merchants. This flexibility brings extra value to their customers at little cost while also bringing an edge to the business.

2. Tackling Industry Problems with Blockchain
This is a natural extension from the above discussion. Startups should take a step back, look at the industry value chain (including upstream suppliers, downstream customers, and key players on the ground) and think about how blockchain technologies might bring value to the table and affect each stakeholder. As we all know, blockchain allows unrelated parties to build trust and transact with each other without any central authority. This makes it possible to define business rules and incentives that are different from the existing industry landscape. These new sets of rules, if designed correctly to fix the burning issues at hand, could disrupt the whole industry.

For example, we all know that big internet companies like Facebook and Google are using their customers’ personal data to generate huge profits. These internet giants are so powerful that no other businesses can compete with them, and no individual customers could request different treatment of their own personal data.

Startups — and I have actually come across quite a few of them recently — could use blockchain and smart contracts to define a new set of rules so that the personal data of consumers is owned and controlled by the individual. Upon certain incentives, consumers can choose to share with advertising companies. Will this solve the industry problem? We won’t know until it’s happened. But it at least gives startups an opportunity to challenge the big guys, which is otherwise not possible.

A local start-up in Singapore, called Spokkz, is another example of this. The company tries to solve the issues of the content industry using blockchain technology. Spokkz’s parent company, Spool, already has 60 million users from 180 countries. As seasoned industry experts, the Spokkz team thinks that the middlemen of the industry (e.g. large studios and distribution platforms) are becoming too powerful squeezing both producers and viewers. The company has decided to use blockchain to decentralize the process of content funding and distribution, which is otherwise centralized and dominated by only a handful of key players. Millions of video viewers, myself included, will now be rewarded according to their contribution.

3. Tackling World Problems with Blockchain      

Some of the most of famous blockchain projects are intended to address global problems, meaning they would fall into this category. Bitcoin is one good example. Using blockchain technology, Satoshi addresses at least two problems that exist in the global banking system: an ever-increasing money supply and inefficient cross-border money transfer and settlement. Ethereum, NEO, and EOS are another set of good examples. Each uses blockchain and smart contract technologies to solve the problem of global resource allocation, coordination, and value exchange, which have been very difficult to achieve due to political, cultural, and regulatory barriers.

Although we have seen limited success in terms of industry adoptions (aside from fundraising and payments), it is an amazing achievement that so many startup projects, which have only existed for a handful of years, already have tens of millions of believers globally.

From an investors’ point of view, we characterise this group of startups as infrastructure projects, which are the essential “building blocks” for the larger decentralized economy. Examples of infrastructure projects, or the “building blocks” that are laying the groundwork for projects to come, include Ontology, Zilliqa, Oasis, Algorand, Bluzelle, MultiVAC, and Block Cloud. While they all individually strive to solve certain challenges of blockchain technology, together, they are working towards a new economy: one that has a solid and robust infrastructure that can be built and ran on top of it as the industry progresses.

However, it is getting more and more difficult for startups to get involved in this space. Due to the network effect and billions of dollars of capital investment, the earlier waves of projects are quickly building up the entry barriers, and latecomers will face fierce competition. Unless a start-up has unique competitive advantages or resources, they need to think twice before committing time and resources trying to break into this space.

    Funding: The Ultimate Competitive Advantage

Having gone through the above analysis, startups might have a few options or ideas regarding how to leverage blockchain technology to build and enhance their business. However, it is still critical to look internally for unique competitive advantages that can’t be easily copied by potential competitors. More often than not, we see the competitive advantages of startups coming from two places.

First is the team. A strong team has a solid background, proven track record, unique knowledge, and know-how experience, and/or industry resources. Strong teams have a higher chance of getting ahead than others.

The second is timing. Most blockchain projects are building and contributing to an overarching ecosystem, thus the network effect will grow exponentially over time. The early movers in the blockchain industry have had an advantage — one that is longer lasting than most other industries. We encourage capable start-ups to embrace blockchain technology sooner, rather than wait on the side lane and miss the party.

The Bigger Picture

NGC has invested in more than 100 projects across many different industries that are relevant to blockchain, however, we believe the industry is still in its early stage. Dedicated efforts will need to take place addressing blockchain’s limitations in order for the technology to make its way into the mainstream. This includes improving interoperability between blockchains, transaction processing speeds, and protocol security, as well as eliminating some of the high fees associated with initially implementing blockchain.

While it will take some time before we begin to see mass adoption, even then we should expect that the adoption of blockchain technologies in various industries will not occur in sync. Industries with digital links, or in need of a digital overhaul, will be the early adopters, such as the financial services industry (including banking, financing, payments, and exchanges) gaming, online content streaming, online travel, and so on. Startups in these verticals are more likely to succeed in both the implementation and subsequent adoption of blockchain technology.