Survey: the boom in Accelerators is sign of bubble or a new form of post corporate work?

The case for Accelerators being a sign that we are in a tech bubble.:

  • This is what happened in the last tech cycle in the late 1990s when we called them Incubators. When supply (of new startups) increases so fast, it must meet a demand wall and end in tears.

The case Accelerators being a new form of post Corporate work:

  • Corporates are not good at innovation, so they outsource innovation to Accelerators/Incubators and then buy whatever is proved to work in the market. Even ventures that don’t hit the big time can be acquire-hired, which is OK if the cost of building the MVP is so low. Some Accelerators/Incubators have done very well; look at the portfolios of original Incubator – Idea Lab – and the leading Accelerator today – Y Combinator.

So, what do you think?

DealIndex: aggregating & adding value to the unbundled alternative financing sector

By Efi Pylarinou

The Unbundling of Finance is talked about, it is info graphed, and it is happening left and right. Private markets maybe very small in size compared to public markets, but they are increasingly attracting interest and the audience with a “watchlist” in private equity, private debt and real estate is growing.

Traditionally, the investors in these asset classes have been HNW, family offices, accredited investors in the US, and Angel investors and Venture Capital firms. We are also seeing more and more direct and indirect involvement of “the crowd” in this space, which boils down to retail investors. They are either individuals who are willing to do the homework needed to generate higher yields or some alpha (expected from such private investments) or indirectly, via financial advisors and robo- advisors who are integrating such private offerings into their platforms. Financial advisors for example, may use NSRInvest for managed accounts of their clients in order to create and manage a portfolio of P2P loans. Robo-advsiors for example, like Hedgeable offer their clients private investment choices through a partnership with CircleUp (US focused on private consumer products).

Traditional financial institutions have already begun to partner with the “undbunled Fintech” companies in the private market space, opening up their distribution network to the alternative finance Fintech companies. Few examples of such partnerships are: MyMicroInvest, a crowdfunding platform in Belguim, has partnered with BNP Paribas Fortis in Belgium, so that the incumbent’s clients have direct access to the alternative financing platform.  MarketInvoice, an online invoice finance platform has partnered with KPMG, so that their small business clients can have direct access to the MarketInvoice platform, should they require working capital.

Alternative financing, which includes crowdfunding and is focused in private markets, is not yet mainstream. When we all have apps for our private equity/debt/real estate watchlists, trading, and risk management on our smartphones, then it will have become mainstream. Steps are taken every day towards that direction. Equity crowdfunding is less developed than debt and real estate crowdfunding. All these subsectors will continue to develop and geographic structural needs will dictate the pace of growth in each region.

DealIndex is a crowd funding aggregator that has launched its platform by concentrating more in the equity crowdfunding space and is slowly expanding into debt, reward/donation, and real estate. They screen alternative financing platforms and make selections based on quality.

Screen Shot 2015-08-25 at 9.44.00 AM

They provide real time and historic data on company deals (some of their functionalities are graphic). They include mainly data, valuations, analysis tools and some research.

Research is in-house and they aim to provide more analysis than the crowdfunding platforms showcasing the deals.

DealIndex users have the flexibility to filter their watch lists by business sector, by geographic region, by platform and or by funding instrument. Their dashboard has a blog and in house research, including regular (expected to be) thorough overview white papers on the industry developments globally (Democratizing Finance, DealIndex Research, July 2015). Insights are summarized from across the globe, from their NY presence and their Asian presence.

DealIndex reaches out to their extensive network Grow VC and leverages the experience in creating marketplaces and Fintech technology implementation of the “mother” company, to source offline deals and offer extra value in evaluating online deals, while respecting the privacy and time-sensitive issues around such deals.

Neha Manaktala, CEO and co-founder of DealIndex, wants the platform to be the next generation of FactSet that investment banking professionals use. She also wants to contribute to expanding the audience of private alternative financing investments and to alter the way such deals are marketed.

The paradigm shift that is part of the big trend of Unbundling of Finance, is happening. VCs, Angel investors will collaborate with crowdfunding platforms. Hedge funds already are getting more involved in hybrid model allocations by increasing their private market holdings. And the re-bundling of all these alternative financial services is shyly starting to happen.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation about creating marketplaces and re-bundling innovative financial services.

Getting to strategic value in partnerships between Fintech ventures and Banks 

By Bernard Lunn

We see three levels of maturity in the relationship between Fintech ventures and Banks:

  • Level 1: Incomprehension. The other party just looks strange and it is hard to imagine a productive conversation. 
  • Level 2: Funding. Banks take minority equity stakes in Fintech ventures. This is the level that most relationships have reached. (Funding while still in incomprehension mode is clearly dangerous).
  • Level 3: Strategic. This is where the relationship drives revenues and profits for both parties. This may or may not include an equity relationship; the strategic relationship comes first.  Creating these win/win strategic relationships is one of our core skills at Daily Fintech Advisers because we understand enough about both parties to “know what makes them tick”.

Habit 5 in the classic 7 Habits book by Steven Covey is:

Seek First to Understand, Then to be Understood.

Two words of advice to Fintech ventures seeking to understand Financial Institutions:

  1. Partner means having skin in the game.
  1. Be relevant to their disruption challenge but don’t use the D word.

Partner means having skin in the game.

If you license technology or do labor for hire, you are a vendor not a partner.

The word “partner” belongs with “innovative” and “leading edge” as corporate-speak filler words that have become de-based from over-use.

Used by vendors, “partner” means, “pay enough to enable my high margins”. In short, “don’t commoditize me”.

Customers want to commoditize vendors. That is their job. By commoditizing vendors they reduce costs. Customers also like having partners, but when customers use that word they mean, “skin in the game”. You need to do offer three things to prove your skin in the game and earn your right to treated like a partner:

  •  Pricing based significantly on business outcome. If you are taking a risk in the transactional model, customers will respect your expectation to share in the upside. Licensing software by usage is not shared risk, because the vendor doesn’t care about the customer’s business outcome. This must be a negotiation between partners around shared risk and reward; the customer also has to put skin in the game (thus the word “significantly” which does not mean “totally”).
  • Proactive innovation. This means investing ahead of the customer need. When the customer’s need catches up with your innovation, they will recognize your investment in that innovation as your skin in the game that entitles you to be seen as a partner. The incumbent vendors can just ask customers what they want. To break into that market, new ventures need to anticipate what customers will want in the future and invest in that innovation. This is not a one-time event; you need to be continuously figuring out what your customers will want in the future. (My book, Mindshare to Marketshare, teaches entrepreneurs how to use the sales team as “market sensors” to achieve this objective).
  • Bring something else to the table. We are moving to the next phase of Cloud. In the first phase, Cloud was about reducing data center costs. In the next phase, Cloud based solutions need to bring something else to the table that they have created in the cloud. That something else could be consumers or data – basically anything that brings revenue or that adds to your customer’s delivery capability. This is how you build a moat around your innovation, so that a fast follower cannot simply copy your innovation.

Be relevant to their disruption challenge but don’t use the D word.

If your value proposition is not relevant to their disruption challenge, you will be like the waiter at the hotel asking the guest if she wants another cocktail just when the tsunami is hitting the beach. You must be relevant to what the CXO level guys are thinking.

For example, you do not want to be pitching systems to make bank tellers more productive to a Bank that is trying to decide how many branches to close and how to sell to the 70% of the world that is unbanked by using mobile money services.

It is not easy to figure out where the puck is moving to in your market, but if you don’t figure this out you will be flying blind in a hurricane.

Disruption makes it hard to have a genuine dialogue that leads to a partnership.  The CXO level executives know very well that their world is changing and that they cannot simply keep doing what worked so well in the past. At the same time they have to keep the current numbers looking good, so they present a public face of “it’s business as usual”. That message is meant for investors, customers and partners.

The “it’s business as usual” message is also meant for their own middle management. The CXO level executives need middle managers to “keep their eye on the ball”, so that they keep making the quarterly numbers with the same products and services that worked in the past.

This is what creates the problem for your business development team. They will be working with middle management executives that are not empowered to deviate from the “it’s business as usual” message. This won’t lead to a productive dialogue.

To avoid this fate, you need to be able to talk at the CXO level in a way that connects to their priorities today while being cognizant of the coming disruption. Don’t hype the disruption – that will lose you credibility really fast. Bring evidence of what is happening today, not just what might happen tomorrow. For goodness sake don’t use the word disruption. Nobody wants to be disrupted. Talk about how to increase revenues and profits.

——-///——-///

Three words of advice to Financial Institutions seeking to understand Fintech ventures:

  • Look past the style differences.
  • Understand how some startups get to $100m in revenue so quickly.
  • Understand the powerful forces within your organization that are lined up to kill this innovation.

Look past the style differences.

This is superficial, but it is still important. Most banks already get this. I have been at meetings where the bankers turned up in casual clothes and the entrepreneurs turned up in suits. It did help – at least got a laugh and that is helpful to melt the ice. However too much focus on style enables Financial Institutions to “put a tick in the innovation box”. A lab/accelerator that looks like a Silicon Valley startup is useful. Making it look like a bank would not be good. The danger is mistaking style for substance.

Understand how some startups get to $100m in high quality revenue so quickly.

I am using revenue as the yardstick not valuation. If you have $100m in high quality revenue, you can be valued at a 10x multiple and get the unicorn status in a sustainable way.

$100m in high quality revenue is also a number that starts to “move the needle” for many Financial Institutions.

There is a well defined methodology that high velocity startups use to get to $100m within 5-10 years. It is now fairly well understood. The key thing for banks to understand is that it is totally different from the methodology used within large corporations. Which brings us to the next part.

Understand the powerful forces within your organization that are lined up to kill this innovation.

There are many good reasons to kill a bit of innovation. There are also many bad reasons. The bad reasons include:

  • That’s not the way we do things around here (style differences).
  • That huge market sits at the intersection of two markets that are served by large existing divisions who will fight about it while a startup takes the market away.

Daily Fintech Advisers (the commercial arm of this open source research site) does a lot of couples therapy where we find the win/win partnership between a bank/insurance company and a Fintech startup. Contact us to start a conversation.

Changing social values is driving the Green and Sustainability agenda for Insurers

By Rick Huckstep

There is little doubt that the insurance industry has at least one eye firmly focused on the impact of technology. Across all segments of the global insurance market, the key questions being asked at the most senior levels all center around tech and how it will drive new business models and change customer engagement.

The evidence for this is clear to see. Ranging from the growing number of new InsuranceTech startups (aka instech or insuretech) through to established insurers setting up VC funds, supporting the FinTech accelerators or building their own in-house innovation labs.

But there is another trend that insurance companies need to keep an eye on. This is driven by an increasing social conscious for green and sustainable products and services.

These two terms are often interchanged but they are not the same. The example often used to illustrate this is bamboo flooring. Bamboo is a renewable resource and therefore ticks the green box. However, since the vast majority of bamboo flooring is manufactured in China and shipped around the world, burning fossil fuels in the process, it does not tick the sustainability box.
UntitledFor customers across both commercial and personal lines, their requirements are changing with this growth in social conscience. For consumers, research shows a change in values towards more ecological and social sustainability underpinned by transparency and credibility from their financial institutions.

For companies, the development of Corporate Social Responsibility signifies the increased awareness in the boardroom of society’s demand for better behavior and conduct in these areas. However, for the vast majority of businesses, their CSR policy is perceived to be window dressing and has little resonance or connection with their clients and customers. They need to do more!

The net net of all this a combined affect of growing consumer appetite for both green and sustainable products together with the corporation’s desire to satisfy customer demand.

According to a 2014 report from Deloitte, entitled “Sustainable/Green Insurance Products”;

The sustainable/green products and its associated need for green insurance products are growing at a remarkable rate. Given the available government incentives and the cultural shift of a growing environmentally-conscious population, the future market for green insurance markets are optimistic. There are still a lot of coverage gaps insurers can make efforts on, as well as the advancing of green technologies which provide enormous opportunities for those who are bold enough to take them.

The breadth of green and/or sustainable insurance products is wide ranging, from discounts in motor for low carbon offsetting and emissions through to increased weather forecasting and crop insurance (see previous article on Meteo Protect).

And this offers enormous opportunities for insurers to both increase market share and for expansion into new segments.PSI4Deck180x140

But this is more than a commercial opportunity for insurers, it has become a commercial necessity. In 2012, the United Nations Environment Programme launched the Principles for Sustainable Insurance. As of July 2015, 83 organizations had adopted the principles, including insurers representing around 20% of world premium volumes.

Whilst the 4 principles are open to broad interpretation, they are clearly all aligned to ensure that insurers consider environmental, social and governance issues across all parts of their business.

Looking closer at the changing social values of consumers I found a report from 2012 by German management consulting firm, zeb. Whilst this report looked at the social demographics of the German market from a banking perspective, its research is relevant to insurance.

Interestingly it showed the link between changing social values and the trust issues affecting this industry. It showed that customer’s perception was that banks were more focused on profits, progress and power and much less on trust, sympathy, family-friendliness, responsibility and stability.

The report drew a parallel with the growth of the organic food industry. Europe’s first organic grocery store was opened in Berlin in 1971 and the market has grown ever since. From 1997 to 2011, the CAGR was over 11% and today Germany is the second largest organic food market in the world.

The organic food market has shown that consumers will pay a premium for commodity purchases when it satisfies their social conscious.

In defining the demographics, the report segmented the survey group into three categories of consumer; social-ecological; sustainability-aware, and conventional, i.e., the rest.

The social-ecological tended to be the youngest segment with below average levels of income and education.

Whereas, the sustainability-oriented group were slightly older and had above-average incomes. More than half had completed tertiary or at least higher secondary education

Amongst these two groups, the report found that 38% would swop to a savings product that paid 1.5% instead of 3% interest if it was a “green” product.

When these two groups were asked about making this decision, the biggest hurdle by far to switching from conventional to green products was the lack of visibility of green products and providers.images

To find out more about the growing green insurance market I Skyped with Fabrice Gerdes, the founder of Gruen Versichert (which translates to Green Insured).

Fabrice explained what it is that makes his insurance business green; “the business is green for three reasons. First, everything we do at Gruen Versichert is green first. We hardly use paper, my team all work remotely to cut down on travel and we work hard to give Gruen Versichert a green profile. We also donate 75% of our profits to good causes. Our customers tell us about causes they believe in. Then, we have and an independent panel who decides how the donated profits should be distributed.

“Second, the insurance carriers must also have green credentials, which includes an ethical investment policy. This is more about what they don’t invest in, as much as what they do. For example, nuclear power and arms dealers are definitely no-no’s when it comes to industries the insurers must avoid.

“Finally, the products themselves must be green. For example, with household insurance, the replacement of goods in a new for old policy will incentivize the policyholder to go for items with a high energy efficiency rating.”

Gruen Versichert is an intermediary business that has quickly established itself in the German and Austrian markets, with aspirations to expand across Europe. They have established a strong brand in just over a year and are the first insurance broker to be certified for sustainability from the German Institute for Sustainability and Economy.

A key characteristic of Fabrice’s business is that they offer consumers a choice between green and non-green products. For many products, such as house and motor, the premiums are largely the same. Policyholders can chose these products based on other factors or simply because they are from an ethically motivated insurer.

However, for longer-term products, those that have are investment backed protection products, such as critical illness or income protection, Fabrice still sees a price disadvantage for buying green. “These products can be as much as 30% more expensive to buy!”, explained Fabrice. “But I do believe this will come down as volume increases and the insurers can be more competitive.”

Gruen Versichert is a digital only platform with no offices or high street presence. The site offers online insurance product comparisons through a self-serve capability although should custome
rs need help, they have a live chat facility to answer any questions.

Like the majority of insurance tech entrepreneurs, Fabrice has an insurance background. He has bootstrapped this business himself and is now embarking on raising his first seed round to fund growth through additional marketing and more customer support capacity.

Gruen Versichert is one of a growing number of InsuranceTech distribution businesses coming out of Germany but they are first that I have seen with a focus on green insurance. To be successful, they need the Insurance industry to also respond to the growing change in social values, consciousness and demographics.

4 of latest Y Combinator operate in the massive Fintech Underbanked market – GetSaida, Xendit, TabMoney, Xfers

By Bernard Lunn

It is worth looking at Y Combinator batches because it is such a Darwinian process that it reveals underlying trends.

Last week I looked the most recent Y Combinator batch and found that 26% were Fintech, more than 2x any other batch. Apart from more confirmation that Fintech is a hot market (hardly needed), I noted that four of these ventures can be categorized as the Underbanked sector within the Fintech market.

The Underbanked is one of those blue ocean market windows “so big you can drive a truck through it”. You can see our coverage of the Underbanked here. Most Banks ignore the Underbanked; so this is a perfect market for startups. This is a “first the Rest then the West” story that we found in the Fintech Unicorn from India (Paytm), driven by mobile adoption. So it makes sense that Y Combinator should select so many startups in this sector of the market.

I found 4 vezntures in the latest Y Combinator batch that I would categorize as serving the Underbanked. I categorized them based on the Techcrunch coverage as they heard the pitches live. New ventures like this often change their pitch and even their name and I have noted that below.

GetSaida (fka Greenshoe)

What Techcrunch wrote: “Loans for the mobile age. Greenshoe is trying to reinvent the mobile banking sector in developing countries by analyzing SMS spending and receipts to underwrite small consumer loans. To date, they’ve given out 8,100 loans and grown at 47% week-over-week with an 84% retention rate. They say that their default rate so far on their 30 to 60-day long loans is about 8.5%.”

Changed their name but the pitch remains the same.

Xendit

What Techcrunch wrote: “Xendit is building Venmo for Southeast Asia with instantaneous peer-to-peer mobile payments. This is key in the region because only 15% of the region’s consumers have debit or credit cards and the vast majority of transactions happen in cash. Meanwhile, mobile phone penetration has grown to about 120% penetration (as many consumers have more than one phone). That presents an enormous opportunity for mobile commerce. Since launch, Xendit has acquired 13,000 users and is growing 50% week over week. They’ve handled 1.5 billion rupiah in Indonesia, or about $110,000.”

The pitch on their site is no longer Asian specific. However the Venmo for Southeast Asia tag will probably remain and with Venmo now owned by PayPal and PayPal in the Daily Fintech Index of publicly traded Fintech companies, an exit to PayPal seems pretty likely.

TabMoney

What Techcrunch wrote: Let merchants in developing nations accept credit card payments.

Buying things while on vacation can be tough. Merchants often lack credit card machines. Those that have them are often gouged for 7% by local providers, and tourists still have to pay a 4% fee. Tab. has created an app that lets merchants accept payments with just a smartphone. They’re charged only 1%, and tourists pay less too as transactions happen in their home currency. With 40% week over week growth thanks to word of mouth amongst merchants, Tab. is rapidly growing to take a chunk of the $40 billion in transaction fees paid on tourism payments in emerging markets. Soon you won’t need cash anywhere.

This is a great early adopter market to go for. In the developing world, tourism is a big business for the micro entrepreneur and I believe that the micro entrepreneur is key to the Underbanked market.

Xfers

What Techcrunch wrote: PayPal for Southeast Asia

Most of Southeast Asia has less than a 5% credit card penetration rate, leading to low usage of PayPal and most ecommerce purchases being paid for with cash on demand. Xfers has erected a payment network on top of the existing online bank accounts most people have, and APIs it built for the local banks. With a growing middle class, the region could be spending $350 billion on ecommerce just 5 years from now. Just a 1% fee could earn Xfers $3.5 billion in this rapidly evolving market.

Sounds very like Xendit and it sounds like PayPal will be taking a look at both. In fact, TabMoney looks to be in the same space. I have seen others in this space. I like the TabMoney focus on the micro entrepreneur in the tourism business.

The Y Combinator stage is the “bleeding edge” stage. It is a huge achievement to get to graduate as one of the Y Combinator batch. They are the most watched of all the Accelerators, with some big wins already on the scorecard. Yet this is still a really risky stage and many will fail. I think all 4 could be winners although I think that Xendit, Xfers and TabMoney are more likely to be trade sales. The one with a unique value proposition (as far as I know) is GetSaida. Analyzing SMS spending in the Rest is like analyzing credit card spending in the West; it is a genius idea and it will be interesting to see how they execute on it.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

Crash of the “faux Unicorns” & birth of the Anti Fragile Unicorns

By Bernard Lunn

There will be another recession/bear market. Nobody knows when or how deep, but the statistical probability of mean reversion is a horse worth betting on.

I am guessing that the current wild market (correction in a bull market telling you to buy the dips? start of a bear market? Hedge Funds playing chicken with the Fed?) has made more entrepreneurs take notice of macro cycles.

I am not trying to write a depressing post. I think software is eating the world and there has never been a better time to launch a startup, particularly in Fintech. Many really great ventures got their traction in a downturn (eg Lending Club in 2009, Google in 2001).

From a macro viewpoint, 2015 feels like 1998. In both times, technology was the driver and oil prices were low (which is good for everybody who does not own oil related assets) and in both times the crisis shock was from Asia.

It does not feel like 2007 when all the signs were screaming recession in America. The economic recovery in America and UK maybe too slow and unequal, but it is a recovery of sorts and there are emerging markets with promising data points such as India.

Here is the comparison between now and 1998:

1998 2015
Internet Growth Forecast Happening
Disrupter Web Browser Mobile
Oil Prices Low Low
Interest Rates Rising Forecast to rise
Time to crash Two years ????
Tech Bubble Public Private
Market Turmoil Thailand, Korea China

The coming crash of the faux unicorns driven by media hype

Yes, there is a bubble. It is not in the public markets where valuations maybe a bit stretched but nowhere near crazy levels. In Public markets for example, Apple has a PE of 12, HP is 11, Cisco is 15. Sure there are many over valued tech stocks and guess what happens – short traders spot that and bet on the stock falling. That market discipline does not exist in private markets and that is why there is a bubble in private markets where in comparison with 1998:

  • Seed is the new Series A
  • Series A is the new Growth Equity
  • Series B is the new IPO

The bubble is in private deals for hot tech stocks, for the simple reason that you cannot short private stock.

For now it looks like “every ones a winner babe“, but when the tide goes out we will see who has been swimming naked. The biggest losers will be founders who chased the unicorn headlines. In order to get that Unicorn headline, some entrepreneurs gave away some details in the term sheet around Preference rights that look like a niggling detail in good times and a “what on earth were we thinking?” horror in bad times.

I still think that unicorns are cute (so,we kept that pic on @dailyfintech)…but they are rare. That is the point. The current unicorn mania is like Veruca Salt in Willy Wonka – “I want a unicorn and I want it now”. Building a billion $ worth of real value in a few years is very hard and very rare. Not everybody can have one.

In December 2014. I published my list of Fintech Unicorns. It is a short list, because my criteria is realizable value for common stock over $1 billion. That means:

  • Either: Exit with over $1 billion in cash to shareholders (equity in highly liquid stock with no selling restrictions counts).
  • Or: IPO with over $1 billion in market cap.

This is nothing new.

Most startups fail and a very, very small number become very, very big. All the Unicorns together are not worth as much as Apple.

We do not know what is happening behind closed doors of the current masters of the universe on Sand Hill Road. However when you see this kind of bubble, it must end in tears. Most of us won’t care. The hurt will be limited to a few people who have the financial strength to handle it. This is not like 2007 when millions of people were impacted.

The mirage of the Bitcoin mulligan

One sign of the bubble in private tech funding is the mirage of the Bitcoin mulligan.

In golf a mulligan (aka “do over”) is a second chance to perform an action, usually after the first chance went wrong through bad luck or a blunder.

If you worked through the 1990s Internet gold rush and you did not call every shot perfectly (who did?), the narrative that Bitcoin is like the Internet in the early 1990s is hugely appealing. It is like having a time machine. You know how it will play out, so you can make that perfectly timed prescient bet.

This is a mirage. Back to the Future is only a movie. Time travel is impossible. You cannot see the future. The future always surprises.

That mirage can be dangerous if you act on it. VCs with a lot of money are tempted to make huge bets because “if all you have is a hammer, everything looks like a nail”. If you have lots of money under management, it looks like you can grow markets by throwing money at them. Two deals stand out as representing this kind of hubris:

  • 21 Inc with $121m put into a venture that few can explain. That is a seed round. Yes, over $100m into a seed round sounds like a bubble to me.
  • Blockstream with $21m (that number smacks of insider joke hubris) for open source that has yet to be accepted by developers in a market that is still nascent and may fail.

The birth of the Anti Fragile Fintech Unicorns that will benefit from a market downturn

Lets turn to the good news.

One of my favorite business books is Nassem Taleb’s Antifragile (which has more insights per page than in the whole book by most writers). A Unicorn is Antifragile. It benefits from massive change. LendingClub (and other Fintech Unicorns) benefit from the credit implosion of 2008 occurring at the same time as the explosion of digitization.

Almost all other businesses are harmed by massive change. Normal businesses that do well are like cart horses. They are tough and resilient, so they can withstand the brutal knocks of massive change.

However cart horses don’t benefit from massive change, they survive massive change. Only Unicorns benefit from massive change because they are Antifragile.

Today we are in a period of greater than normal change with three tsunamis hitting at the same time – digitization, deleveraging and globalization – creating lots of Black Swan events. In this environment, Unicorns can be lower risk than “normal” businesses.

Cart horses are good businesses, but Unicorns are awesome.

How do you get massive traction in a downturn?

In short, how can you be like Lending Club in 2009 or Google in 2001?

In simple terms, you have to ask:

“Does my value proposition work in a deep recession/bear market?”

In even simpler terms:

“Can you offer 90% of the value for 10% of the cost”?

90% is enough to get people to switch if it is 10x cheaper.

If you have some seriously disruptive technology (e.g. trustless blockchain systems) you could be very popular in a recession offering:

  • Lower cost sharing economy services. Uber, AirBnB and other sharing services can get away with a big % take today. What if somebody charged 1.5% rather than 15%? What if that 1.5% included payment processing by cutting out credit cards? We will then stop referring to “sharing economy” which sounds all lovely and social and refer to what it really is which is squeezing cash out of unused assets.
  • Services for micro multinationals. In a global economy, there are millions of entrepreneurs in the developing world that want to sell globally. In a recession in the West, many will join them as forced entrepreneurs. Make it cheap and easy for them to do business and your platform will scale in tough times.

Google sold a lot of advertising, but did not use advertising to scale its business. Ditto for Facebook. If you have a really strong proposition, then organic word of mouth will do the marketing for you and you don’t need a mega round of capital for marketing costs.

At time of posting, Mr. Market has not yet decided if this is a correction in a bull market or the start of a bear market. If the 1998 comparison is accurate, this is a correction in a bull market that is reminiscent of the Asian Financial Crisis in 1998. (I was working with a Korean banking software company at the time and it did not look like a blip if you were at the epicenter).

Nobody knows when this bull market will end but we do know that a) it will end sometime and b) that tech will power the recovery as it is now so embedded in all our lives. When it does end, the faux unicorns will crash and a new breed of unicorns will be born (while talking heads are proclaiming the end of tech startups).

Update: this site has some good data to show that public markets are not the problem and that the mass adoption of mobile really does change the game.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

LendingRobot and NSRInvest, “les fiancées” of LendingClub

By Efi Pylarinou

It has been bloodbath out there this past week and this Monday looks dismal for Europe and the US with Asia leading an 8+% decline. Publicly traded Fintech companies have not escaped the plunge. Lending Club (LC) and OnDeck (ONDK) are down more than 50% ytd (based on Friday’s close). The highs for both were around $29 and now they are trading close to all time lows, roughly $12 and $9 respectively. Lending Clubs insider-trading activity showed high trading volume, which maybe associated with the end of a lockup period for shareholders. While this shake-out is happening and possibly affecting Prosper’s or Marlette Funding’s time line for an IPO; the online origination space continues to grow and plant its roots deeply. Two significant partnerships have been rolled out:

  • One that makes that makes retail investing in Lending Club and Prosper more efficient; with LC’s “fiancée” being LendingRobot.
  • Another that opens up the online origination market of Lending Club to advisors and brokers, with LC’s “fiancée” being NSRInvest.

LendingRobot focuses on retail investors (as LC has been doing up to now) and is a robo-advisor specializing in the loan marketplace. Founded 3yrs ago, they have developed automation tools and algorithms to facilitate individual investors in selecting, placing and executing orders on loans, discovering new loans as they come to market, and reinvesting cash from distributions. They have provided access to a market otherwise “visible” only to hedge funds and institutions and have offered to retail simple to use analytics and tools for risk management and trading.

Before this partnership with LC, investors using LendingRobot would have to create a LC account on the LC website; then link to the LendingRobot API (confusing for most); and juggle back to their LC account for money transfers when trading or managing cash distributions. Now LC and Prosper have opened up their system and through API integration, LendingRobot users can seamlessly use the tools, analytics, and order system to access Notes from both origination platforms.

In addition, LC announced the launch of Lending Club Open Integration (LCOI) which is the API that allows advisors and broker-dealers to offer Lending Club Notes as an investment option directly to their retail clients. This API integration allows brokers or advisors to offer their clients the LC functionality, which includes reporting of distributions, reinvesting, and reporting of positions and for tax purposes. This means launching a secondary market for LC retail loans, facilitating the creation of customized loan portfolios in increments (as low as $25) and with diversification across many borrowers.

At the same time, LC has partnered with NSRInvest who will use LCOI to allow its’ financial advisor network to manage LC investment accounts. NSRInvest is a marketplace in the P2P origination space that evolved from a traditional P2P picking newsletter into a loan-picking proprietary system. The company targets financial advisors and expects that this partnership will offer its clients seamless access to LC notes (instead of juggling from one site to another). NSR Invest is owned by the same holding company that owns Lend Academy and LendIt Conference.

We are moving towards peer loans becoming a traditional portfolio holding for retail investors. LendingClub is enabling individuals to trade and manage their loan portfolio more efficiently; enabling advisors to dare to offer such securities to their clients looking for high yielding assets; and to broker-dealers that already have experience with the origination space but have been kept away from it for a while.