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19/01/2019
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R3 fights back amid media firestorm » Brave New Coin

Speaking under the condition of anonymity, ex R3 employees are claiming the company is likely to run out of funds by the first quarter of 2019. Additionally, sources have laid out a range of other claims around lavish spending and misrepresentation, which they say will eventually be the undoing of the firm.

What is R3?

R3 is a software company devoted to developing blockchain-based solutions designed to operate optimally in a commercial context. While its solutions are designed with a focus on the financial sector, the firm claims they are applicable to a wide array of industries. The consortium burst on to the scene in 2015 with significant backing from a number of notable names in the financial sector. With nine leading banks, including Barclays, J.P. Morgan, and UBS onboard at its launch, the firm continued to amass supporters peaking at over 70 members.

Its most high profile solution so far is Corda. Some of the code is available through its open-source publishing on Github, however, there is an enterprise version with more developed features. Corda “records, manages and executes institutions’ financial agreements in perfect synchrony with their peers, creating a world of frictionless commerce,” R3 says.

In addition to its prestigious array of backers, the R3 consortium managed to raise significant investment funds, allegedly bringing in over 107 million in its first financing tranche. Accounting firm Ernst & Young has valued the company at between $150 and $250 million.

While the R3 project was initially met with positive accolades in a scantly populated sector, it is no longer the only game in town in the blockchain-as-a-service marketplace and now competes with other high-profile providers like IBM’s Hyperledger Project and the Ethereum Enterprise Alliance 

The allegations

Speaking anonymously to Fortune, two former employees of R3 are giving new insight into the inner workings of the consortium. To begin with, they allege that the firm has misrepresented the amounts it raised during its funding rounds. The duo claims that the firm included previous payments it had received from its partners in the estimation. It was revealed that R3 termed the consulting fees as equity as part of its partner agreements. Interestingly, the consortium conceded that the actual figure was around $98.2 million, almost $10 million off from its original sum.

Moreover, the ex-employees are stating that the firm is not bringing in as much revenue as it had hoped to. Using the terms “10X short” and “laughably off”, the duo claim the firm may not survive beyond the first quarter of 2019. They further intimated that these concerns are widespread across the company, with people hoping for a buyout from other tech giants. “Executives were joking about getting bought out, saying ‘Look for the vultures in Q1 of next year’, and predicting Oracle or IBM or Microsoft or Accenture will arrive with a buyout offer. It will be a fire sale.”

R3 recently raised $15 million as part of its third funding tranche. However, the former employees are claiming this is part of a final attempt to raise enough funds to keep the company afloat.

The company is pushing back, however, describing the Fortune article as “negative and inaccurate” and R3 CEO David E. Rutter has been front and center refuting the claims, saying, “Firstly, R3 is in a very strong financial position. We have the widest and largest funding base in the enterprise blockchain space, having raised more than USD120 million from more than 45 institutions and brought in over USD 20 million in revenue.”

Attempting to explain the fairly speedy cash burn, the duo hinted at the company’s administrative structure. Alluding to the large number of people employed by the company, the various offices across the world, travel costs as well as the salaries of top executives, they stated: “Just look at the public information. You see their hiring plan and the number of people on their website. There’s also expensive real estate in London and New York.”

Rutter also hit back against the allegations of careless expenditure. He explained that the company is keeping a tight handle on spending. “We’ve always been very sensitive of operating as cost-efficiently as possible, and in fact, our average operating expenses per employee has declined each year since launch. We pride ourselves on continuously monitoring, evaluating and trimming expenditures to deliver maximum value for our shareholders.”

With regard to the slow accumulation of revenue, the informants believe it has to do with R3’s internal structure. They explained: “Instead of hiring tech people, they started hiring bankers and guys in suits who don’t know much about technology.” While this may reflect the firm’s decision to hire people with intimate knowledge of the financial industry, the former employees reveal that is has had an effect on the rate at which the Corda ledger is being developed.

They reiterated these claims saying: “Although R3 will say 1,300 architects are contributing to Corda, if you look at the public release notes of R3, there will be no more than three people listed. The public version of Ethereum had 10,000 developers contributing.” This is an important issue as an open-source project requires a significant number of developer engagement to create DApps on the underlying software if it is to succeed in the marketplace.

There are also claims that R3 is reluctant to publish all its software in an attempt to gain an edge. While he did not respond to the issue of active developers, Rutter did comment on the nature of the code in Corda saying: “Corda is 100% open source. The reason for this is simple: the only platforms that will thrive in the long term will be the open ones. Who in their right mind would choose a closed source platform in an industry with such network effects?” He further invited people to look at Corda’s Github page to verify developer interactions.

While Rutter dismisses the allegations as bitter ramblings, R3 has been facing challenges. For instance, some of the banks originally backing it left the consortium. Most recently, the firm has also been embroiled in a legal dispute with Ripple. This legal battle is based on an option contract between the two firms. Ripple is refusing to hand over 5 billion XRP tokens claiming R3 misrepresented certain information that was essential to the agreement. A win in the case would see R3’s coffers boosted by around $2.5 billion at current XRP prices, but Ripple has deep pockets and would likely appeal any court ruling.

It remains to be seen how the recent negative press will affect adoption of the Corda ledger and how long R3 will manage to maintain its status as a leading blockchain-as-a-service company in light of its alleged financial difficulties. The company remains upbeat, however, announcing a deal between blockchain insurance initiative B3i and Corda on June 18th and stating “it’s business as usual at R3.”

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