We can help. Perkins Coie has identified 34 factors in 5 overarching categories that shape the outcomes of successful enterprise consortia engagement efforts through its analysis of 71 consortia across 12 industries.
In April 2019, Forbes published an article detailing the ways that large companies, including some of the best-known companies in tech, finance, manufacturing and retail, are forming or joining blockchain consortia or other proprietary blockchain projects. The Forbes article reflects an uptick in enterprise engagement with blockchain, a trend Perkins Coie’s blockchain group has also seen in recent months. Specifically, across industries, companies are coming together to form and participate in blockchain consortia, which allows them to address common issues and challenges—in their industry or with each other—by leveraging the tremendous potential of blockchain and distributed ledger technology (“DLT”). Whether to help address business or operational challenges, or unlock new business models and opportunities, DLT is fueling a new collaborative trend among enterprises. Blockchain consortia are emerging as the vehicle enterprises are using to drive toward common goals and desired objectives.
The Current Enterprise Trend
Joining or forming a consortium is not a new concept, especially in the blockchain community. However, we’ve observed a recent trend in which consortia are being formed not to build new private blockchain protocols, but rather to collaborate in developing enterprise-hardened business and operational solutions using (or based on) existing blockchain protocols, whether public or private, such as Ethereum, Hyperledger Fabric or Ripple. These consortia are seeking to leverage DLT to solve common operational problems or unlock new opportunities, not to reinvent the blockchain protocol wheel.
Blockchain is an inherently collaborative technology, where collaboration and effective interaction among constituents is key to success and the network effect is a core driver of value, in that the value of the platform increases with the increase in participation by constituents. Given the underpinning of the technology, collaborative innovation is necessary for a community of developers, participants and others to create the layers of functionality that interact with one another to produce the optimal and desired experience or use case.
For these reasons, consortia have emerged as potentially transformative tools for companies and other organizations that are seeking to explore or adopt blockchain or DLT solutions. They allow companies and organizations to leverage valuable technological and business insights, intra- or cross-industry connections, and policy and public advocacy resources. They also provide a forum for devising interoperability standards that can facilitate more seamless adoption of DLT solutions within an industry or sector. Just as importantly, consortia allow their members to share the burdens of development and experimentation across the membership, providing greater efficiency at a lower cost.
Navigating the Factors that Shape the Outcomes of Successful Blockchain Consortia Engagements
Perkins Coie’s blockchain group has reviewed many consortia across a dozen industries, encompassing different member populations within an individual industry or across industries and containing members from a single country, a geographic region or worldwide. Based on this analysis, we have identified several specific interdependent and complex factors that play vital roles in shaping the outcome of the efforts around forming or participating in a consortium and contributing to the success or failure of blockchain consortia. Specifically, we have identified thirty-four distinct factors, which we have organized into five buckets. Some of these factors are straightforward, but the majority present several possible paths, the optimal one of which will be dependent on the specific goals of the consortium, or are themselves dependent on other factors, such that decisions among multiple factors must be coherent and coordinated. Such factors include legal structure, governance, and intellectual property contribution and distribution. We are happy to help clients navigate these many factors and their legal and regulatory implications.
We’ve organized and analyzed each of the thirty-four factors in a report, laid out in the following format. Below is a sample of our analysis of the factor addressing a consortium’s economic and financial model:
Consortium Economic Model
|Description:||Consortium economics and financial costs depend on various factors, including membership composition, business objective, industry and technology implementation.
Among the most common methods of consortia financing is the use of membership fees. The use of fee proceeds varies by consortia, but fees often cover administrative, maintenance and ongoing development costs. Consortia that operate in a cross-disciplinary industry or that rely on a broad membership base may seek graduated membership financing, where small/non-profit enterprises and individuals pay lower membership dues than larger enterprises.
Alternative financing models include founding member financing, equity financing, debt financing, token financing or a combination of methods. Founding member financing is more common when a single enterprise or organization leads the consortium and may be in a unique position to profit from operations. Some consortia rely on venture capital financing, using convertible debt instruments (e.g., SAFEs) to fund operations.
A small subset of consortia has products that are monetized through licensing or user fees as part of their overall economic model. These consortia often provide closed-source blockchain products within an industry or business vertical.
- A consortium cannot operate without funding or a plan for how to deploy those funds.
- If a consortium cannot raise funds, raises funds from the wrong sources or spends funds in an inefficient way, it will be unable to achieve its business objective and it can expose the consortium, its leadership and its members to legal liability.
- A consortium’s approach to its economic model will directly or indirectly influence almost every facet of a consortium’s design and operations, and therefore will affect many other consortium factors. The economic model will most directly impact the following factors, however:
- Formation and Legal Structure: The choice of legal structure—for example, a joint venture or a nonprofit corporation—will dictate different approaches to both raising and spending funds.
- Operational Management: A consortium cannot manage operations without adequate funding and a process for deploying that funding.
- Information Auditing: A consortium’s financial model will dictate its audit and recordkeeping needs and requirements.
Findings & Market Observations: Many consortia are member-financed via annual membership dues. Some consortia have graduated membership fee structures based on various criteria (often the size of the enterprise seeking membership or whether the member is a for-profit or nonprofit organization). Other consortia are funded by initial founding members with special participatory rights. Subsequent members in founder-funded consortia often have different or fewer rights than the founders. Some consortia are government-financed or structured as nonprofit organizations and may be financed by charitable giving. Government-financed consortia in the United States are typically financed in the form of grants (e.g., Consortium A). Some international consortia are financed through direct participation with governmental entities (e.g., Consortium B, which is financed in part by Government Z).
Recommendations: Consider the best fee structure to serve the business objective of the consortium. If the consortium desires to attract a broad membership base, the consortium should consider a tiered or graduated membership fee structure with fee categories targeted to attract the different types of participants required for its success. Consortia organized as legal entities may benefit from founder financing to cover startup and organizational expenses but must also consider how new membership onboarding will occur and how financing will be sustained over time.
Issues to Consider When Assessing This Factor: Consortia funding models will depend on various factors, but the choice of model should be designed to support the objectives of the consortium. Legal structure, governance structure, member authority/control, and member contributions and obligations will also significantly impact funding (monetary or in-kind contributions) and risk allocation. There also may be tax benefits (or burdens) to establishing a separate legal entity for the operation of the consortium.
Tax and revenue-sharing considerations, often driven by the structure of the consortium, also play an important role. With respect to taxes, members in a contractual consortium may receive fewer tax benefits compared to members in an incorporated consortium, and separately created legal entities may be able to take advantage of tax deferral and other strategies not available to contractual consortia. With respect to revenue sharing, contractual revenue-sharing agreements among members can create inefficiencies, particularly when rights, obligations and liabilities are unequally distributed between new and old members. Other considerations for revenue sharing include ease of administration, transparency, triggering events, obligations, indemnification, transferability and exclusivity.
An often-overlooked economic factor is the expectation of contributions of time, personnel and technology from the consortium members. Many consortia operate with a skeletal, largely administrative staff, and expect members to contribute significant time, resources and intellectual property to do the work of the consortium through participation in working groups and project teams. In such consortia, the economics of the membership fee may be dwarfed by the value of these member contributions. This can raise concerns of free-riders—members that pay their fees and gain the benefits of membership, but do not participate in the operations of the consortium.
Examples: Consortium C is financed by membership fees and has adopted a graduated membership fee structure based on organization size. Consortium C seeks to represent a broad swath of businesses in its working groups by allowing some smaller enterprises to participate free of cost, while larger enterprises (X,XXX or more employees) may owe as much as $XX,000 in annual fees. Other broad member-financed consortia include Consortium D, Consortium E and Consortium F.
Consortium G is financed by multiple means. Consortium G has membership fees, received venture financing and received startup capital from its founding members. Consortium G also offers consulting services and enterprise products, although it is unclear whether these services and products are or will become revenue-generating. It is also unclear how Consortium G’s products and services are or will be priced and whether product and service revenue will eventually reduce or replace membership fees. Other consortia with similar products and services include Consortium H and Consortium I.
Some consortia are financed by government grants. Consortium J is the recipient of a $X million X-year grant awarded in 20XX. Consortium J also has received donations from various enterprises.
Some consortia organize as tax-exempt entities within their jurisdiction. Consortium K is a tax-exempt 501(c)(6) organization. Consortium L is also a tax-exempt organization.
Trends and Observations: The member fee model currently dominates the consortia economic model factor. Some consortia also seek venture financing or government grants instead of, or as a supplement to, membership fees. Operational costs vary depending on consortia objectives, products and services. For consortia that have developed proprietary blockchain or DLT solutions, it is unclear whether these consortia have realized profits from their operations.
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An enterprise considering whether to form or join a blockchain consortium cannot merely go through the factors one by one looking for their presence or absence; rather, only through a thorough and comprehensive analysis of the factors as a whole can an enterprise gain confidence in the chances of success of a specific consortium project. We have assisted many clients in establishing or evaluating blockchain consortia, and with our data-based analysis and our evolving methodology for guiding our clients in assessing their journeys with consortia, we help clients balance the delicate business and political issues involved in bringing diverse companies together to form a consortium while allowing them to remain focused on the purpose and benefits associated with such efforts.
Collaboration among industry players as they explore blockchain and DLT solutions can yield great successes, but also can lead to failures unless a careful and comprehensive approach and methodology is used to consider the complex and interwoven factors that could determine the fate of such effort. While blockchain and DLT technology can fuel success and industry transformation, the lack of thoughtful planning and execution can lead to wasted investment and multitudes of challenges to all involved. Perkins Coie’s blockchain group stands at the intersection of these complex technology, business and legal issues with the acumen to help guide our clients and partners. Please contact the authors of this post if you would like to learn more.