UK needs a big success to become Fintech Capital of the world & it is not $MONI

By Bernard Lunn

Monitise (stock symbol MONI.L) is the sad story of near death experience of UK Fintech’s first poster boy.

Monitise is a publicly traded Fintech (MONI.L). We do not include them in our Daily Fintech Index because they fail to meet our $300m minimum market cap threshold.

Peak share price was $80. At time of writing it is below $3. Ouch! At peak Monitise was a Unicorn – big deal unless you sold shares at that price.

Three big takeaways from this story:

  • Great technology in a hot market is not enough. Mobile money is hot and Monitise tech was – by all accounts – top notch.
  • White label B2B has been a favored low risk strategy but there is a reason that B2C ventures that succeed are more highly rated. B2B2C works ie you have a consumer brand but you also get distribution through partners (this is the kind of market development work we do at Daily Fintech Advisers).
  • Snapshot valuation is meaningless. This also applies to private company valuation. The difference is that you cannot short or easily sell private company stock. So you see a headline that says Company x raised money at $1 billion and 6 months later you have no idea if it is worth $100m (ouch) or $2 billion (pop the champagne). That is why I do not celebrate a Unicorn until I see either an IPO or a trade sale.

UK Fintech still lacks a poster boy. This matters. Without a big success (in real terms, realized cash on cash from an exit), people will talk about hype and bubble.

Silicon Valley open sourced its core intellectual property. You can get the startup manual on many sites and the combination of open source, cloud and APIs made building that Minimum Viable Product easy, quick and cheap. So the puck moved to scale ups as Reid Hoffman describes so well in this post.

StartUps are easy, ScaleUps are hard.

A few weeks ago I declared London the winner in the Fintech Capital of the World ranking. That was premature. In terms of buzz and activity and conferences, London certainly wins as I can attest after having just come back from London. In a few weeks in Singapore I will be moderating a panel at SIBOS about Fintech Hubs and plan to reissue this Fintech Capital Index with some new data points before then.

As the old saying goes “the proof of the pudding is in the eating”.

It is hard to weight the disruptive innovation that San Francisco/Silicon Valley is known for. San Francisco was not known for transportation expertise before totally changing the industry through Uber.

Which UK company will be the first to get to IPO at a valuation over $1 billion? The candidates that are often mentioned include:



World Remit




Funding Circle



Currency Cloud

Who have I missed?

The one thing that would make a big difference to London’s Fintech Capital status is a big win on the London public market (a subject we explored in this post). The big Fintech winners in London have to head to New York to do an IPO on NASDAQ or NYSE. That must put London at a disadvantage. The Monitise story will sadly make public investors wary of a Fintech story in UK unless it is backed by very good numbers.

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.

11 New Banking Licenses approved in India show the future of banking 

By Bernard Lunn

In 1994 I was running the Misys Asia banking division from Singapore when I got a call to bid on a core banking system project for a new bank in India. I knew Misys needed to get into either India or China (we did not have the resources to do both at the same time) and I was leaning towards India (rule of law and English language), so this opportunity made that decision for me. In short order we closed deals with Centurion Bank, Times Bank and Indusind Bank and so began a long association with India for me.

This batch of new bank licenses looks very different. The facts are here on the Reserve Bank of India site.

The 11 licensees are:

  1. Aditya Birla Nuvo Limited
  2. Airtel M Commerce Services Limited
  3. Cholamandalam Distribution Services Limited
  4. Department of Posts
  5. Fino PayTech Limited
  6. National Securities Depository Limited
  7. Reliance Industries Limited
  8. Shri Dilip Shantilal Shanghvi
  9. Shri Vijay Shekhar Sharma
  10. Tech Mahindra Limited
  11. Vodafone m-pesa Limited

The reason for granting new bank licenses is the same now as in 1994 – to promote competition and financial inclusion for the Underbanked. However this is a totally different list from 1994. First, note two mobile telecoms companies (Airtel and Vodafone) and one conglomerate (Reliance) that operates one of the big mobile phone companies. If the future of banking is mobile (little dispute on that) it is natural that Telecoms firms will compete with banks (as I outlined in this post in November). In the West, Telecoms are dipping their toes into the banking waters. In India, they are diving in fully.

India is where we will see the battle between m-pesa and other forms of mobile money play out. Vodafone m-pesa Limited is one the firms granted a banking license. If they open up m-pesa, it could take off in India and become the global standard for mobile payment.

The Underbanked is one of the biggest opportunities in Fintech (here is an index to all the Underbanked posts on Daily Fintech). The Underbanked market is playing out in Africa, China and many other big countries, but India is one of the most interesting markets for the Underbanked because India is also so strong in software technology.

China is also making some interesting moves in this area. For example, China’s Tencent (operating the WeChat messaging app) has launched its banking arm called “WeBank”. Facebook will probably do this with WhatsApp but it has already happened in China. This is one more example of “First the Rest, then the West” leapfrogging of innovation by the countries formerly known as emerging.

In a few weeks, I will be in Singapore for SIBOS for a session on Killer Platforms, the Chinese road to platform disruption. The panel of speakers include people who know what is happening in China. I wll be chipping in to contrast that with what is happening in India.

It is exciting that SIBOS is in Singapore this year. I will be returning to my old stamping grounds but more importantly, Singapore is increasingly a hub for innovation around the Underbanked as it has deep connections into both India and China as well as other big markets in the region such as Indonesia. We reviewed some Singapore Fintech ventures on the Fintech Global Tour back in February. To that list, one should add Kyepot and Skolafund.

Mobile payments are taking off in India because it solves a real problem (as we explore in this post about Paytm).

M-pesa is huge in Kenya where it accounts for over 40% of GDP. It will be interesting to see if it can take off in a bigger market such as India. However I don’t see this happening unless it becomes an open standard as payments is all about network effects and you only get network effects when a whole ecosystem benefits.

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.

FTF on Tour – InvestTech: Insurgents, Incumbents, Investors & FCA innovation hub

By Efi Pylarinou

Fintech Forum organized a high quality happening in London focused only on InvestTech, this past Friday. The event had representative stakeholders from the entire financial ecosystem. The regulator, the incumbents, the insurgents, and investors, were all represented.

Fast-rewind backwards, to the beginning of the event: The bright wide corridor leading towards the new EY building at Churchill place was full of huge colorful posters, left and right, a visual prelude to the undergoing transformation in financial services. The forum was hosted in a brand new auditorium of EY.

20150925_091549 20150925_091611 20150925_091640

Anna Wallace, head of FCA innovation hub was the keynote speaker. She spoke about the leadership that has seeded all the initiatives of the FCA innovation hub over the past 10 months. She conveyed an entrepreneurial enthusiasm that keeps fueling their new services and tools for the entire community. Their mission is to promote competition, to support good innovation that always benefits consumers; by making sure that rules and regulations are respected. The FCA innovation hub has created tools and services geared for startups so that they safely and efficiently experiment. At the same time, they cater also to the incumbent stakeholders that are vulnerable and need support in the undergoing transformation.

The twenty startups pitching at the event were mainly European and deliberately, more from outside the hosting country (UK). German, Austrian, Swiss dominated and a few from France, Italy, and Poland; two British, one from the US, and one from Israel. Mostly aspiring to be micro multinationals; i.e. headquartered in one country, with offices and customers in a variety of other countries.

Roughly half were pure B2B and the rest B2C already branching out towards B2B that increases their B2C distribution and revenues. The rest were also wanabees of this hybrid business model that is emerging as the dominant trend for customer acquisition. One of the incumbent asset managers supporting and attending the event, emphasized that their philosophy towards the startups that approach them (even those that they don’t choose to partner or invest in) is to help them (a) improve their product, by giving them their feedback that encapsulates broad and diverse market experience, and (b) make introductions to others in the financial ecosystem much like a strategic investor would do.

The event was an interactive forum with lots of good questions from the audience. It actually provided throughout the day, collective insights towards the topic of the closing roundtable discussion: InvestTech startups: Threat, Partner, or Talent pool for incumbents? Moderated by Anna Irrera from Financial News / Dow Jones. Two VCs, two incumbents, two insurgents, participated and exchanged points of view on the how startups are scaling up, how incumbents are transforming, and where investments are piling.

Inevitably, the subsector of InvestTech focused on automating investing and asset management (coined “robo-advisors”) that of course, includes a variety of services and clientele; was the most represented. Cognizant of the risk of oversimplification in grouping the startups pitching, I list them below:

AdviseOnly (Robo)

In2expereince (Robo)

Vaamo (Robo)

Fincite (Robo)

Cashboard (asset manager)

Scalable Capital (asset manager)

Stockpulse (asset manager)

United Signals (social trading)

Crypto Facilities (multi-asset digital online broker)

BondIT (bond portfolio management)

There was one startup purely focused on internal security, Qumram. Four startups that were in the space of Big data: Scaled Risk (real-time management of petabytes of data), Sentifi (innovation in managing unstructured data), Prophis (innovation in managing structured data), Valutico (innovation in business valuation).

And lastly, four companies offering tools or partial stacks for InvestTech: Xignite (financial data APIs), Empirica (tools for algorithmic trading), Quantstore (tools for digital Wealth Mgt), and Niio (tools for Wealth Mgt).

Most startups at the forum are looking to raise capital to complete their development and implement their go-to-market strategic plans. Xignite was probably the more mature in terms of revenues. Most incumbent financial institutions at the forum are looking to adapt to the digital cultural transformation, which will reduce their costs and enable them to more efficiently serve their clients.

$225m into AvidXchange shows the American B2B paper payment dam maybe breaking

AvidXchange just closed a $225m round. Why would a bunch of very smart investors put $225m into something as boring as Accounts Payable software for small business? These are top tier investors:

  • TPG

TPG is a leading global private investment firm…

  • Square 1 Bank

entrepreneurs serving entrepreneurs

  • Keybank

Cleveland-based KeyCorp is one of the…

  • Nyca Partners

FinTech Venture Capital

  • Foundry Group

Foundry Group is a venture capital firm focused…

  • Bain Capital Ventures

Venture Capital & Growth Equity

Visitors to America, the source of so much of the technological innovation that drives our world, are often amazed by how backward B2B payment processing is. Accounts Receivable in a Supplier sends printed invoices by snail mail to Accounts Payable in a Buyer who keys in the data and then prints and sends a check and then….

Working Capital Finance is one of the biggest market opportunities in Fintech and none of those dreams are realizable unless invoices travel digitally.

New working capital finance models are getting traction today when the buyer is a big company which tells its small suppliers to issue invoices digitally. This has enabled Supply Chain Finance (SCF) to take off.

However small suppliers selling to a big buyer is only one part of working capital finance. Most small suppliers sell to small buyers.

That is where AvidXChange comes in. They are automating Accounts Payable processing for small business. The main way to automate Accounts Payable processing is to get your suppliers to send invoices electronically. If that starts to happen the great American B2B payment dam may finally break. When it is perceived that the norm is to send invoices electronically, the laggards still using paper will quickly follow. Then working capital finance will finally be revolutionized. My theory is that $225 million is the vote with the wallet from a bunch of smart investors that this is about to happen.

Analyze Re – applying Cap Mkts tech to bring reinsurance underwriting into the 21st century

By Rick Huckstep

The $500bn reinsurance industry provides insurance for the insurers. In this market it is all about premiums and risk and the relationship between them, defined as the loss ratio. Like primary insurance, reinsurance is a mechanism for spreading risk. Reinsurers takes some portion of the risk assumed by the primary insurer in return for a premium.

However, here the similarities end. Where reinsurance differs from primary insurance is that each policy or contract is individually priced. Each contract is unique and there is no place for the law of big numbers or the pooling of shared risk. There is no average price in reinsurance.

And this creates the pricing paradox as defined in the study notes by David R. Clark, FCAS, in the Basics of Reinsurance Pricing.

“If you can precisely price a given contract, the ceding company will not want to buy it.”

In other words, if the historical data were stable enough to provide data to make a precise expected loss estimate, then the reinsured would be willing to retain the risk them selves.

Reinsurance is a complicated and complex business. With massive volumes of data, finely tuned algorithms, variable upon variable upon variable, all these factors result in an (near) infinite number of permutations.

This is why the reinsurance industry relies so heavily on the judgment and competency of their actuaries and underwriters (see difference here). They make their money by knowing when the underlying assumptions have not been met and how to supplement the results with additional adjustments and judgment.

“Technology to the rescue!”

A few months back I featured a London based business, QuanTemplate. They have just raised $8m to continue their expansion in predictive analytics for the insurance industry.

And earlier this month, I caught up with two of the threeAnalyze Re co-founders of Canadian based Analyze Re when they were in London. I had been introduced in the summer to co-founder and CEO, Adrian Bentley by a mutual acquaintance who had worked with Adrian at Flagstone Re a few years ago. I also got to meet fellow co-founder Oliver Baltzer, the CTO and technology brains behind the business. The person missing from this triumvirate was Shivam Rajdev.

The backstory here is a familiar one for all tech startups.

  1. They understand the market.All three co-founders come from the industry, which means that they have real life experience and understanding of the market problem they are solving.


  2. They have leveraged tech from another industry.Using real-time, mass volume data technology developed for hedge funds to support decision-making and where speed is of the essence.
  3. They have clearly identified their niche.Which is to enhance and augment the decision making process for actuaries in the underwriting process

Their journey started around 2006 when Adrian and Oliver joined Flagstone Re to apply their capital market technology skills to the insurance market. Flagstone’s objective was simple; to enable underwriters to make better decisions using high performance computing. Working on catastrophe models, they started to develop tech that would drill deeper into the underlying assumptions and risk details of contracts.

Following Flagstone Re’s acquisition by Validus in 2012, the three co-founders left to start up Analyze Re. By 2013, they had raised cdn$1.4m in funding from a combination of VC’s and angel investors.

In the beginning, the co-founder’s took their business idea through the Starting Lean program at one of Canada’s oldest universities, Dalhousie University before moving in to the Volta startup in Halifax, Nova Scotia. Volta is different in it’s approach because it has been set up to NOT be an accelerator, but instead create a community environment to nurture new startups through quality and not speed.

Through 2014, they built the tech and now they are engaging with some of the largest reinsurance and Insurance Linked Securities firms in the industry,

So, what is that that Analyze Re have built?

Adrian and Oliver explained the reason they see their Prime platform as unique. “In a traditional reinsurance business, the Execs and the underwriters are disconnected. The Exec set their strategies for returns against their portfolios. But, because of this disconnect, the underwriters have little line of sight to those strategies. There are no analytics in place to bind these two functions together, which is where the Prime platform comes in. We produce real time analytics that connects the strategic objectives of the Executive with the contracting process of the underwriters.”

Typically, the way this process works today is that, around this time of the year, ahead of the January renewals season, everyone gets in a room and in turn, they each discuss a book of business. They look at each book individually through the lens of a spreadsheet and manually re model the book, eventually reaching consensus on an outcome they want to achieve. This becomes the strategy for each book.

Sum of the parts…

Analysts collate these strategies together and generate scenarios based on the bottom up, collective position for each book. With Analyze Re, the process is turned on its head. The top down strategic objectives from the Exec are plugged into the Prime platform and distributed to the underwriters. Each underwriter then assesses their own position against the interdependency on their own books of business. They then feedback what they can achieve against the strategic objectives and as a result the Exec should expect a high return against their portfolio.

Analyze Re effectively crowd source the performance returns from their own underwriters

Prime is a scientific computing platform designed to handle massive volumes of data extremely quickly. Its algorithms are deeply routed in science and combined together in an engineering framework using high performance computing.

It enables underwriters to model multiple scenarios in a way they couldn’t do using conventional tools and spreadsheets. As a result, they improve their forecasting by adjusting the variables to predict the underwriting decisions that give the best return.

At Rendez-vous last week (the reinsurance industry’s annual get together in Monte Carlo), the theme of the conference was efficiency with M&A as a hot topic for achieving operational efficiency to improve returns. The Analyze Re tech tackles the root cause that the industry is grabbling with. And with the market being tough right now, without this step change in performance enabled by this kind of technology, it’s going to be difficult for reinsurers to continue to be profitable.

Analyze Re has made the platform easy to use and easy to buy. The in-house underwriting and decision support systems remain in place and connect to the Prime SaaS platform through standard APIs. It is tech solutions from the likes of Analyze Re and Quantemplate that are redefining the ‘art of the possible’ for insurance underwriters and actuaries. And this is not a small step change either, this is massive for the reinsurance industry.

Banks can buy the FinTechs, it is the BigTechs they have to worry about

By Bernard Lunn

That is a common Banker refrain at conferences. When the BigTechs (Google, Apple, Facebook, Alibaba etc) move into financial services it will no longer be a David vs Goliath story. It will be Goliath vs Goliath story. It will be BigBanks vs BigTechs.

We covered some of the BigTech move into FinTech about 9 months ago. These profiles need updating but you can at least see the direction of travel:





Financial Services will be collateral damage from a bigger war about how to monetize content.

This article in The Verge describes Apple is taking the oxygen out of Google’s room using ad blockers on mobile.

With the ad revenue line under threat, BigTech will go more aggressively after big niche markets such as finance and healthcare where they can get transactional revenue.

To break into these markets, BigTech will offer massively lower prices (10x lower) because that is the logic of Moore’s Law. Consumers will benefit (and consumers vote, so I don’t expect Regulation to be a good moat for Banks for much longer).

I assume banks are not reassured to know that their market is only a niche that is collateral damage in a bigger war!

Stock up on popcorn, this one will be spectacular.

It is mostly a positive for Fintechs who will be acquisition targets for BigTech. A very, very small number of Fintech ScaleUps will become BigTech themselves. There are also be plenty of niches (particularly in B2B) where BigTech is not interested and Fintechs can grow without a destructive battle with BigTech.

A few global BigBanks will compete with BigTech. Increasingly they will become financial services platforms used by an ecosystem of Fintechs and smaller Banks.

The other banks (about 9,000) will do well by using platforms offered by BigTechs, BigBanks and Fintech ScaleUps and using these platforms to stay close to their customer without big IT investments.

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.

The 4 wrenching leadership pivot gates that entrepreneurs face

By Bernard Lunn


There are 4 gates that entrepreneurs have to pass through:

  • Gate 1: From Concept to Minimum Viable Product.
  • Gate 2: Prove the Concept = Product Market Fit.
  • Gate 3: Make it work as a business.
  • Gate 4: Expand and dominate as a public company.

It takes totally different leadership skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate.

Each Gate requires a wrenching leadership pivot.

This is like a ski race where you have to change from downhill to slalom to telemark to langlauf skis as you go through each gate. Yes, that is very, very hard!

Gate 1: From Concept to Minimum Viable Product.

Many people have an idea for a world-changing company worth $ billions. Some people have multiple ideas. As the old saying goes “ideas are a dime a dozen”. However, the concept does matter. The concept behind Uber and AirBnB and Lending Club and Facebook was good.

There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.

Conceptual clarity must tick these 4 boxes:

One: Massive market. A small niche might make for a great little venture that can be bootstrapped, but scalable ventures need massive markets. The good news for entrepreneurs is that, if you get traction in a massive market you will have exit opportunities from companies in that market with the scale to realize the value potential that you have created, even if you don’t master the wrenching leadership pivot challenge as you pass through these gates yourself. If you go after a small niche you will be a “bolt on acquisition”. If you go after a massive market you will be a “platform acquisition” and the valuation multiples are totally different between bolt on and platform. What confuses some entrepreneurs is that first wrenching leadership pivot as you go through Gate # 2; this is when you have to focus not just on a small market but on a ridiculously tiny market.

Two: Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising or AirBnB vs traditional hotels. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).

Three: You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.

Four: Timing. Watch this great TED talk by Bill Gross of IdealLab on the “single biggest reason why startups succeed”. The punch-line – timing matters more than Idea, Business Model, Team or Funding. I would phrase it slightly differently – an idea where the timing is wrong is not a good idea. I have seen and worked on unique ideas that failed and years later seen somebody create a valuable business from that idea. The timing may relate to something like how many people have access to the Internet, or bandwidth or economic necessity or a technological breakthrough (such as blockchain). You need total clarity on the “why now?” question.

Here are the two things you do NOT need to have at this stage:

  • A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. After you have passed through Gate #2 a few investors will take notice. After Gate #3, lots of investors are clamoring to get on board. After Gate #4, everybody always knew that the idea was brilliant because hindsight is always 20/20. However, at Gate # 1, nobody cares about your venture and most people will think it is a lousy idea. You do need a couple of smart people to believe in the idea, whether they be co-founders, early employees, partners or investors. But get comfortable with the fact that most people will think you are crazy. Unless you actually are crazy, there will be plenty of times when you doubt yourself and when you think that most people may be right.
  • Any proof that any of the things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner. Proof only comes later.

Many great entrepreneurs have conceptual clarity but are weak at articulating it, or are too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.

There is no exit opportunity at this Gate. Only when you get to Gate 2 do you have any value. If you fail to get to Gate 2, you could still exit through an Acquire-Hire deal, but this is no pay-window exit for entrepreneurs. This a “put it down to experience and put the best spin on it” exit. Investors get some of their money back and everybody gets the optics of an exit. The founders get a pay check and a chance to learn more and make maybe a chance to make their dreams happen within a larger company.

There is lots of free content and free software and free data that entrepreneurs can use at this stage (when they have no cash to spend).

A Minimum Viable Product is essential to show your concept. Don’t think about approaching people with just a presentation deck. Without a Minimum Viable Product, the only people who will talk to you are people who will want to take your idea. The good news is that it is ridiculously cheap to build a Minimum Viable Product today.

Gate 2: Prove the Concept = Product Market Fit.

This is the “fit to today’s market” phase. This is also what VCs call “traction”. This is where the failure rate is massive.

This is the Product Market Fit chasm.

Investors understand this chasm and that is why nobody wants to fund the pre PMF stage. This is why Accelerators have value; they help guide ventures to the PMF stage. Of course even Accelerators would prefer to invest post PMF, but the competition among investors post PMF is intense.

The failure rate of pre PMF ventures is massive. For example, only a tiny % of Y Combinator applicants get into the program and only a small % of the ones that graduate create a valuable business.

The wrenching leadership pivot getting to Gate 2 is from massive market conceptually to tiny market for real.

Peter Thiel explains this very well in Zero to One when he describes PayPal going after the tiny (at the time) market of power sellers on eBay.

This where you focus on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers. These tiny niche customers will be ready to do that because they have a real problem to solve and that need is not being solved because they represent a tiny market that established companies are not interested in.

At launch, all the market will see and all the entrepreneur is thinking about is that tiny market.

Somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate 2.

Many entrepreneurs stumble at this point because they are not consciously making the transition from thinking about the future to executing on the present.

The future that you envisage may or may not come to pass. If it does, you may strike gold. However, that won’t help you get traction with customers today. All those customers are concerned about is problems they have today. Your customers may be happy to “shoot the breeze” about the future, but they will only spend their money on problems that they have right now.

This process of focusing 100% on the present day needs of a tiny market is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate  1.

In B2B markets, getting through Gate 2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive the founders of enterprise software ventures crazy is to ask them about this chicken and egg problem. These reference customers need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate. The difficulty of getting these first references is why so much of the innovation in enterprise IT is coming from ventures using B2C techniques to slip into enterprises “under the radar” such as Slack and Atlassian.

In consumer ventures or media ventures with an indirect monetization model, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, unique visitors, downloads, active users tend to change a lot as publishers “game” the old metrics.

If you pass Gate 2, you typically have two opportunities:

  • A Series A VC round.
  • A small Trade Sale Exit.

To put this in perspective, this is like getting to Everest Base Camp. It is a big achievement, but you still have a long way to go and most don’t make it all the way to the summit.

Trade Sale acquirers know that the price will go up after a VC round. They might be happy with this if the VC round leads to growth and reduction in risk. Or they may want to avoid the risk of a competitor acquiring you. Series A investors understand that you may have this choice and that is why they will sometimes allow founders to do some personal de-risking by selling some shares into this round; it is in the investor’s interest for the founders to be ready to “shoot for the moon”.

Entrepreneurs have to assess the choice between Series A and Exit based on age, motivation and the offers coming in. If you get to Gate 2, you have choice.

If you bootstrapped to Gate 2, the value you will get from the trade sale will still be life-changing, because you don’t have to share the spoils with investors. However, the big money is reserved for those who make it to Gate 3. One way to look at this is, don’t raise VC unless you are determined to make it to Gate 3.

Media ventures can sometimes exit for great multiples at Gate 2 without any revenue, as deals like Instagram and WhatsApp show. However, it only ends that way if you get massive growth in attention at a time when a big acquirer is facing massive disruption – think of Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp. Fortunes are lost trying to emulate this when those rare stars are not aligned. For most ventures, you need to get to Gate 3 and make it work as a business.

Gate 3: Make it work as a business

Here I will go against the Silicon Valley grain. I think revenue and profit generation is a muscle that needs to be exercised. Postponing both worked for Facebook and postponing profit may or may not work for Uber, but this postponing strategy makes you totally dependent on the whims of investors (who are totally dependent on the whims of central bankers).

In Gate 2, you got Product Market Fit in a tiny market. You cannot build a business in that tiny market. It is just a stepping stone to a real market that that you go for in Gate 3.

This is the “make it work as a business” phase. This is the point where you will need the sales and marketing skills and techniques that I describe in Mindshare to Marketshare. You will need to scale your sales and marketing with replicable processes without losing the passion and creativity that got you to this Gate.

This is another wrenching leadership pivot. During the PMF phase, you do things that don’t scale. You do whatever it takes to get customers including things that are totally uneconomical at scale.

All of that changes when you get to Gate 3. Now you need to make sure your unit economics work and that Customer Acquisition Costs are OK. You may defer profit and cash flow if your investors support this, but the unit economics have to be right. You have to scale revenue but it must be the right type of revenue (high margin, predictable, low customer/partner dependency etc).

This is when you start to scale your team and accelerate growth by making acquisitions.

For ventures with an indirect revenue model, there are now trade-offs and conflicts to be managed between the needs of free users and the different needs of paying customers (e.g. advertisers). That is a wrenching leadership pivot for entrepreneurs who won in the last Gate through their self-proclaimed single focus on user experience.

For direct revenue SAAS models, you now need to move from pilots to enterprise wide deployment and in small business to become the market leader in at least one substantial niche market.

Businesses that make it through Gate 3 are “in the catbird seat”. You have a profitable, scalable business that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers. You get to choose when and who you sell to. Or you may choose to go all the way to Gate 4.


Gate 4: Expand and Dominate.

This is the post IPO sustainable public company phase.

The “expand and dominate” Gate 4 is about pivoting back to that original founding conceptual clarity, of realizing the big picture potential.

All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate 3 are all about constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate 3, you will be able to leave the quarter-by-quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating the market.

Dominate may sound harsh to some ears, but that is what public market investors expect; that is what the high valuations given to fast growth tech companies are based on. Another way of saying this is what Peter Thiel describes as natural monopolies in Zero To One, the kind of monopolies created by network effects (think of Google, Facebook, Uber, AirBnB).

Entrepreneurs that make it through Gate 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate 3 get the opportunity to exit and that is a good result for founders, investors and management; this is when those stock options become life-changing. Gate 4 is for a handful of companies that get fame as well as fortune (founder faces on the front page and on TV). This is a very small elite club.

The changing game of Innovation Capital

The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore, VCs historically tried to either sell the business at each of these Gates or find professional management to replace the CEO with one who is more suited to the next gate. I refer to the Founder CEO as the key, because even though there are often co-founders, there is usually one of them who emerges as the leader.

That conventional wisdom was overturned after the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff, Kalanick, Chesky. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company. Yet some of them actually do that.

This is now the accepted wisdom in Silicon Valley – to back founders all the way. It has gone a bit too far. The primary job of the Board (usually run by VCs) is to change CEO when needed.

By shirking that responsibility in order to appear “founder friendly” they are hurting their real customers (the LPs). Too often these days, a founder CEO is only ousted after a scandal that does reputational damage that is hard to recover from.

Also, the impact of this new orthodoxy – to back founders all the way – is not reflected in the business realities of the VC business.

The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. For example, this has led to “premature IPO”, when the company really is not ready to operate in the public eye and this damages the reputation of the VCs and I-Bankers who promote the IPO. Now many investors prefer to wait at least until after the 6-month lockup period or when a scandal breaks in an otherwise sound company. It has also led to a game of “pass the parcel” among VC and PE funds, so that one fund can book a profit during the time window of their fund.

So we are likely to see some innovation in this area, with more evergreen capital, because the reward for backing entrepreneurs through all four gates is very big.

These are 4 pivot gates:

  • Gate 1: From Concept to Minimum Viable Product.
  • Gate 2: Prove the Concept = Product Market Fit.
  • Gate 3: Make it work as a business.
  • Gate 4: Expand and dominate as a public company.

If you are coming up to one of these gates, be very conscious of the wrenching leadership pivot that you will be encountering.

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