The UK Teenage Fintech Unicorn is hiding in plain sight – Monetise

For London to earn the coveted title of Fintech Capital of the World, there needs to be a couple of “poster boys”, the kind of names that trip off the tongue when people say things like:

“London is the Fintech Capital of the World as demonstrated by ….”

When you say things like that about Silicon Valley, the list is as long as your arm. When you say that Bangalore is the Outsourcing Capital of the World, a long list appears. When you say New York is the Investment Banking Capital of the World, Goldman Sachs and Morgan Stanley trip off the tongue.

Today we have a good list of reasons why London should become the Fintech Capital of the World. These reasons are plausible and I detail them here. However that promise needs to become reality and people are impatient. Some big private fund raising deals will be an indication that London is on the right track, but Unicorns take time to grow. It takes 9 months to grow a baby and it still takes about 5 years to grow a Unicorn. While we are seeing amazing reduction in the time it takes to get to get over $100m in high quality annual revenue, it still usually takes at least 5 years.

The problem for London is simple:

  • Most of the companies born 5 years ago were more limited in ambition for sensible reasons (early stage capital was limited and investors wanted limited ambition, lower risk plans).
  • Companies born within the last 5 years need a bit longer runway. Capital is no longer a constraint, but customer revenue growth is tougher.

My definition of Unicorn is over $1 billion of market capitalization. I do not include companies that get a headline valuation over $1 billion as in “raised $100m at a $1 billion valuation” as the Fund almost certainly got Preferential Shares and they are valued differently than Common Shares (if the company was sold for $100m the next day, investors would be OK, not great but OK, but Common Shares would be worthless).

A Trade Sale over $1 billion is a great result for founders, investors and management but unless it is WhatsApp/Facebook scale, it tends to generate headlines for a day and then disappear from conversation.

That is why a public Fintech company listed in London is so critical to London being perceived as the Fintech Capital of the World.

 

The IPO market for Fintech is hotting up. Sorry to all my mates in London, but the activity is over the other side of the pond. The London Fintech aspiration is to be listed on NYSE or NASDAQ. Why is the aspiration not to be listed on LSE? If London really becomes the Fintech Capital of the World, one can envisage a great Fintech venture from Singapore or Mumbai or Beijing or Silicon Valley or anywhere else saying:

“If we were in any other market, we would list on NYSE or NASDAQ, but we are a Fintech company so LSE is a no-brainer”.

 

Which brings me back to Monetise. I first heard about Monetise on CNBC. On December 2013, Monetise was one of 5 top picks for 2014 by Lee Cooperman. That fact alone is significant. I cannot think of another Great British stock being lauded on CNBC. We would have to go back to pre-historic days to remember Hanson Trust. I paid attention because Lee Cooperman is one of the smartest investors on the planet and he was talking about a market that I understand. In October 2014, when it was gloomy in the market and there was gloomy news about Monetise, Lee Cooperman reiterated his conviction on Monetise.

Here is the problem. Check out Key Statistics for Monetise on Yahoo Finance:

Yep, nothing, nada. OK, Yahoo Finance is bad and getting worse, but you try this for any international stock; it is a problem relating to all international stocks, it is not just a Yahoo Finance problem. The data gap for international stocks will be filled by some entrepreneur will fill (if you are working on that and using XBRL please get in touch); but today it is a real hurdle.

It seems silly that something so simple to fix could be a hurdle. You might think:

“Lee Cooperman is not reliant on Yahoo Finance”.

Of course Lee Cooperman is not reliant on Yahoo Finance and neither is any institutional investor. However there is a reason that CNBC exists as a major media property. The retail investor maybe battered, bruised and derided but she/he does still exist. Listening to CNBC, the average retail investor would key Monetise into Yahoo Finance and when it comes up blank they move onto the next deal. Dig a bit deeper and you will find the stock data on Monetise.

I call Monetise a “Teenage Fintech Unicorn”. They are not quite at $1 billion, but you can see the adult inside the person who is clearly no longer a child. This is quite different from a Baby Fintech Unicorn (an early stage big ambition play with a great team and enough capital). With recent good news, Monetise may get there soon.

 

M-Pesa and Bitcoin are mirror images of each other

M-Pesa started in Kenya because people were trading their mobile phone minutes; in a world without bank accounts or landlines, these mobile minutes were vital to life and were a form of currency. The roadside stands (a kind of decentralized Wallmart) became the bank where you could convert mobile minutes into Kenyan Fiat. Bankers lobbied the Kenyan government to kill it, but a study found it to be secure. Anecdotally, the Kenyan President wanted to pay his gardener and when he saw how easy it was to do this with M-Pesa he was sold.

Off ramp – solved.

M-Pesa solves the off ramp through all those roadside stands. Western Union should rightly “look at those and tremble”.

M-Pesa and Bitcoin are like mirror images of each other.

  • M-Pesa is closed, controlled by Vodafone. Bitcoin is totally open.
  • M-Pesa has massive mainstream traction in markets where Vodafone dominates such as Kenya and Romania. Bitcoin has early adopter traction globally.
  • Bitcoin requires smartphones and expensive computers, M-Pesa works on the cheapest phone.

There have been attempts to marry the two. An early attempt was to convert M-Pesa to Bitcoin. That was clever, but was not solving a real world problem. Bitpesa is going the other way and this puts them into the huge remittances market. It is a good start but still suffers from all the problems of using Bitcoin for cross border transfers at the on ramp and off ramp.

Disruption happens through outsiders who are not being served by the current financial system. For that reason, M-Pesa is the one to watch. Bankers, fighting over the overbanked in the West, are eying the 70% of the world that is unbanked. One of the simplest trends to ride in the 21st century is the rise of billions from subsistence farming into the consumer society. Each of those billions spends very little but in aggregate the market is big and when a market reaches the tipping point when a real middle class emerges, it becomes a very big market – witness China and more recently India.

Yet it is hard to imagine M-Pesa, controlled by Vodafone, being anything other than a transitional technology.

M-Pesa solves the problem of delivering money to the most basic phone. However Moore’s Law favors the growth of cheap smartphones and Android is a big enabler for this. The phenomenal growth of Xiaomi indicates the huge market demand for cheap smartphones in the developing world. In the meantime, there are bridging strategies that people in developing countries use for other scarce/expensive assets (basically shared devices).

An open source M-Pesa that is not controlled by Vodafone is an obvious idea. However it is unlikely that would get the massive adoption through roadside stands. That happened organically in places like Kenya where Vodafone dominates because those stands were already selling Vodafone minutes.

Small business – not consumer – is driving Alternative Finance

The NESTA study has a wealth of data about UK Alternative Finance, but one fact jumps off the page

“It’s about small business, stupid!

First, the whole market is big and growing fast (all numbers in GBP millions):

2012: 267m

2013: 666m

2014:  1,740m

That 2014 total is $2.7 billion – to make it real for American readers.

That is more than doubling every year! Those are growth rates to go after.

That is not really news.

What is news is that a couple of areas that are “hot” and get a lot of attention are small:

Rewards crowdfunding: 26m (1.4%)

Equity crowdfunding: 84m (4.8%)

The big news is when you add up the two segments that offer lending to small business:

P2P Business Lending: 749m

Invoice Trading: 270m

Total Small Business Lending = 1,019m

Total Consumer Lending = 547m

Small business lending is almost twice as big as consumer lending.

 The story across the pond is similar. Lending Club sounds like a consumer lending venture but the bulk of the revenue is coming from small business and OnDeck is headed to IPO based entirely on demand from small business.

Virgin Money – challenger bank, full stack Fintech, or re-branded old bank?

Millenials want choice. Their parents might have been OK with the a few big old banks, but if you grow up with everything that you want being a click away, the world looks different.

Virgin Money is coming to IPO. Other challenger banks are in the wings. Full Stack Fintech (digital first ventures that sell to consumers and are regulated like a bank) will be watching this closely as well.

Virgin Money will become the public market comparable for all of them. Mr. Market will soon give his verdict on Virgin Money. If Mr. Market gives a high multiple to Virgin Money expect to see more challenger banks (such as Aldermore and Atom) line up for the public markets. That will lead to some Full Stack Fintech ventures raising large pre-IPO rounds.

If Mr. Market gives a low multiple to Virgin Money, Eeyore will be heard muttering gloomily:

“it is just old wine in new bottles, nothing changes, nobody will replace the big old banks”.

I hope Mr. Branson understands the hopes and dreams riding on this.

I will be looking for two things in the Virgin Money financials:

  • Fundamentally lower costs
  • Lower fees and interest rates for consumers

If I don’t see those two, you might find me nodding along to Eeyore’s gloomy muttering.

 

 

OnDeck IPO puts the focus on Customer Acquisition Costs for Alternative Credit ventures.

Alternative Credit is scaling fast today, with ventures headed to IPO. OnDeck will be the first out of the gate. It is likely that Lending Club, Kabbage and Prosper will follow. This will give OnDeck a tremendous branding opportunity. It will also put OnDeck under intense scrutiny.

The weakness in the Alternative Credit model is a very old-fashioned metric – Customer Acquisition Cost. If they have to pay a lot of money to brokers or to advertise, their CAC maybe too high.

A high CAC is fine if you get a lot of repeat business. That translates to a high Life Time Value (LTV). The metric to track is CAC/LTV. That works in a SAAS business. You spend a lot of money to acquire the customer because the churn rate is low, your CAC/LTV ratio is still OK. If you spend a lot of money to acquire the customer and the churn rate is high, your CAC/LTV ratio will be bad and that translates into a profitability problem.

This is where Alternative Credit businesses that offer short term “stop gap” funding have a fundamental CAC/LTV issue. When pressed about the high APR rates (which you get to by multiplying the interest on a 30 day loan by 12 or a one day loan by 365), the response from Alternative Credit businesses is that the APR rate does apply in their case because the borrower only needs that “stop gap” financing occasionally.

If that is true, they have a churn problem aka a CAC/LTV issue. If it is not true, because borrowers become reliant on “stop gap” funding, then those APR rates are true and that puts the borrower into financial difficulties. That is where you can end up on the front page in a bad way, like Wonga. Reputation risk and regulatory risk are closely related in the social media age.

OnDeck is not the highest APR for SMB. That dubious distinction goes to Merchant Cash Advance which is the SMB equivalent of PayDay Lending. OnDeck is close to Factoring APR costs at around 70%. You cannot run a competitive SMB with 70% APR. So this must be “stop gap” funding only. In which case, their CAC/LTV will look bad.

Businessweek has a good review of their IPO prospectus and has this to say:

 

OnDeck isn’t profitable. The company brought in $108 million in revenue during the first nine months of this year but reported a net loss of $14.4 million, according to the filing.

 

At those interest rates and with such a low cost of capital, the profitability problem cannot be at the net financing revenue level. I think OnDeck has a fundamental model problem. They can:

EITHER: Keep acquiring new customers = bad CAC/LTV metric

OR: keep the same customers coming back for more, in which case high APR rates for their customers will be unsustainable, which will lead to higher default rates.

That sounds similar to the problem that Wonga has. Those default rates then lead to reputation problems and that leads to regulatory risk.

The Alternative Credit companies that are coming later in the IPO pipeline may have this one figured out.

For more on how to manage Customer Acquisition Costs, please buy my book Mindshare to Marketshare from Amazon.

 

This European Fintech Unicorn Is Low Profile and Bootstrapped

Saxo Bank is low profile unless you have been deep into currency trading, but check out these numbers:

2011 Revenue: US$594m (3,526.9m DKK at 5.94)
2011 Profit: US$104m (617.8m DKK at 5.94)

Apply a similar revenue multiple that is applied to a hot VC funded company and you get to north of that $1 billion market cap unicorn milestone quite easily. Actually a measly 2x revenue multiple gets you there.

It has Bank in the name, but Saxo Bank is closer to a Fintech startup, with four differences:

1. Age. Founded in 1992. That is young by the standards of banks that like to talk about being founded before the 20th century. However, it is prehistoric by the standards of Accelerators, Angels and VCs.

2. Bootstrapped. They did not take outside capital until 2005 and since then have made a number of acquisitions to add both functional capability and geographic reach.

3. The technology came later. Founded in 1992, Bank License in 2001, new platform built in 2005 (outsourced to a Russian vendor).

4. Location: Copenhagen, which is not one of the obvious Fintech Capitals.

One other feature that is unusual but which I suspect we will see more of, is that Saxo Bank is a:

  • Consumer brand. It was their advertising in Geneva airport that caught my eye.

And,

  • White Label service to other Banks. This seems to be their strategy for the huge and challenging American market.

It is also in America that they will meet established companies of a similar age and determination, such as eTrade and Charles Schwab. This might explain why they opted for a white label approach to the American market.

What impresses me about Saxo Bank is that they offer Joe Q Public the types of tools that have tended to be reserved for Hedge Funds.

Specifically, Saxo Bank enables you to trade:

1. Across asset classes. Saxo started in FX, but you can also trade equities and bonds. That enables innovation such as letting you use your equities portfolio as collateral to leverage up to trade FX.

2. Global. Coming from the FX market, Saxo clearly thinks global. Being based in a small market like Denmark will also make you think global.

Saxo looks like one of the players who will help democratise financial markets. Startups entering this market should be wary of Saxo Bank which has an interesting mix of size, agility and ambition.