Tradeplus24 CHF100m Fintech raise in Switzerland signals Insurance move into SME Lending 

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Note: the deal was done in CHF which is about parity with USD, so you can read that as $100m.

When I first started looking at the Swiss Fintech scene in 2014, my post was called: Zurich Fintech fans look jealously to London (I did point out that while London might have more VC, the Swiss trains and mountains were better).

A lot has changed in that time. A more updated view of a much more vibrant Swiss Fintech scene was captured here two years later:

In the two years between those two posts, four things happened:

  1. Swiss regulators drafted perhaps the most progressive Fintech License anywhere. That took almost everybody surprise. A prediction along these lines would have got only cynical laughter in 2014.
  2. Bitcoin became respectable because it is legal tender and can be bought at any train station and used to pay taxes and other government bills. The legality was known for a long time thanks to the strange history of the WIR (as we reported in March 2015) and that legality led to respectability and both are prerequisites for mainstream adoption.
  3. London suffered Brexit (what soccer fans call an “own goal”) making other places in geographic Europe more attractive.
  4. Some potentially great ventures are starting to emerge from Crypto Valley. Lykke is one to watch in our view – a proven entrepreneur using disruptive technology to execute on an ambitious vision.

A $100m Fintech raise in Switzerland in 2014 would have been inconceivable. In 2017 it is noteworthy as another sign of a rapidly maturing Fintech community in Switzerland.

The Tradeplus24 news has a big number to get our attention. However, it is the innovation behind that number which gets our scrutiny today.

I could only find the Tradeplus24 news on German language sites, so if that is an issue for you, here are the key facts:

– they raised CHF100m debt

– The debt is for lending to Swiss SME (note: they refer to KMU which translates to SME). This makes them a balance sheet lender, like Avant, not a marketplace lender like Lending Club. This means they have assured capital to offer rather than simply matching on a best efforts basis (our take is the latter is the better model long term but that you need balance sheet based lending to get a market going).

– The lender is a boutique investment firm called OceanoOne that connects lenders to what they describe as “sourcing engines” (which is how they categorize Tradeplus24). Lending platforms consistently tell us that the demand from lenders far outstrips the supply of good quality borrowers. Lenders are hungry for high quality debt with a good interest rate. OceanoOne’s proposition is having relationships with the sourcing engines that deliver that high quality debt (what OceanoOne calls “short duration, secured working capital finance”).

– Kessler & Co AG, a Swiss Insurance broker, is listed as a partner

– AIG, the global Insurance carrier that got into trouble in the Global Financial Crisis is also listed as a partner.

It is the role of the last two that is interesting. This is Insurance getting into SME Lending and that could be game-changing.

A Credit Rating for SME?

Classic Supply Chain Finance (see this interview with Orbian for an example) works very well if the buyer is a credit agency rated corporate. That gets something like 150 bp spread over LIBOR.

That is great for an SME who is at the final stage in the supply chain that supplies to a credit agency rated corporate. What about an SME that is further down the supply chain or that only sells to other SMEs?

The rest of the SMEs currently rely on one of two types of solution:

–      Receivables Financing, Factoring, Invoice Discounting. Whatever you call it, the credit rating is based on the seller not the buyer and the APR % compared to Supply Chain Finance is massive.

–      Credit approval based on bank processes. Lots of ventures have made this process more efficient by digitizing it, but it still relies on the data that banks have traditionally asked for such as tax returns and audited financial statements which are at best one input to a credit model. That can work in America and Europe where that data is easily accessible in digital format, but it is not game changing. It is far harder in the Rest of the world.

All of this goes away if SMEs can get a credit rating as easily as a corporate.

In the interview with Dianrong, we see an approach to this problem in China.

The Tradeplus24 approach is different. It brings Insurance into the mix. AsOceanoOne put it “An insurance or equal protection of investment grade quality against credit loss and fraud is in place for all pre-financed receivables. The purchase of the receivables occurs only when a credit insurance or an equal protection is in place and confirmed by the relevant protection provider.”

The role of AIG is critical. We cannot see the details yet, but credit market work with Insurance. Think of the Credit Default Swaps (CDS) that are credited with the Global Financial Crisis and in which AIG played a much criticized role. A cynical knee jerk reaction might be “here we go again, this must end badly”. Our take is that there is nothing wrong per se with securitization or the insurance of securitized debt. Both can lead to more efficiency and lower cost financing. The issue is data transparency and now, nearly 10 years after the GFC, we have had the Big Data revolution and that transparency is now possible. If that makes financing cheaper for millions of SMEs we can all cheer.

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Bernard Lunn is a Fintech thought-leader, investor and deal-maker. 

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Blockchain Bitcoin & Crypto Weekly CXO Briefing

The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and offer one expert opinion.

This is week two. For week one and the intro, please go here.

News Item 1: Bitcoin Pool ViaBTC says no to Segwit

News Decrypted: Last week we reported that a major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit. For explanations/glossary please go to last week’s post. Our take on last week’s news was that this signaled the last bloody battle in the Bitcoin Civil War and that Bitcoin Core was winning.

The news this week is that another Bitcoin miner is saying no to Segwit.

Our Take: This week’s news seems to indicate the opposite of what we reported last week, but we hold to our conviction. Our take this week is that there are always skirmishes after a war is over. You could also say “it ain’t over till the fat lady sings” and that there is always some risk, but that does not invalidate that there is more upside than downside. If you read this week’s news item below the headline, it is more “not yet” than a no, despite the headline. You often get “headline negotiations” ie making a tough public statement followed by private negotiations.

News Item 2: Billionaire investor holds 10 percent of his life savings in bitcoin predicts price to hit 2000

News: Billionaire hedge fund investor Mike Novogratz, who made it into the Forbes billionaire list in 2008, revealed that he holds 10 percent of his net worth in Bitcoin and Ethereum.

Decrypted: Bitcoin price continues to rise and so we get forecasts that it will continue to rise. There are many more stories like this that are along the lines of “follow the brilliant investor leader”. Novogratz also invested in Ether. Another high profile investor making bullish statements is Tim Draper.

Our take: These investors are talking their book and they bought when the price was much lower, but that does not invalidate what they are saying. With the Bitcoin Civil War nearly over, there is more upside than downside, but nothing goes up in a straight line. A major Bitcoin hacking story is likely in 2017 and that will be a buying opportunity. It depends on your time horizon. If you view buying Bitcoin like a 10 year bet on a startup, these fluctuations are irrelevant.

News Item 3: Criminals who deal in bitcoins in Florida could soon be busted for money laundering.

News: Just because you use bitcoin to do something illegal, does not give you a defense.

Decrypted: This is only relevant as it drives mainstream sentiment and regulation. If the headline was “Criminals who deal in dollar bills in Florida could soon be busted for money laundering” it would not be significant.

Our Take: Regulators are in a quandary. On the one hand, bitcoin should be like cash – it is irrelevant as a defense for illegal activity. That is what this week’s news is about. On the other hand, banks and governments want to have control over cash and so don’t want bitcoin to be a legal currency and tax authorities prefer to see it like a commodity and to tax based on capital gains. The last sentence in the news article is interesting “But critics say the law could deliver a chilling effect on the bitcoin, which can be valuable in promoting commerce between Florida and countries such as Venezuela, where traditional banking systems have gone awry.” In short, money laundering out is bad, but money laundering in is good.

Opinion: Bitcoin continues to struggle ethereum looks strong

Why it is worth listening to: Ethereum is the only crypto currency with a market cap even comparable to Bitcoin and Ethereum is building the world’s first decentralized operating system.

Our take: Ether, like all Altcoins, have done well price-wise during the Bitcoin Civil War. If that is over, bitcoin price will rise and much of that will come from people converting Altcoins to Bitcoin. Ethereum could be the one exception to that. However, as a reality check it worth noting that few mainstream people have heard of Ethereum – this is reserved for crypto true believers . Also, the news last week was more about traction for Sidechains, which takes away some of the programmability benefits of Ethereum and to have a major differentiator, Ethereum needs to prove Proof Of Stake as an alternative to Proof Of Work and there is still real technical risk in that. If you love the idea of the world’s first decentralized operating system (I do), you may want to buy the Ether currency. As an investor, Ether at current price has a lot more risk than Bitcoin.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Religare is the biggest exit so far in InsurTech and it is from India

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The biggest Insurtech exit to date just happened. The news is public. This is no scoop or insider information; that is not our game at Daily Fintech. Yet despite the story “hiding in plain sight”, it did not receive much mainstream media attention. That is our mission at Daily Fintech – to find the needle of insight that is hiding in the public domain haystack.

In this post we look at the big trends behind this news.

First, a bit of deal background explanation is needed.

A Unicorn valuation funding round makes headlines, but what matters is realized value at exit.

It is no secret that VC money is pouring into InsurTech. As any deal guy knows, getting a big headline valuation (the “PR deal optics”) is easy. We will be getting a lot of InsurTech Unicorn headlines. What follows explains how some of those PR deal optics are constructed. Looking below the PR deal optics to the reality will help see why the Religare story is significant.

As an entrepreneur, if you want that Unicorn headline you simply give away egregious preference terms. Say an entrepreneur wants to sell 20% in that round and the investor really thinks you are worth $100m (keeping to round numbers to keep it simple) and the entrepreneur is asking for a $1 billion Unicorn headline. The investor is willing to put in $20m for a 20% stake. To get to your $1 billion valuation you either need the investor to put in $200m or to accept a 2% stake. Both are showstoppers. If the entrepreneur offers 10% Preferential Equity terms, the headline can say “Hot Venture x raises $yyy at $1 billion valuation from Hot Fund z”. When you look at funding valuation data, you see a lot of deals at exactly $1 billion for this reason. Entrepreneurs need to get the amount invested from $20m to more like $100m for the headline optics. Then the headline is “Hot Venture x raises $100 million at $1 billion valuation from Hot Fund z”. Naïve journalists may extrapolate a 10% stake from that headline. With 10% Preferential Equity terms and an exit in 10 years at $300m, the actual realized value at exit for that investor (keeping it really simple and only assuming one round) is 86%. Run a simple compound interest calculator to see that. That 86% looks bad, but it gets worse if you count the more egregious terms where investors get their $100m back before calculating the compound interest at 10%. If you factor that in, or factor in multiple rounds with a whole preference stack at different dates, you can quickly see how an entrepreneur has to build an incredible amount of value for their founding stake to be worth much and why many entrepreneurs walk away with zip after a headline that makes them look vastly wealthy.

Unless the entrepreneur gets to a really big valuation or does it really quickly. Yes, that is really, really hard to do and happens very rarely.

All of this kind of deal optics fancy dancing stops at exit. Then somebody is paying hard cash and what you read is a real number. That is why we track real exit value (whether by IPO by trade sale). This is when the tide goes out and you can see who has been swimming naked.

My reason for giving that lengthy explanation is to make sense of what is not a sensational story, but which is a big deal in real terms. The Religare exit is not a Unicorn – ho, hum, click away now. Yet it is the biggest exit in InsurTech to date and that is a real story. (If anybody knows of a bigger one please tell us in comments).

If my explanation saves any entrepreneur from 10 years of “blood, sweat, toil and tears” for minimal financial benefit, I am happy.

The News

On 9 April, Religare Enterprises Ltd sold an 80% stake in Religare Health Insurance Co. Ltd (a standalone health insurance company), to a consortium of investors led by True North, a private equity firm. Religare will get about Rs1,040 crore for the deal and the health insurance company is valued at Rs1,300 crore. Religare Health Insurance is owned by Religare Enterprises (80%), Corporation bank (5%), Union Bank of India (5%) and the remaining 10% is by the employees of Religare through employee stock options.

Decrypted. Converting Indian Rupees to a well-known global currency like USD, EUR or Bitcoin is simple. But then you have to deal with Lakhs and Crores. When I negotiated my first deal in India that threw me for a loop momentarily (I had my pricing in GBP and was used to negotiating in USD and had the conversion to INR figured out but when the buyer started talking Lakhs and Crores I was blindsided for a moment). A Lakh is 100,000 and a Crore is 10,000,000. To really confuse non-Indians, a Lakh is written numerically as 1,00,000 and a Crore is written numerically as 10,00,00,000. The USD to INR conversion as I write is 64.47. So (rounding to nearest million) that makes the cash portion of the deal worth USD 161m (Rs1,040 crore) and the realized exit valuation worth USD 202m (Rs1,300). Those calculations throw algo-driven reporting for a loop. I saw this reported as a deal worth $10 billion and knowing that Indians don’t tend to pay bubble value this surprised me. So I dug in and I found that the data was incorrect as reported.

In the future, when Bitcoin is mainstream, we will convert Indian Rupees to Satoshis and Crore Rupees to Bitcoin; but that is another story!

Religare Healthcare is what we categorize as Full Stack HealthInsurTech. They offer Health Insurance policies to consumers.

News link is here.

Why mainstream business media missed the significance of this news

We are now accustomed to looking for mega funding events from China. We also look for mega HealthInsurTech deals from America. We have reported on both. These trends jump out of the data. This was a big exit, but it was from India and so it is not a story unless you are in India, or from India (as my fellow Author Arun is) or into India having done a lot of business there (as I am).

And on top of that you would have to decrypt Lakhs and Crores. In short, the story was ignored outside India.

The Three MegaTrends behind this news

  • First the Rest then the West.
  • Corporate (aka Strategic) Funding is getting more prominent.
  • Innovation capital formation is starting in the Rest

MegaTrend 1. First the Rest then the West.

This is a theme that we have been writing about for years (example post here). For most of the 20th century, technology was limited to the West. Countries in the Rest (formerly known as developing, then emerging, then rapid growth economies) were “tech deserts” until those economies started to open up (first China, then India, then Africa). Then technology adoption started to flow from the West to the Rest; the last decade has been a boom time for Western tech firms selling to the Rest.

Now the flow is reversing as technology adoption starts in the Rest and then goes to the West. For example, look at Xiaomi to see the future of mobile phones and Alibaba for the future of e-commerce or PayTM or M-Pesa for the future of mobile money.

This megatrend is not limited to Fintech, but within Fintech mobile payments and mobile e-commerce is the big disruption and that is happening first in the Rest and then will flow to the West.

Technology adoption flowing from the Rest to the West is one of the big 21st century megatrend stories.

Note that I am referring to technology adoptionWhere something is invented matters a lot less than where and how it is adopted, as Steve Jobs taught us after wandering around Xerox Parc and seeing the first graphical user interface and using that insight to change how we used personal computers. Adoption, whether through network effect or any other customer acquisition technique, has replaced patents as the technology moat and competitive advantage.

Adoption drives value creation and adoption is happening faster in the Rest.

Now look at Healthcare and HealthInsurTech within this context. Where would you prefer to build value:

  • Option 1: a Red Ocean market where there is a lot of entrenched competition (such as America).
  • Option 2: a Blue Ocean market where demand is small compared to established markets but is growing very fast and where there is very little entrenched competition (such as China, India, Africa and the other Rest).

Corporate (aka Strategic) Funding is getting more prominent

This is particularly true in China, where we see massive rounds done by corporate parents. For example, Zhong An (see our post where we describe their upcoming IPO as the Netscape moment for InsurTech). For more, see our Fintech China Week coverage. We are also seeing this trend in Europe where a lot of the InsurTech ventures are being funded by Insurance or Reinsurance companies rather than traditional Financial VC. This is what we have observed as Reinsurance As A Service. The old idea that the Corporate or Strategic investor is always the dumb money at the table that signals a bubble phase, needs to be re-evaluated.

The Religare story shows this. There are no VCs benefiting from this exit.

The Religare Healthcare exit beneficiary, the company that created the value, is called Religare Enterprises Limited (REL). This is a holding company/conglomerate. The mantra in the West for decades was that the holding company/conglomerate model is dead (core competency focus was the mantra). This deal makes one re-evaluate that mantra (as do other deals in China and India). REL got $160m in cash by selling 80% and kept 20% to ride for future upside. That is value creation.

India innovation capital formation

For a long time, Venture Capital fundamentally meant Silicon Valley. Entrepreneurs everywhere else had three lousy options:

  • Move to Silicon Valley where your costs are far higher and you don’t have a network and where you don’t understand the culture that you are selling into.
  • Find the local subsidiary of a Silicon Valley VC fund. Many Silicon Valley VC funds don’t even bother globalizing, because it is too hard and there are plenty of deals at home. The ones that do have a local Fund often lead to long decision cycles that kill a deal – first you convince the local guys, then you fly to Silicon Valley to convince the global Partners.
  • Find a small local VC that has very little expertise and/or only a small fund.

What the Religare story indicates is pretty significant which is the formation of more Innovation Capital locally. REL will have $160m in cash from the deal and a successful formula to follow. One assumes they will be hungry for more. That is one part of the story. The other part of the story is about the True North private equity fund that bought Religare Healthcare. True North, formerly India Value Fund Advisors, is a local Private Equity fund that started in 2000.  You can see their Fund size growth below:

Screen Shot 2017-04-15 at 11.29.04

The history, as per their site is interesting:

“True North came into existence with the power of one crucial decision. Mr. Gary Wendt, then Chairman and CEO of General Electric Capital Corporation (GECC), decided to set up a US$ 2 billion private equity fund with a focus on transforming businesses in a variety of global markets, one of which was India. Impala Partners, a US-based boutique investment and M & A advisory firm founded by former senior GECC executives, was chosen as a global partner for the venture.

The fund was focused on investments in Japan, India, Israel, Poland and Mexico, and sought local partners in each country. In India, Mr. Wendt tied up with Ambit Corporate Finance and subsequently HDFC to form GW Capital with Vishal Nevatia as CEO. Later, Mr. Wendt took up other responsibilities, and though he and Impala remained as investors, the new company developed a strong local identity, and was reborn as TRUE NORTH in 2004. With its new identity in 2016, True North will continue the company’s journey in transforming businesses.”

It will be interesting to track the value creation of Religare Healthcare after the acquisition by True North.

Note: I use the term Innovation Capital rather than Venture Capital because the term VC implies only one business model (2 and 20, LP and GP) and a lot of the action today is in areas such as Corporate funding, ICOs, Family Office Club deals and so on. All these can be called Innovation Capital, but calling them Venture Capital would be confusing.

American investment bank J.P. Morgan acted as the exclusive financial adviser to Religare Enterprises.

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Introducing The Blockchain Bitcoin & Crypto Weekly CXO Briefing

The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world.

Start your week with The Blockchain Bitcoin & Crypto Weekly CXO Briefing in your email by 7am CET. It should take you 5-10 minutes to read properly (and a minute or less to skim if it is one of those crazy Mondays).

You owe it to yourself to invest 5-10 minutes a week to learn about the technology that will change your company, your career and your world. Don’t get blindsided by important news from the Blockchain Bitcoin & Crypto world. Be in the know and in the flow – without getting stuck in the weeds.

Each week we select 3 news items that matter. We keep it to 3 because we know that you are busy. If it is a big news week, it is our job to find the 3 news stories that matter so that you get a high signal to noise ratio. We give you the news in one sentence and link to the announcement.

For each news item we offer News Decrypted,  which explains why investors, bankers and entrepreneurs should take notice. We include a Glossary if we have to mention some critical jargon (which will be marked in red like this). Finally we offer Our Take on the underlying trends represented by this news and “where the puck is headed”.

In addition to 3 news items, we select one analysis/opinion/insight piece each week that we think is excellent or a controversial subject that is being debated in some forum.

Our point of view is that all three are important – Blockchain Bitcoin & Crypto. There can be private, permissioned Blockchains without any Bitcoin or any other Cryptocurrency. There can also be Cryptocurrencies other than Bitcoin (Altcoins) and distributed ledgers that use some form of Crypto other than Blockchain. We cover them all.

In this first post, we are tracking news for a bit longer than a week as we are in catch up mode:

News Item 1: Is a Mining Manufacturer Blocking SegWit to Benefit from ASICBOOST?

News Decrypted: This could be the last bloody battle in the Bitcoin Civil War. A major Bitcoin miner (Bitmain) who has been backing the breakaway group (called Bitcoin Unlimited) has filed for a patent to a technology called ASICBOOST that would be harmed if Bitcoin used a technology called SegWit.

Glossary. SegWit is shorthand for Segregated Witness. It enables signatures to be kept outside the Bitcoin block (which matters if you don’t want to increase the block size and that is the technical issue at the heart of what is referred to as the Bitcoin Civil War). Think of this like keeping signatures on a check outside the core banking system (which only records that a signature was received and points to the system where evidence of that signature is stored). This becomes more important now that MultiSig means more signatures.

Glossary.  MultiSig is shorthand for Multiple Signatures. This is critical to fraud prevention. It means that more than one person is needed to release a transaction (payment or other value exchange), just like in old-fashioned banking/payments systems.

Our Take. The ASICBOOST patent is filed in China (which raises doubts about its enforceability). More importantly it raises doubt about the intellectual credibility of those opposing Segwit and other Bitcoin Core approaches to scaling (for our decrypted take on Bitcoin scaling challenges please read this).

This could be the last bloody battle in the Bitcoin Civil War. The war has to end for Bitcoin to move forward. A hard fork would be “game over” for Bitcoin, Blockchain and Crypto. Obviously this news can be interpreted in different ways. The Bitcoin price action in the weeks and months to come will be the wisdom of the crowd that will tell us who is winning this argument. I am putting my belief on the line by launching The Blockchain Bitcoin & Crypto Weekly CXO Briefing this week. If I thought that a hard fork was likely and that everything Blockchain Bitcoin & Crypto would be relegated to the dustbin of history, I would be foolish to do this.

News Item 2: Blockstream Launches New Confidential Assets Feature for Enterprise Blockchain Customers

News DecryptedMany Bitcoin enthusiasts love the transparency that is enabled by every transaction being publicly visible on the Blockchain. That transparency does not work for enterprises that thrive on proprietary data, secrecy and control. Nor does it work for those individuals who, for whatever reason, don’t want anybody being able to see their transaction. Blockstream, a VC funded venture, offers “cryptographically-enforced confidentiality” (translation = hard to hack). Blocksteam is a driving force behind the idea of Sidechains, which is an alternative to a Turing Complete Blockchain platform such as Ethereum. Blockstream, via Confidential Assets, aims to offer the benefits of transparency – that transactions can be publicly verified to be accurate – without losing the benefits of privacy, by  giving control to individuals who can selectively disclose the hidden asset values and types.

Glossary. Sidechains is the idea of taking a Bitcoin transaction and sending it off to anther system where some additional processing can be done. The idea is to keep the core Bitcoin transaction processing simple (which tends to mean cheap, fast and reliable) while enabling each transaction to be programmable.

Glossary. Turing Complete means you can run application code on a platform.  That is why Ethereum is such an ambitious project; it is a decentralised operating system.

Our Take

  • This could be a blow to Z Cash, Monero and other Altcoins selling anonymity.
  • This could be a blow to Ethereum as it will boost the idea of Sidechains as an alternative way to have programmable transactions.
  • This could be a boost for Bitcoin as it will overcome one of the perceived weaknesses (lack of privacy).
  • This signals a more commercial Bitcoin, with VC funded companies like Blockstream making the big moves. The price for this commercialisation is greater centralization and less control by individuals (unless they invest time and money to get that control), but the commercialisation is probably needed for Bitcoin to go mainstream.

News Item 3: Japan Officially Recognises Bitcoin as Currency Starting April 2017

News DecryptedLegality is essential to any move to the mainstream. The issues are complex and this has been debated a lot in many countries. It is natural for politicians to fear the lack of control, but there is also the increasing recognition that being bitcoin friendly can drive innovation, productivity, jobs and a higher standard of living. So when one of the biggest economies in the world does this, it is a seriously big deal.

Our Take: This is another sign of something that took most people by surprise, which is that Bitcoin adoption is happening first in countries with strong currencies and fairly good governance. Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

We spotted the trend towards wealthy countries adopting bitcoin first in Switzerland and now the news from Japan indicates that exactly the opposite of what pundits expected is coming to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency. Here is our review of Bitcoin in Japan.

Opinion of the week

VC Fred Wilson Thinks Coinbase Is the Goldman Sachs of Bitcoin

Why pay attention: because Fred Wilson is a VC with a great track record, who is very thoughtful and who has made many bets in Bitcoin ventures, including Coinbase.  Cynical counterpoint: he is just talking his book

Bernard Lunn is a Fintech thought-leader and deal-maker

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Where the VC Funding is going in InsurTech

Highway Signpost Venture Capital

Yesterday we announced our content partnership with Venture Scanner. Today we use their data in our InsurTech post.

We looked at 14 categories within InsurTech to see where the funding is going (numbers are in $ millions).

Category Total Ventures Funded Ventures Total $ % Funded Average $
Health & Travel 321 67 9260 21% 138
Life, Home, P&C 112 26 6870 23% 264
Auto 64 33 6610 52% 200
Data/Intelligence 105 55 2810 52% 51
Employee Benefits 110 30 1200 27% 40
Comparison 105 73 1200 70% 16
Infrastructure & Backend 245 80 1040 33% 13
Commercial 126 20 840 16% 42
Reinsurance 31 5 759 16% 152
Product 29 10 443 34% 44
Consumer Insurance 82 29 385 35% 13
User Acquisition 86 27 342 31% 13
P2P 31 7 86 23% 12
Education/Resources 35 4 53 11% 13
TOTAL 1482 466 31898 31% 68

Takeaways:

  1. Comparison sites look the most fully invested. 70% of comparison site ventures got funded. Our analysis here.
  2. Despite all the hype, very little money has gone into P2P (and out of that $86m, $60m is to Lemonade which no longer positions as P2P).
  3. Only 16% of ventures in Commercial and in Reinsurance get funded. I believe that is because these are functionally complex (and so the supply of ventures is limited and investors lack the knowledge to evaluate them fully).

This data comes from Venture Scanner. You can get the full FinTech Market Report and data at Venture Scanner.

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Announcing our content partnership with Venture Scanner 

In God we trust, everybody else please bring data (thanks Mr. Deming).

Daily Fintech is in the insights business. Every day our awesome Authors come up with fresh insight for the global Fintech leaders in our rapidly growing base of subscribers from 130 countries.

Today we are announcing our partnership with Venture Scanner so that our insights are packed with a lot more data.

Venture Scanner is an analyst and technology powered startup research firm. Their customers use them for a one-time snapshot or continuous coverage on any emerging technology sector (not just Fintech, which is all we are interested in). Their customers research the categories that make up a sector, learn about the companies within categories, and analyze funding and operational data.

Daily Fintech readers can get a 25% discount for access to the Venture Scanner landscape reports and datasets.  Use discount code: VSDailyFintech. This promotion is valid for next 10 days and expires on April 26, 2017.

We will use the data provided by Venture Scanner in two ways:

  1. Test a thesis. We often observe a trend from conversations in the market. When we hear the same thing from lots of smart people in the market, we see a pattern/trend that is worth writing about. Using Venture Scanner, we may be able to get some data to test that thesis.
  2. Immerse in data to see what emerges. Sometimes insights emerge if you just swim around in the data.

Our first post using Venture Scanner data will be tomorrow on InsurTech (as Thursday is always InsurTech day on Daily Fintech).

2017 is the year bitcoin starts to move from Darknet niche to Clearnet mainstream

darknet

One of our 10 Fintech predictions for 2017 (in December) was:

Bitcoin moves from its Darknet phase (illegal) to the early adopter Clearnet phase. This is when legitimate people charge in bitcoin for legal transactions. This will start with cross border digital products. Because this brings new bitcoins into “circulation” with owners who also then want to pay in bitcoin, this starts a sustainable move to mainstream use which supports the price.”

This post expands on that thesis. But first we have to look at an ugly backdrop which is the Bitcoin civil war. If we get a hard fork, all bets are off. Spoiler alert, I think the probability of that is now low (around 10%) so planning for the future makes sense. The bad news if you hold bitcoin – a 10% chance of total loss. The good news if you hold bitcoin – a 90% chance of a big appreciation.

Talking about a glorious future during a civil war is strange

We have about a 10% chance of apocalypse now in Bitcoin.

Nobody can say exactly when the Bitcoin Civil War will be over, but it will be over soon one way or another. It is a % game as I write. I rate the chance of a hard fork relatively low, around 10%. Assigning a % smacks of false certainty. All I mean is that the probability is low and investing is all about assessing probability (anybody selling a “sure thing” probably also has a bridge to sell you).

My reasons for saying this are based on my reading of the Bitcoin scaling challenges and solutions (see here). I think that Segwit makes sense technically and a move to a more commercial Bitcoin via Lightning network is just the way the world works, whether you like it or not. The pure P2P vision, where everybody runs their own node, will turn into a more commercial reality. Today we could all run a server in our closet, but most of us choose to trade control for convenience by using some cloud services for things we like to do like email, social media and blogging. The same thing is likely to happen in Bitcoin, with some centralized services within a free permissionless network. This will still be a free market, where anybody can connect and offer a new service. The permissionless genie will never go back into the bottle of control.

There is lot at stake in this civil war. If there is a hard fork, Bitcoin may not recover. I do not see this as just another Mt Gox. The damage to reputation among mainstream people will be too severe.

If Bitcoin dies, it will also drag Altcoins into the same shallow grave. Sorry to strike a morbid note, but I don’t buy the idea that a better Crypto Coin will arise like a phoenix from the ashes from the death of bitcoin. Yes this may happen in the really long term, but “in the long run we are all dead”. Try telling your average Joe/Josephine who is already skeptical of bitcoin “I know that bitcoin failed, but this one is better, really I promise”.

We will know when bitcoin is forked; there will be a lot of sound and fury. What is harder to know is when we can declare the civil war over; that event may be accompanied by silence. I asked @tonevays on Twitter and he responded with:

Screen Shot 2017-04-03 at 09.57.14

Hopefully peace will soon be declared.

Bitcoin’s Darknet phase was critical and will remain

To see how big the Darknet is, go to DeepDotWeb. The Darknet is a perfect early adopter market for bitcoin. The market may be a niche, but it is a big enough niche to prove the technology. There are plenty of people who do things that are illegal in some jurisdiction or another. They may live in a dictatorship or believe that what they want to do (such as use drugs) should be none of their government’s business. Crooks and good people co-exist in these markets.

Bitcoin needed Darknet users because they are motivated. Traditional payment methods don’t work for them, so they use bitcoin even if it takes a bit more effort.

Reality check in one chart – bitcoin is a tiny, tiny part of the world economy. That is why bitcoin needs to move to the Clearnet phase.

I am not suggesting that the Darknet will disappear. It will coexist with the Clarinet. It serves a real purpose.

Why Bitcoin will move to Clearnet phase

Clearnet does not mean that some big retailer adds bitcoin as a payment option. We had lots of Press Releases about that and it is not much more significant than adding some obscure Fiat currency.

The Clearnet phase will be when thousands or even millions of free agent knowledge workers charge for their digital products (code, writing, designs, movies, music, etc) primarily or entirely using bitcoin. They will price in bitcoin (or in Satoshi, depending on the price point) and offer conversion to Fiat and an option to pay using legacy payment rails (maybe for an additional fee). This is the bitcoin-first option.

The more radical is bitcoin-only. You are invited to pay in bitcoin and those who do not already have a bitcoin wallet are given links to help them get into the bitcoin economy. That network effect will drive adoption.

This will happen first in free agent, digital knowledge workers offering products/services cross border. Let me break that down:

  • Free agent. This means an individual or micro business, which accounts for an increasingly large share of global GDP.
  • Digital knowledge workers. The bitcoin Clearnet will happen first in digital products, because the no return irrevocability of bitcoin is easier in digital products where delivery and payment can be concurrent.
  • Cross Border. If somebody in Swaziland wants to pay somebody in Sweden (very close in the country pick list), what currency do they choose and what payment rail? Bitcoin is simply the easiest option, particularly if you get a more complex transaction such as Swaziland Bob pays 1 bitcoin to Sweden Alice with 20% automatically going to Ted in Tokyo who then buys something from Carol in Copenhagen.

Three reasons why this will happen in 2017.

  • Price move. The correlation of searches for “bitcoin” and a rising price are clear. When the price goes up, the mainstream notices.
  • Increasing Respectability. This varies by country. Switzerland is one where you can buy bitcoin at any train station, pay your taxes and speeding fines and it is all totally legal and normal. Japan is another country where bitcoin is legal and increasingly mainstream.
  • Real need. The highly educated knowledge worker gig economy is real. In Fintech that market is becoming bigger as managers leave incumbents (voluntarily or involuntarily) to set up shop as consultants. The bitcoin Clearnet means that highly educated knowledge workers  don’t have to trade their expensive education for a “career” driving a car for Uber.

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Bernard Lunn is a Fintech thought-leader and deal-maker. 

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