P2P financial match making: Low CAC and Scale-up recipes

Lendborrow

Image courtesy of SIIPClub

By Efi Pylarinou

P2P online lending marketplaces claim to be Tech platforms in the match making business. They pair borrowers and lenders and cover the entire lifecycle of the origination process:

  • Customer acquisition
  • Sales
  • Scoring and underwriting
  • Funding
  • Servicing and collections

Today I want to think of these platforms as mines. I am going in with my torch and will be looking with you at some of these processes. Come along with me to shed some light on What happens and How in order to acquire a retail customer.

Tech businesses typically report in their filings, metrics like:

CAC = Customer Acquisition cost

CPC = Cost per click

KYC = Know your customer

CLV = Customer lifetime value

If you are interested in understanding more about the factors that affect the CAC (which includes CPC, KYC, and CLV) and how this relates to a scalable business, read more in “How to calculate Your online customer acquisition cost”. Derek Palizay, a strategic marketer, claims that a CLV of 3-5 times greater than the CAC, is a decent rule of thumb for a scalable business.

P2P online marketplaces like Lending Club, On Deck and the sort, acquire retail customers in the same way that traditional credit card businesses have been doing.

  • Direct mail
  • Google, Facebook ads
  • Listings in comparison shopping sites

Mintel Comperemedia, a database that tracks advertisements, reported that for July:

  • Lending Club mailed 33.9 million personal-loan offers, more than double the amount during the same month in 2014
  • Prosper Marketplace, direct-mail volume increased to 20.2 million offers
  • The average monthly volume of personal-loan offers sent through the mail is roughly 156 million y-o-y (through July 2015)

Clearly, the US Postal service is one beneficiary of the soaring old fashioned mail volume coming from these online lenders. The estimated conversion rate from these mailings to a lead is roughly 4%. So, for example from 20million mailings, 800k leads maybe generated (4%). From here on, smart use of data is essential to rank prospects and improve likelihood of conversion into actual customers. Kreditech can be the potential beneficiary at this stage of the mining process. Remember we are still behind the scenes, down in the mining labyrinth before issuing the loan.

From the public SEC filings of OnDeck, that I checked before going down into the mine, the reported customer acquisition costs are:

“During the nine months ended September 30, 2013 and nine months ended September 30, 2014, the average customer acquisition cost as a percentage of principal from all initial and repeat loan originations in each respective channel was 8.3% and 3.9% in our direct marketing channel, 4.4% and 3.4% in our strategic partner channel and 8.6% and 8.2% in our funding advisor channel”

Customer acquisition costs vary largely by acquisition channel. The most expensive way to acquire customers has been direct mailing and funding advisor channels. The less costly way has been through strategic partnerships. OnDeck is focused more on SMBs rather than consumer loans but data related to consumer loans and credit cards is also difficult to disentangle and cant be that different (except for the funding advisor channel). Lending Club (also with public fillings) reports spending $200-$300 per loan but that includes all the servicing.

It’s dark down here in the mine and 8% handle for CAC makes me shiver (2014 figures). Maybe 2015 will prove to be a better year and CACs will be reduced because of customer loyalty, smarter credit scoring and more revenues from strategic partnerships.

On the lower end, it seems that even

4%-5% CAC pretty much would eat up all the spread between borrowing-lending rate

I am still shivering with these thoughts. Revenues but no profitability with such high CACs.

The big beneficiaries from the soaring P2P retail lending volumes (even though overall this space remains small as a % of the overall origination market) seem to be the:

  • United Postal Service, with millions monthly mailings (offline)
  • Mailchimp, with millions monthly mailings
  • Google and Facebook ads

While still operating in the high end of the credit spectrum of the retail market, the strategic direction that P2P retail lending needs to head towards to move from revenues to profits, is clearly

Customer acquisition channels via partnerships for better lead generation and accelerated scale-up. CAC costs need to come down to the 2%-3% range and volume needs to soar.

The easiest partnerships, are already happening with lead generation sites like LendingTree, CreditKarma in the US, and Moneysupermarket in the UK. Credit Karma for example, has over 40million users. The traditional adjacent type of partnerships are similar to those that old fashioned credit card businesses have been engaging in: a la SoFI partnering with the top 100 US universities. Or partnerships with small to mid-size banks that want to participate in the origination business but need to outsource parts of the process that we described above (from acquiring the customer to servicing the loan). These partnerships are also starting to happen in the US and the UK (Zopa and Metro Bank).

The ones that will fuel and accelerate the scale-up process are the tech and e-commerce partnerships, like Lending Club with Alibaba, Lending Club with Google, and Zopa with Uber. These are partnerships will simultaneously lower CAC costs and gain marketshare by accessing customers from other marketplaces that are speeding on the highway of transforming commerce and services.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

Alternative ways to score consumer credit worthiness in the global Underbanked market

SCORE_logo

 

By Bernard Lunn

Fair Isaac Corporation, which invented the FICO score, was founded way back in 1956. The FICO score was one of the great Fintech innovations before the term Fintech was coined and the company is now publicly traded (symbol is FICO of course), with a market cap over $2.8 billion.

FICO invented the credit score business and they dominate it today. Of course that means that entrepreneurs look for windows of opportunity to break into this huge market.

 

There are two basic opportunities – in the West and in the Rest.

In the West there are about 25% of consumers who are no file or thin file. 

That is a big %. The assumption that the market makes is that all 25% are bad credit risks (“deadbeats” in common parlance). That is a faulty market assumption that leaves an opportunity in these cracks in the market:

  • Professional Class Immigrants. They arrive in a new country with assets back home and a good job in the new country and…no credit history in the new country.
  • Too rich to bother with credit scores. Private Bankers serve this niche quite well. Collateral in Custody is the lender’s protection.
  • Divorce or death of spouse who had the credit history.I assume there are legal ways to avoid this problem but people going through a life trauma may not be super diligent on paperwork.
  • Students. Some parents teach their kids how to play the system (get a credit card and use it a lot and pay it back 100% each month). Some parents don’t do this and some kids reject the advice as stupid grown up stuff. The much bigger issue is students without rich parents who pay for their own education by going into debt.
  • Ambitious Entrepreneurs. Most entrepreneurs fall into the 25% category for a while (particularly if bootstrapping) and either end up in the too rich to care category (if the venture succeeds) or slowly and painfully crawl their way out (if the venture fails).
  • Digital MicroEntrepreneurs. Many are first generation immigrants without a professional class job. Some may end up building a huge business. Most cobble together income from multiple digital services (Uber, AirBnB, Amazon, eBay etc).

These are the innovators we found:

  • Earnest is going after the Student market  using money raised ($299m) as a proxy for traction, they seem to be doing well.
  • PRBC. The initials spell Pay Rent Build Credit and that explains the concept. If a consumer pays rent reliably for years, they may pay a mortgage regularly as well. PRBC now also analyzes other spending. PRBC is one of 5 official Credit Bureaus in the US that is FCRA (Fair Credit Reporting Act) compliant.
  • IWOCA serves the Micro Entrepreneur market (we put that segment in both Consumer and Business Categories in Daily Fintech and the segment is attractive partly because it “falls between the cracks” that more bureaucratically oriented incumbent banks tend to ignore). We reported earlier on IWOCA here.
  • Aire graduated from Barclays Techstars in October 2014 where they got everybody’s attention with the most compelling opening pitch when one of the founders went on stage and simply said “I am a reject” (meaning rejected by conventional credit scoring). Our ranking of their pitch at the time is here.
  • Ffrees. Their approach is delightfully old fashioned and contrarian. They help people build their piggy bank to save before buying. In a way they are the anti-credit alternative. We wrote about them a year ago here.

In the Rest there are about 100% of consumers who are no file or thin file.

There is no FICO score in Africa for example. This is where a Y Combinator alum called SAIDA operate. They analyze SMS spending and receipts to underwrite small consumer loans. At their Y Combinator coming out event they claimed 8,100 loans with a default rate so far on their 30 to 60-day long loans of about 8.5%.

I call this the global Underbanked market. There are Underbanked customers in the West (a minority) and in the Rest (where they are a majority). While banks mostly fight over the Overbanked, entrepreneurs are serving the Underbanked. This is another example of Innovation coming from the excluded.

In the Rest, the distinction between small business and consumer is irrelevant because there a) is no FICO score and b) most people are entrepreneurs (albeit micro entrepreneurs). This is where a company like Kreditech is interesting as they claim to becoming profitable in a new market within 1 year (that was what I heard them say on stage at SIBOS) by analyzing earlier loans and their repayment.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

Trōv – the standalone digital platform that enables an entirely new way to insure the things people care about

By Rick Huckstep

The future for personal lines insurance is all about “engagement”. When insurance becomes a lifestyle choice, then consumer perception will change. And so will their behaviour  This week I get an exclusive sneak peek at Silicon Valley based Trōv and their platform that will change the game for insurance.

The concept is a simple one, the best one’s always are!

We all own stuff that is important to us. Things that we value. Items we want to protect from damage, loss or theft. Possessions that are important to us because we have decided that they are.

And with this stuff comes a heightened sense of protection towards them. We handle them with care. We look after them. We take care of them. We protect them.

But sometimes, bad things happen and our possessions are damaged, lost or stolen. This is why we take insurance… to give us protection when bad things happen to our stuff.

But the problem is that consumers don’t think about insurance in this way. And we all know why – consumers don’t trust insurance and they don’t value it either (until it’s too late).

Which means that the successful insurance companies are going to be those that create an ongoing engagement with their customers, and to do that, they have to engage with their lifestyle.

A few weeks back I covered what I call “engagement insurance”, and it is relevant here because it is also about lifestyle insurance.

Let’s talk about TrōvLogo-Blue-on-White-300

Trov was founded around 3 years ago by Scott Walchek, who is no stranger to launching successful tech startups, raising money and the whole Silicon Valley thing.

Scott explained the genesis of Trōv, there’s enormous value latent in the information about the things people own. That value isn’t being tapped by individuals because it’s hard to collect it. By reducing the friction around collecting the information, and giving people agency over it – we can curate really powerful ways for them to benefit from it.

“The first big opportunity to emerge is a new way to insure. On-demand protection for just those few things people care about – for as long as they’d like.”

Trōv is a lifestyle app that collects data about your things, builds it into a list, then provides machine enhanced risk pricing for single item coverage. Trōv provides micro-duration policies (down to the second), charges micro-premiums (down to the cent) and uses chat robots to manage claims.

This is an entirely dis-intermediated experience through a smartphone app.

How does it work?

The key is that Trōv is both a data collection app and a digital insurance platform all rolled into one. And it starts with the way that the platform makes it easy to collect information about your stuff.  

MY TROV-1To see for myself, I signed up to the beta trial in the UK. I downloaded the app, signed in through FaceBook and Trōv immediately added my iPhone to start my personal inventory. In the process it pick up the model, size and calculated its replacement value.  

The automated approach to data collection is fundamental to making Trōv a convenient and effortless experience. For example, when a purchase receipt hits your inbox, Trov reads it, identifies the purchase and places the purchased item straight into your inventory with a product description (and eventually it will automatically add the cost of insurance).

Next to come after reading the Inbox will be scanning barcodes, using metadata, or taking a feed from services such as Zoopla. These are just some of the ways to get data in.

Streaming insurance on and off at will

There was a time when we all bought music albums. Then iTunes came along and introduced the ability to buy a single song. Then Spotify introduced streaming and now we just pay to listen to the music when we want, where we want.

Imagine the same transition for insurance!

Imagine a time when we can turn insurance on and off to suit our situation or circumstances. This is what Trōv enables the consumer to do. By providing micro-duration policies with micro-premiums priced to the second, when you want, where you want!

Over the past couple of weeks, I’ve been given a sneak peak at the app and what’s to come (and to say that I’m excited by what I’ve seen is an understatement!)

The signature feature is “SWIPE TO PROTECT”. ThisSWIPE TO PROTECT-1 makes turning insurance protection on and off very easy.

From the Trōv list of possessions, the user “swipes right” with their finger to activate cover. And with a user profile that contains all the relevant information, this is all they do to start the cover.

To turn off the cover, the user does the opposite. They swipe their finger to the left over the item in the list. This brings up an option to turn off cover. It’s that simple.

And there’s more to come from Trōv to instigate insurance cover to suit your lifestyle. Whilst details won’t be released until next year, the essence is that Trōv will integrate with your life.

By syncing activity on apps like Tripit and airBnB, or using geolocation, events or your diary, cover can be activated automatically on the user’s behalf with little or no intervention.

Only insure for when you need to

A key design feature of Trōv is the ability to quote premiums in real time for single items in the app. With Trōv protection, the consumer is only charged for the actual period of cover, measured to the second. And when activating cover, the consumer has the ability to adjust key variables, such as the deductible, to suit their circumstances and adjust the premium.

Trōv have also simplified the policy documents by redefining the product disclosure section. Instead of many pages of detailed policy conditions written in 8-pitch fonts, Trōv have simplified the terms and conditions whilst also meeting their compliance obligations.

The engagement is convenient…

Trōv is clearly targeted at the millennial, the generation that have become disenfranchised from insurance as they see it as a luxury that is too hard to buy with no obvious benefit. But this is the very demographic that should be comfortable with insurance.

Which is why the Trōv team have built a great UX to drive ongoing engagement with their users. Trōv is not going to be an insurance product you buy once a year and forget about.

This is a lifestyle app that is used all the time and provides the perfect “on ramp” for millennials into insurance.

Over time, the Trōv gets fuller and fuller as new items are added to the list. Old items will be archived, but the expectation is that consumers will continue to build-up their list of possessions.

And Trōv solves another problem for consumers.

If you’ve ever had your house burgled, you will know how it feels to be asked (quite reasonably) by the insurer to provide evidence of existence and value of the stolen items. How many of us have a comprehensive itinerary of assets and possessions with details of when the item was bought, how much it cost and its specification?

The dynamic of this experience is bad for both the consumer and the insurer. Any sense of trust is sorely tested!

With Trōv, the consumer has a detailed itinerary, problem solved!

…And so is making a claim

Scott explained; “today, the world of claims is a very negative experience. It assumes claimants are telling a lie.  At Trōv, we are taking the opposite approach and believe that by giving our users numerous ways to build their Trōv reputation via their social graph, platform engagement, protection history, and the like – we can come alongside our users at a time when something in their lives has gone wrong: a theft, a loss, a fire, whatever.”

The way that the user initiates a claim is genius!SWIPE TO CLAIM-1

First, the user swipes right (again) on an item that is already protected. This time, the option given is to make a claim.

The user then engages with a chat robot that is based on an expert system. The technology uses contextual verbiage to collect date and location information, description and images of the claim. This online chat becomes a record of the claim which the claims adjustor can see near-real time.

Over time, Trōv will assemble enough data to completely automate the claims process and minimise the effort from manual handling.

It’s all about the customer experience

Scott explained, “we’re really insuring people, it’s not only about the individual item, we are focused on the person behind it.  We’re removing anonymity of the human through the Trōv profile. By making it easy to use the app and by building up an online profile, we believe we will reduce fraud.”

It is this user experience that is the real differentiator for Trōv. Unlike other personal lines insurers who battle it out on price, the make or break factor for Scott and the team is going to be the behaviour of Trōv customers.

And frankly, there is no precedent for this in insurance!

Sounds great, when can I get it?

Trōv 4.0 will launch in Australia and the UK in the first half of 2016. Tier 1 underwriting partners are already in place and, when they are made public, the Daily Fintech readership won’t be surprised to find that they are two of the most innovative and forward thinking insurers in the market.

And why Australia and UK first? Because both countries are easier to enter from a regulatory perspective. Both have a single and progressive regulatory body, unlike the US, where insurance is regulated by each of the 50 states.

Trōv is the one to watch!

It is not often that I say this, but Trōv are definitely the “ones to watch!” Scott and his team have built a lifestyle app that ticks all the boxes for the millennial generation.

And if the insurance industry is going to have any relevance to the millennials, it needs to build an insurance model that is engaging first and insurance second. Just like the Trōv team have done!

See the promo video here on Youtube.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

Microfinance 3.0 to tap the massive Underbanked opportunity

microfinance-pyramid

By Bernard Lunn

  • Microfinance 1.0: The Gameen Foundation proves that default rates can be low when lending to the very poor. Microfinance is born. This was possibly the most important financial innovation in the last 50 years.
  • Microfinance 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 startup model. This almost killed Microfinance by giving it a bad reputation.
  • Microfinance 3.0. This is emerging at the moment and is characterized by three innovations.
  • Free payment wallet with low cost micro payments and simple ways to save money. Look at Ffrees to see how to do this well.
  • Impact investing and philanthropy. Kiva made this accessible and compelling for millions.
  • Poor lending to the poor via a platform. The closest I have found to this is Zidisha. 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).

This is financial inclusion in action and is key to lifting billions out of poverty into a global middle class (and that will be key to global growth). More innovation is needed and is coming in the form of:

  • Digital Identity via mobile devices
  • Asset recording and exchange via Blockchain technology.

Most bankers and most entrepreneurs fight over the Overbanked in the West (spoilt for choice and very rarely switch suppliers) and ignore the massive Underbanked blue ocean market where demand is strong and supply is weak.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

Bringing KYC digital identity to the Global Underbanked

internet-dog-cartoon

By Bernard Lunn

Are you really sure I am not a dog? Maybe I am a really smart dog with an AI implant pretending to be a human. Disclosure, Daily Fintech is written by a stealth mode AI venture as a proof of concept.

Seriously folks, you cannot know my Identity. To read a free post you don’t care. If you are going to send me money, you do care. You do not want to send money to my dog.

In the West, KYC digital identity is a pain for banks and for consumers. However it is an aspirin level pain (it does not cost much to fix and it is not top priority to fix). Real change happens when you get heart attack level pain (it costs a lot to fix and it is your top priority and you are not price sensitive).

In the Rest of the world (the countries formerly known as emerging), KYC digital identity is a heart attack level pain for both banks and consumers.

This is another First the Rest then the West story (the flow of innovation is reversing thanks to leapfrogging and now originates in the Rest and then goes to the West).

I am calling this market KYC digital identity:

– KYC (Know Your Customer) is the problem seen from the viewpoint of the provider (whether Bank or Fintech).

– Digital Identity is the problem seen from the viewpoint of the consumer.

Any solution has to work for both provider and consumer.

It annoys me that I have to either remember passwords or let Google or Twitter or Facebook or LinkedIn be my digital identity.

It annoys me, but it is not on my A List Priority to solve. It is an aspirin level problem for me in the West.

It annoys me that I have to scan my driver’s license and/or passport to open a new account. But I do it. If a provider offers me an easier way to do this I will use it, but it is not on my A List Priority to solve. It is an aspirin level problem for me in the West.

KYC is also an aspirin level problem for Banks. Despite all the noise about KYC, the reality is that this is a pre competitive ecosystem problem. Consumers will continue to scan documents because opening a new account is such a rare task and we don’t have a choice and we have all learned to live with some boring tasks as part of our lives.

I use this simple quadrant picture to evaluate something new:

Axis A: Impact. A heart attack level problem is High impact and an aspirin level problem is Low Impact.

Axis B: Ease of Adoption. An Enterprise System is Difficult Adoption, which is OK if it is also High impact. Consumer solutions for overcrowded Western markets (yet another way for a metro hipster to shop more easily) are Easy Adoption and Low Impact. This is where the VC money has flooded in the last decade and it is therefore less interesting now (oversupply of capital is bad for investors). The great ventures are Easy Adoption + High Impact. We will see more of these among the Global Underbanked for two simple reasons:

  1. The consumer has a much greater need. Digital Identity means the ability to own assets and make/receive payments. Digital Identity is the on-ramp to the global middle class. This becomes an A List Priority for people. If you need to do something in order to receive some money in order to buy food for your family, you will do it – today.
  1. The mass adoption of mobile devices enables new solutions to emerge.

Verifiable identity is the on-ramp to financial inclusion and that applies to the Underbanked in the West as much as the Underbanked in the Rest. This was brought vividly home to me when waiting in line at a Post Office in NYC and witnessing the desperation of a homeless person being refused a PO Box because she had no physical address. Without that PO Box she would be refused the job she had applied for. She would be an unperson without any official identity who could not get a job or get paid or own any assets other than what she could carry with her. Some of the most interesting Fintech ventures are focussed on the Underbanked in the West, such as Ffrees and Aire (alternative credit scoring spotted in Barclays Techstars coming out party in October 2014). One writer calls this the Unexotic Underclass and that phrase resonates.

That digital identity on ramp to society cannot be solved by technology alone. In India they are tackling this through the Unique Identification Authority of India, which is a government initiative to collect the biometric and demographic data of residents and store them in a centralized database and issue a 12-digit unique identity number called Aadhaar to each resident.

There are two issues with this:

  1. It won’t work in failed states. India is a democracy with rule of law (with all the messy noise and confusion that accompanies democracy). This won’t work in Syria for example. One intriguing suggestion at the SIBOS co-creation workshop on financial inclusion for refugees was that Telecom companies should have to collect this data. As they get bandwidth from government, this would be simple to enforce. Even people in failed states use mobile phones.
  1. Centralized databases raise privacy and security concerns. As of August 2015, the legislation to back UIDAI is still pending because some civil liberty groups have opposed the project on privacy concerns.

Both problems can be solved by immutable blockchain technology. This would be secure against all these issues:

  • Identity Theft. As more data is digitized the problem gets worse. Bitcoins stored using private keys have been secure despite sustained attempts by the world’s best hackers. So Digital ID can be secure as well.
  • Asset theft by corrupt governments. If land is recorded in a paper registry a corrupt dictator can pay a minion to change the title so that my house becomes his house.
  • Commercial and government snooping. All power corrupts and the Digital ID of billions of people is an awful lot of power.

Storing Digital ID on the Blockchain is an idea whose time has come and I see two interesting companies in this space:

OneName

ShoCard

Once Digital ID is securely stored in an immutable decentralized database, new consumer solutions can be layered on top. One company to watch is Trunomi. They are not using Blockchain AFAIK, but they are solving the granularity problem. If I can control my Digital ID (and all the Personally Identifiable Information associated with it) I can release subsets of the information – you can have my driver’s license but not my passport or medical records and you can only have it for this one transaction.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

A Fintech offspring of MIFID II research unbundling; Alphametry

Screen Shot 2015-11-22 at 9.36.28 PM

Image courtesy of “The Equity Research observer” from the Alphametry blog.

By Efi Pylarinou

The market of equity research content is roughly around $15billion and when MIFIDII hits the market and makes it illegal to pay for research via trading commissions; the market will shrink. The consumers of research, the buy-side firms, will have to figure out how to pay the cost, since execution wont be an option anymore. The producers of research, will have to re-invent their product and delivery to keep their clients. And the intermediaries, the marketplaces, that bring buyers and sellers of research together, will have to also reinvent themselves to stay in the business.

The traditional go-to markeplaces for equity research have been: Bloomberg, Thomson Reuters, and FactSet.

The producers of research, looking for buyers, have been traditionally Wall Street analysts (no more with suits but with a Banana Republic dress code), Brokers (with the traditional Happy hour meetups), and Independent boutiques with niche areas of expertise. The mindset shift from the internet penetration has added to that list of research producers; Traders, Industry experts, and bloggers. Seeking Alpha is a curator of such research producers.

The consumers of research, have been asset managers of all “religions” and “strategies”. From mutual funds, pension funds and asset managers to hedge funds and individual financial advisors.

Half a dozen of Fintechs are focused in providing some sort of marketplace for equity research when the landscape is forced to change. Even though this market is doomed to be hit and shrink in terms of revenues, at least initially; there are opportunities for these Fintech service providers:

  • Provide higher granulation for buyers (i.e. option to buy part of a package)
  • Provide discovery algorithms that are more suitable product and optimize expenses (i.e. better search engines)
  • Provide an online platform for all new content that will spring out of the new market conditions.

When all is said and done, we should end up with faster delivery of a better product match and cheaper for the end user. Naturally, the adaptation of market stakeholders will be painful for those that aren’t able to adapt.

I have covered Airex market, in the US, earlier this Fall (Airex Market: Discover & shop a la carte financial research, apps and info) that has its own cloud-based marketplace program (AMP) for research, financial info and apps. This program has been growing and recently they have added Finadium and Interactive Brokers. Airex Market has a broader scope than addressing the research unbundling issues around MIFID II.

Alphametry is a French Fintech that is going live as we speak and offering a platform for consumers of equity research to host digitally their shopping cart-library. Alphametry, curates equity research first by indexing the researcher’s opinion and its actionable strategy; and then calculating metrics to track the quality and the ranking of these research opinions. Second, by creating a community that can up vote articles and offer a crowdsourced recommendation lists of notes. Alphametry, as most of the Fintechs, allows for purchases per unit of any research piece but most importantly, the digital database is searchable and the algorithm behind it, should produce better “advice” to shoppers. Data and embedded algorithms, are used to differentiate Alphametry from the traditional approaches.

Incumbents and insurgents are in or going after a shrinking market; the market of trading equity research. 2016 will be the year that asset management and wealth management will make larger strolls towards adapting automation in the investment process. Research and education will be one of the differentiating factors in the evolving platforms that are competing for AUM and for users. In 2016 we will shift our focus from reducing trade costs, to better investment decision making (i.e. optimization and risk management). Data algorithms that extract value from research will be one added value in that direction. The race has started.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

 

 

Silicon Valley finally goes global – good for some but not others

Global

 

By Bernard Lunn

The VC Fund model has a strange paradox. It breeds scalable global giants while remaining defiantly small and local. There are two reasons for this:

  1. You need to be local at the early stage. When a company reaches the growth stage it is easier to manage your investment in a portfolio company via an occasional Board Meeting and lots of metrics. In the early days you need to be physically close to the team to a) read body language to see how stressed or energized the team is and b) spot problems where a founder is going off the rails in some way (such as being dishonest, drug problems or depression) and c) be able to give advice informally just in time during learning moments outside the formal constraints of a Board Meeting.
  1. The Weekly Partners meeting does not scale. The weekly meeting, with all Partners discussing and approving a deal works well. You get lots of experienced eyes on a deal. However that does not scale beyond say 10 partners (when it starts to get political) and it is too hard to manage a Partnership with global conference calls where the global offices feel left out and may have to dial in at strange hours to accommodate the “head office” (and then people start to resent the Head Office and factions emerge).

This is starting to change. This post describes how the Silicon Valley financing model is finally starting to globalize properly.

This is a Good News and Bad News story. It is Good News is for entrepreneurs based outside Silicon Valley who get greater financing choice. It is Bad News for local funds and accelerators who get more competition.

There have been two experiments in VC globalization:

A. Some Accelerators have gone global. For example:

  • 500 Startups. You cannot extrapolate much from this example as it depends on the energy and personality of Dave McClure. I get tired just watching his travel schedule from the comfort of my office. They did ramp this up a notch with their recent Nordics Fund. This is the carve out model (see below) applied to an accelerator (which makes sense as accelerators morph into becoming full scale VC Funds).
  • Sponsored Accelerators. This is being used within Fintech. For example the Barclays Accelerator powered by Techstars is now in both London and New York. This global viewpoint is not surprising because Techstars originated from Boulder Colorado rather than Silicon Valley and so they had to obey the Steve Jobs instruction to “think different” from the start. Another Sponsored Accelerator (with multiple sponsors) is StartupBootCamp (SBC) which is now in London, Berlin, Amsterdam, Hong Kong, Istanbul. SBC is scaling this model. They are in multiple verticals (Fintech, Insurance, IOT, Health and many more) and I can envisage them in all major and minor innovation hubs.

B. The Carve Out model. This is how the Tier 1 VC Funds have traditionally gone global. They carve out a % of Fund for a country. For example, they raise a $1 billion Fund and carve out 10% ($100m) for Country X. This model has not always worked well because the Weekly Partners Meeting does not scale (for reasons outlined above). When this does not work out there is either a buyout and rebranding (e.g. Benchmark UK becomes Balderton Capital) or the Fund sells a whole country portfolio to another institution (e.g. Canaan Partners selling their India portfolio to JP Morgan).

Sequoia Capital is innovating on the path to globalization. I saw this on a video interview with Sir Michael Moritz (which I did not bookmark and cannot find, so may have got it a bit wrong and happy to correct if necessary) where he said that they have allowed the team in China to make investment decisions without referring those decisions back to Silicon Valley. That decision took courage because it is relinquishing control. I do not know if Sequoia Capital is doing this in any other country. Perhaps China is a special case. Perhaps it is an experiment and if it works well they will apply it to other markets. Sir Michael Moritz has certainly been vocal on how important China is in the global economy. His point is really to point out the obvious and to point out that too many people are in denial about the obvious. China is driving change in so many areas and within Fintech this was the subject of a session I was part of at SIBOS this year.

I think that China is the lead example, but it is broader than that. I refer now to the “countries formerly known as emerging” because there are so many that are innovating and the old labels (third world, developing, emerging, growth, BRIC etc) no longer fit that well. The one market that I know from personal experience is India and I have written about how the movement to mobile wallets in India epitomizes a more general trend that I call “first the Rest then the West” (that innovation now starts in the countries formerly known as emerging and then moves to the old world of America and Europe, which is a reversal of the historical flow of innovation). That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.

Silicon Valley open sourced its core IP. Countless blogs, books and online course now teach how to create and scale a startup. Obviously Silicon Valley has a far greater % of people who understand how to do this, but the manual is available to anybody from anywhere. That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.