Swiss Banks could create a different model for Fintech innovation capital

On Monday, the Fintech City Tour took a return trip to Zurich, where I moderated a Meetup Panel with three startups:

Millipay

Squirro

Dragon Wealth

Thanks to John Hucker for organizing the FinteCH Meetup Zurich, which meets about once a month and has a great group of bankers, technologists and entrepreneurs (mostly from Switzerland but some from other countries as well).

There was a good discussion about the value of Accelerators and Pitchathons. The summary was that they can provide good value if approached with a clear set of objectives; lots of good, practical advice was given by the panel.

The discussion then moved on to the challenge of raising “innovation capital” in Switzerland. I avoid terms like venture capital or angel or seed or growth as they all get blurred and misused over time. The objective is always the same – to fund something radically new. So I call it “innovation capital”.

It maybe easier to raise innovation capital in London than in Zurich, but folks in London will tell you that it is hard compared to Silicon Valley. You will hear exactly the same complaint in New York. Every city has Silicon Valley envy when it comes to VC money.

There are three ways to deal with this:

  1. Change the ecosystem. Work to make a center more attractive to investors and entrepreneurs through regulation, tax incentives and networking to connect investors and entrepreneurs. These valuable initiatives take time because it is about changing people’s mindsets.
  1. Do without external capital. Avoid the capital raising process by bootstrapping from customer revenues. This is a rational response by entrepreneurs. It tends to lead to incremental rather than transformative innovation (there are some fascinating exceptions that prove this rule). This requires innovative customers (consumers or businesses). If I could select one reason why America is the home of so many great tech companies it is innovative customers (VC is an enabler, but far less important). So even bootstrapping requires a culture of innovation in which to thrive. Rather than getting investors to believe, you get customers to believe.
  1. Just wait. Change happens, albeit sometimes too slowly. Access to innovation capital in Switzerland is far better than it was 10 years ago and in 10 years time it will be far better than it is now. Entrepreneurs are not patient, that is why they are entrepreneurs and that is why the world needs entrepreneurs; so this advice is unlikely to be heeded.

So none of these three ways is ideal.

There could be a better way. To think about that, one must first discard the notion that the Silicon Valley model is ideal. Then one must “skate to where the puck is moving” as the whole asset management business is going through disruptive change and VC is one part of the asset management business. Then one must do the judo trick of turning weakness into strength. There could be a way to do this in Switzerland that is specific to Fintech; that is the ideation part of my post at the end.

The Silicon Valley model (as practiced in Silicon Valley or London or New York or Zurich or anywhere else) is brilliant at creating game-changing companies, but here are three reality checks:

  1. Real innovation risk is passed to founders and their families. The phrase “come back when you have x” is the common refrain from investors. The x changes as you progress, from “working prototype” to “customer validation” to “revenue growth” to “profit growth”. This is a rational response from investors who are looking for the optimal risk adjusted return on capital. You can see examples of concept stage ventures funded with a lot of capital but a) these only happen to serial entrepreneurs who are wired to Sand Hill Road and b) the track record of these deals has been bad (so they are getting even more rare).
  1. 90% of startups fail. You can debate the % and it varies by stage of venture. The key fact is that the % looks totally different to investors and entrepreneurs. Investors protect through portfolio diversification. Entrepreneurs do not have a portfolio of lives and despite the great tales of repeated failures and then one glorious success, the reality is that you get one or two a shots at grabbing the “brass ring” if you are lucky. If you have put in years of your life and the hard-earned money of family and friends, failure really does hurt.
  1. In aggregate the VC asset class is seriously challenged. In aggregate, VC as an asset class does no better (net after fees) than putting money into an Index Fund and the few great returns (the ones you read about) go to a tiny number of VC Funds that most investors don’t get to invest in. See this Report entitled Venture Capital Firms in America: Their Caste System And Other Secrets in the Ivey Business Journal from August 2010 by Hatim Tyabji and Vijay Sathe. Two data points will make investors pick up that Vanguard brochure selling low cost Index Funds:
  • For two-thirds of the VC firms, the first fund is their last fund.
  • Only 10% of the VC Firms Launch More Than Four Funds.

You cannot invest in those 10% of top tier Funds, unless you happen to be lucky/smart enough to invest in their first fund and have the right to invest in future funds. Yes, it is like the old Groucho Marx joke:

“I don’t want to belong to any club that will accept people like me as a member”.

In this environment, the risk aversion that gets discussed a lot in Switzerland is perfectly rational for employees, entrepreneurs and investors. Related to this is the pleasant fact that employees of banks in Switzerland did not suffer the bankruptcies and mass layoffs of their colleagues in London or New York. Out of that trauma emerged the Fintech revolution (just like the Boston Route 128 tech innovation grew out of the implosion of DEC and Wang). Nobody should wish for this cycle of boom, bust, boom; it works at a macroeconomic level, but it is tough on lives and families.

On the other extreme, nobody would wish for the stagnation that Japan went through because there was no motivation for Banks to change. The Fintech revolution is for real and unless Banks innovate, there will be bankruptcies and layoffs. It is not feasible to cling to a mythical golden age. Change is inevitable. The question is, what sort of change? You cannot take the Silicon Valley model and plant it in Switzerland and expect it to flourish.

Innovation has to be native to the culture.

Before looking at a model that could be native to Switzerland, we need to look at where the puck is moving and study Angel List, which is deeply threatening to that permanent aristocracy of VC Funds that the Ivey Report describes. That is good, because permanent aristocracies may make for entertaining TV (Downton Abbey), but they are seldom good for most people. Angel List is slaughtering 3 sacred cows of the Private Equity Asset Management business:

  1. Paying 2% of Funds under Management. A Syndicate does not have a permanent fund structure, so the concept of Assets Under Management (AUM) simply disappears.
  1. Raising multiple Funds every few years. This is a huge cost and as the Ivey Report shows, very few achieve this. Take this away and you take away the artificial constraints on entrepreneurs to get an exit within a pre-defined time. Take this away and the Fund manager can concentrate on what matters – finding and helping great ventures – rather than spending their management bandwidth courting investors.
  1. Paying 20% Carry. Angel List Syndicates compete in a very dynamic environment that enables investors to judge their net returns and a Syndicate that charges 10% will give twice as good a return as one charging 20% assuming the underlying performance is the same.

Those three sacred cows are all about aligning the incentives of the LP and the GP. Charlie Munger (Warren Buffet’s partner) has said:

“Never, ever, think about something else when you should be thinking about the power of incentives.”

In summary so far, it does not make any sense to try to re-create Sand Hill Road on Bahnhofstrasse, because the asset management revolution led by Angel List and others will change Sand Hill Road beyond recognition.

Switzerland has two great advantages when it comes to Fintech:

  • Talent. Switzerland has good public education and a hard working and efficient workforce; there is a great mindset around engineering, quality and design.
  • A trusted brand. The Swiss brand, when it comes to money, speaks to safety, reliability, precision and trust. When it comes to money, these are the brand attributes that matter.

Switzerland is an expensive place to do business. The recent move by the SNB has made that even more painfully obvious. That forces Swiss companies that want to compete globally to be even more efficient and to make sure that most of the costs are outside Switzerland if most of the revenues are outside Switzerland. The jobs that are in Switzerland will be highly paid and the ones getting those Swiss Franc salaries will need to constantly show that they are adding value compared to cheaper workers in other countries.

Growth stage capital is global and efficient. Large growth equity funds such as General Atlantic, Summit Partners, Bain Capital and Francisco Partners invest wherever they find the right companies. By the time ventures get to public markets, capital is totally global and efficient; I can invest in a company anywhere with a few clicks of a mouse.

It is during the early stage of a venture where the whole ecosystem needs to be in one place. That is why top tier Silicon Valley VC firms such as Sequoia, Benchmark and Andreessen Horowitz will only invest in teams that are physically close enough that they can meet face to face regularly when the venture is young. When a venture is more mature, it becomes feasible to manage your investment remotely with lots of emails, metrics dashboards and phone calls plus the occasional face-to-face board meeting. Once a venture is mature enough, these VC funds morph into Growth Equity funds and compete to invest wherever on the globe the venture is based (for example, Sequoia investing in Klarna and Andreessen Horowitz investing in Transferwise).

The early stage VC fund model does not scale. Top Tier VC Funds make fortunes but do it with very small teams and have had great trouble globalizing. The ventures they invest in can scale at hyper speed, but the size of their partnership grows at a glacial pace. The early stage VC Fund works because of a few partners meeting every Monday and the venture in discussion being near enough for regular face to face meetings.

So, top tier VC Funds will not come to Zurich to do early stage and the chance of a Zurich Fund breaking into the Top Tier is statistically and historically unlikely.

It is also unrealistic to expect Swiss angel investors to suddenly discover an appetite for early stage risk.

 Motivation to take early stage risk in Fintech has to come from the Banks.

Banks do have motivation to take early stage risk because the old model of acquiring scale is not working.

Banks can acquire scale the traditional way by buying other Banks. However they may be buying just when that Bank is about to be disrupted by Fintech digitization.

So Banks want to “get on the right side of the wave” and invest in Fintech startups. However the model that Banks have followed to do this may not work as well due to the scaling impact of network effects driven by the fact that nearly 50% of the 7 billion people on the planet have mobile phones.

Banks (along with other strategic acquirers) have historically followed a simple model of waiting until a venture gets to IPO Scale (typically north of $100m revenue) before acquiring. This takes out the risk and ensures that the venture has a real chance of reaching Bank Scale (meaning it can “move the needle” of a Bank with $ billions in revenue).

Consider Lending Club to see why this model is no longer working. Lending Club became a highly valued public company through network effects in a very short time. Growth equity investors understand this and provided capital at massive valuations that a Bank could never justify.

That explains why Banks are investing in Accelerators, Corporate VC Funds and other ways to invest in early stage ventures. However, Banks need to think like entrepreneurs. Banks need to think how they can change the game, rather than play the game according to the rules that others have been training at for much longer.

Corporate Venture Capital sooner or later has to face the question of which mission they focus on. You can either focus on serving the strategic needs of the Bank or you can focus on serving the strategic needs of the venture you have invested in. Corporate VC funds that succeed long-term, such as Intel, focus on the venture because they know that they compete with pure play VC who focus 100% on the venture.

Banks can change the game when it comes to Fintech ventures, because the needs of a Fintech venture are different.

The optimal organizational strategy will combine the best practices of high velocity startups (“VC Model”) with the best practices of large global banks (“Bank Model”):

  • Use the VC Model until you get to IPO Scale (usually north of $100m annual revenues).
  • Use the Bank model to get to Bank Scale (usually north of $1 billion annual revenues).

The interesting change that is happening in the VC Model is that the relatively linear model of Series A to B to C and beyond is being replaced by:

  • Very small amounts of capital until you get to the stage of Product Market Fit (PMF). The cost to build and launch a digital product (even if the developers are in Switzerland) is ridiculously low these days with all the open source tools, cloud services and APIs. However, only a small number “catch fire in the market”. In other words, most ventures fail to get Product Market Fit. This is the risk that everybody is trying to avoid.
  • Massive amounts of capital after Product Market Fit has been proven. These are sometimes called “shovel in rounds”. These rounds often recapitalize the Cap Table, meaning this is an exit for friends and family, angels and small scale VCs who invested early.

Banks have the motivation to create the game-changing Fintech innovation. They also have a low risk way to do this by replacing the really early stage pre Product Market Fit capital.

This is where the terminology of the Venture Capital business needs to be updated. The whole Seed, Angel, A Round, B Round, C Round language that gets reported is increasingly meaningless. The numbers are “all over the map”. The reality is a simpler model that has three Phases:

  • Phase # 1 is Pre-PMF (Product Market Fit). This is the world of moonlighting,  friends and family, angels and some minor VC funds.
  • Phase # 2 is Post-PMF to IPO Scale. This is the world of Top Tier VC Funds, Growth Equity Funds and increasingly, Hedge Funds, Public Market Mutual Funds, Sovereign Wealth Funds.
  • Phase # 3 is Post Exit to Bank Scale. This can be public market investors after an IPO or after a Trade Sale (because the acquirer is a public company).

Fintech is a special case in the venture world.

The Pre-PMF phase cannot follow the model that worked in social media ventures, which is just to launch and see if you get traction. Money involves friction – for good reasons. Sending even $1 is totally different from hitting Like or Retweet. Regulatory compliance, security and auditability are all essential BEFORE YOU LAUNCH.

Doing the Pre-PMF phase within a Bank means you can easily handle the issues around regulatory compliance, security and auditability. You can also tap into knowhow and maybe technology, customers and partners. You also take away the risk from founders and their family. Developers creating the PrePMF product (also known as Minimum Viable Product) can be paid from day one, while keeping control with the Bank. You can create a Special Purpose Vehicle so that developers/management can get an upside share and so that when you get to the Post PMF Shovel In Round, outside investors can participate.

This is Incubation not Acceleration. Post PMF, Acceleration will be needed but, that is when it is easy to raise a lot of capital to win on a global scale.

Once a venture gets to that Post PMF stage, capital will flow. That capital might come from America or Asia or elsewhere in Europe. It might come through the wealth managers and Family Offices that call Switzerland home. Capital at the Post PMF stage is easy; there is far more capital than investable opportunities.

Swiss Banks that invested small sums to get ventures to the PMF stage could reap a big reward. Not only is the capital required very little, the bank can add strategic capability (know-how, maybe technology and co-branding) to ensure the venture gets past the critical PMF stage.

There is a simple switch that changes the game. Historically, founders going through all the usual rounds end up with around 10% to 30% of the equity at exit. You start at 100% and end up at 10% to 30%. Change that to start with 0% and earn your way to 10% to 30% by hitting the same sort of milestones that entrepreneurs have to hit to get funding.

Tie-ups with Academia is a natural. Coding is young person’s game and young people (Millenials) are digital natives who can relate to the value propositions of Fintech startups.

Post PMF, the capital will come knocking. It might come knocking from US Funds or Asian or from elsewhere in Europe or from within Switzerland from Family Offices. At that stage, it does not matter where the money comes from. At that stage, the entrepreneur calls the shots and is fielding multiple offers. At that stage, intellectual capital (aka entrepreneur and team) has the upper hand over cash capital (aka investor). That is what Angel List figured out and why they charge investors rather than entrepreneurs.

There are a lot of details around getting this right. That is true with any innovation. However I believe that there is an opportunity for Swiss Banks to change the Fintech Innovation Capital game.

The trickiest part of getting this right is – as always – culture. Specifically, how do you recreate the wonderful in the zone, high energy, creative flow and peer based pressure without politics or bureaucracy that truly great startups have? In Silicon Valley it happens because the guys with the money have figured out two things:

  • The best talent is not just a bit better than the average, they are 3x or 10x better. Attracting that talent is really the driver of economic value.
  • Talent likes to be surrounded by talent and getting a bunch of stars to pull like a team (and not act like prima donnas) is the real secret sauce of Silicon Valley.

That is the culture to import. It is a tax free import. That is the real capital. Forget about the money capital, there is plenty of that in Switzerland.

 

Could Bitcoin and/or Micro Payments Help Me Sell More Of My Book?

For context, please read yesterday’s post on Creative economy, micropayments and Bitcoin.

This series of posts started with a simple question:

“Could I sell more books and keep more of the profits by selling direct and cutting out intermediaries?”

The economics of the publishing business has interested me since I wrote this article on ReadWrite in 2009.

I published Mindshare to Marketshare using Createspace. It was a pretty good experience, certainly better than the total loss of control from finding an agent who finds me a publisher who then tells me that I am responsible for marketing (i.e that despite their cut, the hard work will still be down to me).

This blog records my research in public into Fintech (including the intersection of e-commerce and payments which is the current sweet spot in Fintech). So now I will “eat my own dog food” by recording my research to solve two problems:

  1. Offer a digital version of Mindshare to Marketshare. People have been asking for a digital version (for reading on Kindle, other e-book readers, phones, tablets and phablets). I wrote the book for busy entrepreneurs who may prefer to skim a digital version and make digital notes. This is nothing to do with Fintech, it relates to boring word processing format issues which is still back in the dark ages. I know there is a fix and soon we will will have an open format like MP3. Still, if anybody reading this knows what I should do, please reach out in whatever way makes (comment, Twitter, email).
  1. Reduce the price while keeping the unit net profit the same. The digital version should be cheaper. Reducing the price should mean that I sell more. If the net profit is the same and I sell more, then I make more profit. Business 101 says that this is impossible, but with a digital twist, it might be possible. This is my experiment.

I am crowdsourcing my experiment by publishing what I have learned and inviting help (via comments or Twitter or email) from people who have tried similar experiments or who understand different pieces of the puzzle.

Here are the unit economics for my book (in US$):

Selling Price 28
Print Cost 3.08 11%
Gross 24.92 89%
Royalty 13.72 49%
Distribution Cost 11.2 40%

I obviously don’t begrudge Amazon their print costs. It is the Distribution cost that is annoying. If that really included marketing it would be OK. As an aside this is why businesses that process payments in niche markets (Uber, AirBnB, iTunes, etc) are so massively profitable. Just being able to offer a simple way for people to buy is a huge win for the seller. Now, we should enter the era when this becomes cheaper and the gatekeepers take a smaller slice.

Ideally I would like to sell through my own site (I use WordPress). Then I want to offer Affiliate deals. In other words, if I am going to have to do marketing myself, I want the tools to do it right.

I am totally sold on WordPress as the base platform. They are an amazing company, almost never annoy me, often delight me and deliver far more value than they extract.

I need to sell in multiple currencies (the book is in English but I have readers all over the world, including people who use English as the language of global business even if it is not their mother tongue). That made me think of Bitcoin.

This could be a big deal. Cutting out 3% credit card fees is one thing. Cutting out 40% distribution when that “distribution” is really just the ability to take credit card orders is an entirely different thing. That is why I think that my experiment could be of value to the large creative economy and the Bitcoin ecosystem.

This applies to all creative workers who sell and deliver digitally. Musicians have been in the “eye of the digital storm” far longer than scribblers. iTunes was great, but it has a heavy tax. Anybody who sells their service through expensive intermediaries will eventually want to a) have control over the process and b) keep more of the revenue. So, eventually the tools that enable this can apply beyond the creative economy to all free agent workers using services such as Uber and Task Rabbit. However I am sure that creative workers will lead this market as they have the capability to implement digital solutions as well as the need. One anecdotal observation from using AirBnB – lots of the hosts are creative workers looking for income on the side to enable them to pursue their passion.

In my next post, I will be looking at specific solutions such as Coinbase, Bitpay, OneName, ChangeTip, Millipay, Bitwall and Paystand. If I am missing any obvious solutions, please tell me. Also if anybody can help me pull it all together and make it happen I would love to hear from you.

Creative economy, micropayments and Bitcoin

About 40% of the labor force in America will be self employed by 2020. Globally, including the developing world, well over 50% is self-employed.

Whatever you call it – the free agent economy or the on demand economy or the capital crushes labor economy – it is a reality that banks are ignoring and entrepreneurs are serving.

When half of your customer base is deemed irrelevant, it is not your customer that has a problem. That is when you have a problem.

Marketers, particularly marketers at Banks, love nicely defined categories. They want to know if you are a Consumer or a Business. This is the same tidiness that bureaucrats seek. Is that kitchen for cooking or for that business you are working on? Are you self employed or starting a new business? No, you are not allowed to answer “all of the above”.

Entrepreneurs just service a need no matter what the label. Many companies are profiting from serving the “really really small business” by helping them to either get to ramen profitability or supplementing ramen profitability with some “income on the side”:

  • eBay who pioneered this by turning the local yard sale into a global business.
  • Paypal and Stripe and Paystand and any other payment enabler for e-commerce.
  • Amazon serves entrepreneurs in so many ways – with AWS as well as a distribution partner as well as a way to sell your creative works.
  • Uber, AirBnB and all the other ways to make some extra cash with spare resources.
  • Etsy because they figured out that consumers are also producers and that many of us find mass-produced stuff boring.
  • Alibaba which does all of the above and is more valuable than…

That last one – Alibaba – is a reminder that there are two big waves of change happening at the same time – digitization and globalization. They are related because:

“bits don’t stop at borders”.

That is why this is about Micro Multinationals.

The creative economy is full of micro multinationals. If you create something, you want to sell it to whoever wants it wherever they are and let them pay in whatever currency they want and you want to keep as much as possible of the sale price.

For example, people who write books. Or people who create music, or software, or photography or film or art or…you name it. I chose books as an example, because I wrote a book (shameless plug here).  I plan to use my book as a case study to look at how new payments (using digital wallets and/or Bitcoin) could be a big deal for the creative economy. There is a theory/meme floating around that micropayments for the creative economy will be the use case that moves Bitcoin into the mainstream. I intend to use myself as a creative worker case study as an experiment. Like any creative worker I want to find out:

  • how to sell it
  • get paid
  • keep as much of the sales price as possible.

 For next in this series, please click here.

 

Transferwise has their $ billion fintech unicorn headline two months after the teaser headline

I did learn a few journalist skills and habits in my year as COO of ReadWriteWeb. One was to be wary of being spun. The other was to dig below the surface.

Over two months ago, on November 10th, a couple of “news” sites reported something along these lines:
“Sequoia Capital, the Silicon Valley venture capital firm, is in advanced discussions to invest $50m into London start-up TransferWise, in an investment that would value the money transfer company at close to $1bn, said two people involved in the fundraising.”

That headline comes from the Financial Times (FT) which is as well respected for quality journalism as you can get. (As a courtesy to my readers I don’t link to behind the paywall content).

When the deal was not immediately announced, my analysis was that there were four possible stories here:

  • The deal really was being negotiated and is still is being negotiated; so “watch this space” for an actual tombstone type announcement. Problem with this story: you would expect confirmation within a couple of days.
  • The deal really was being negotiated and fell apart. If so, my “inner journalist” wants to know what happened, the juicy blow by blow account of high stakes poker.
  • Somebody (“two people involved in the fundraising”) leaked it in error and it was never really in “advanced discussions”.
  • Somebody (“two people involved in the fundraising”) leaked it on purpose in order to move along negotiations that were stalled.

The announcement yesterday of a deal with Andreessen Horowitz indicates that Scenario 2 (and maybe 4) is probably true. This is an announcement of a done deal. The amount raised has gone up a bit to $58m and most of the headlines reference the $1 billion number.

The question is, what price did Transferwise pay for this headline?

It is easy to raise money at a $1 billion valuation. It is all a question of the liquidation preference terms. Say you want $50m at a $1 billion valuation. As long as your company is worth at least $50m, you offer egregiously high liquidation preference rates and you get the deal done.

Valuation is meaningless until realized via exit.

I have no inside knowledge of this negotiation, just enough knowledge of deals like this to know that there is an interesting story.

Whatever the negotiation story, this deal does confirm two things:

  1. Smart American VC money is coming into European Fintech. First Sequoia with Klarna, then General Atlantic with Adyen and Saxo, now Andreessen Horowitz with Transferwise.
  1. There is great consumer demand for lower FX rates. To raise Series C you have to show rapid growth.

If growth continues at a rapid pace, preferences become a footnote in history. If growth stalls, those preferences can hurt entrepreneurs. This is a high stakes game.

 

 

Zidisha takes a radical approach to the global underbanked market

Banks are worried that Fintech startups will “eat their lunch”, cherry picking their most valuable customers one service at a time.

Instead of thinking defensively in traditional red ocean markets, they could be looking at blue ocean markets that they are not serving today.

One of the biggest blue ocean markets is the underbanked. These are the billions of people who have been left out of the current financial services, who do not have access to banking.

Most of the underbanked live in the Rest (developing world, emerging markets, frontier markets, rapidly growing economies, whatever we want to call them). However there are also plenty of underbanked in the West. For example, look at the customers being served by Ffrees in the UK.

I prefer the term “underbanked” to “unbanked”. The millions using something as simple as M-Pesa are not unbanked. They have moved from subsistence to a trading economy and have a basic current account – they can make and receive payments. However they do not have savings or lending accounts – so they are “underbanked”.

It was witnessing the M-Pesa revolution that first drew me to this market.

M-Pesa is genuinely disruptive and revolutionary and changing millions of people’s lives today.

The Fintech City Tour went to India to find the key to the Underbanked market. Today I want to go to “where it all started”, to Africa, to look at Zidisha. If M-Pesa is the basic current/checking account, Zidisha is the lending account. Zidisha can also be seen as 3.0 of Micro Lending (aka Microfinance):

  • 1.0 The Gameen Foundation proves that default rates can be low when lending to the very poor. Microfinance is born.
  • 2.0 Fast money rushes in and interest rates go to a level that is still better than loan sharks, but not the low rates that billions need in order to escape from poverty. Microfinance may not be a suitable market for the VC to IPO high velocity model.
  • 3.0 The poor lend to each other via a platform. This is what Zidisha is doing. It is peer-to-peer micro lending. Conceptually, the beauty of this model is it “kills two birds with one stone”. The poor get both a saving account (they lend their excess cash) and a lending account (they borrow when they need extra cash).

Look at this in banking terms and you see:

zero credit risk

zero balance sheet exposure

zero asset liability mismatch.

Zidisha has its critics. Nothing radical escapes criticism, so this is not surprising. Zidisha is not for profit, but there is no reason why a for profit model cannot work as long as it is efficient, transparent and low cost. Many large companies have shown that there is money to be made in the “bottom of the pyramid”.

Fintech City Tour goes to Philadelphia to see Millenials creating Fintech close to Wall Street

Philadelphia was not on my radar screen until regular reader Steve Weiner reached out to tell me about Wharton FinTech, the

“first student-led initiative dedicated to promoting ideas, innovation and investment in FinTech”.

I think this is significant for 3 reasons:

  • If you want one word to explain Silicon Valley success it is – Stanford. The wonderful thing about University/College is lots of bright people with time to think (and code).
  • Students are Millenials and their changed attitudes explains a lot of of the traction that Fintech ventures are getting.
  • An earlier generation of Wharton grads opted straight for the big banks on Wall Street. Look on the Resume of a superstar quant or i-banker and you often saw Wharton. A Fintech career now looks attractive in comparison.

Philadelphia may not rank high when you look at HQ of top Fintech ventures, but many were started by Philadelphia locals, such as:

  • Motif Investing (reviewed here), founded by Hardeep Walia (a Wharton MBA)
  • Venmo (acquired by Braintree), co-founded by two University of Pennslvania students.
  • CommonBond, co-founded by two Wharton MBA students and one Penn Law student.

Turn Secret Sauce Into Unfair Advantage

This is a Chapter from my book, Mindshare to Marketshare.

Fast Moving Consumer Goods (FMCG) companies are masters at avoiding commoditization. Think of Coca Cola selling sugared water at high prices or Gillette charging a premium for razor blades.

Coca Cola is worth around $182 billion and is one of Warren Buffet’s core “forever” stocks.

What is Coca Cola’s secret sauce?

Coca Cola looks like a physical product-based company; consumers buy physical cans and bottles. Yet Coca Cola is as light in business model terms as Google, eBay or Facebook. Coca Cola is really a licensing business, like a software business. The way they have done licensing points the way to the future of the software business (and with “software eating the world”, we are all software businesses with different skins).

Of course, Coca Cola is not revealing their secret sauce. Could it be, shock horror, cocaine? The technical “secret” is probably totally banal. There may not be any secret at all. The secret is really a business model secret. The secret is how Coca Cola turned the concept of a secret ingredient into a massively scalable business with a huge competitive moat.

Coca Cola’s secret is business model innovation.

Coca Cola’s innovation was to combine two strategies that are rarely combined:

  1. Sold through channels (bottlers in their case).

And

  1. Created a consumer brand.

Doing one is normal. Doing both was unusual when Coca Cola pioneered it (it is less unusual now that Coca Cola is such a well-known success story).

However that art of combining is more unusual in technology. It’s like cooking. You have lots of components that go into a dish. You might even have a secret ingredient that defines it. Yet the whole is obviously more than the parts.

Consider the greatest entrepreneur the tech world has ever seen – Steve Jobs.

When Steve Jobs innovated, he did so using multiple components.

At one level he did that to create a device like an iPod, iPhone and iPad with lots of components sourced from all over the world. However, if he had only created “insanely great devices”, Apple’s business would be more vulnerable to competitors like Samsung and Xiaomi. The reason that Apple is so valuable is that Steve Jobs combined great physical devices with digital services like iTunes and AppStore into a combination that still mints money long after he died. That is why Apple has massive amounts of Unfair Advantage (aka moat, aka competitive differentiator).

Think about how the software business is evolving through Past and Present to the Future:

  1. Past = Perpetual Licensing. Close a sale and send a disk with the software. The software was the secret sauce by itself. This is like selling yeast to people who want bread; yeast is the active ingredient, but it is useless on its own.
  1. Present = SAAS. You add hardware to deliver the software over the Internet. In cooking terms, you add water, salt, flour (commodity ingredients) to offer a loaf of bread.
  1. Future = Software Enabled Business Services. This includes hardware – that is now the baseline. Software Enabled Business Services also typically include, 24/7 guidance by experts and business process innovation and digital media that attracts customers to your customers and co-branding partnerships and proprietary data. To stretch the analogy, this is now a restaurant where bread is one item (given free while waiting for your appetizers).

As an example, think of a payment network such as Visa, Mastercard and Amex. These are Software Enabled Business Services. Yes, these payment networks have software at the core. Yes, they own the hardware servers that the software runs on. Yet they don’t license that as a SAAS product to banks. They wrap it into other services to deliver transactions to consumers via Banks. That is how Visa, Mastercard and Amex turn their secret sauce into Unfair Advantage.

What Coca Cola, Apple, Visa, Mastecard and Amex have in common is the art of the chef – to combine commodity ingredients into value.