CXA Group $25 million Series B shows the maturing of InsurTech and future of Innovation Capital

 

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Closing a Series A round is tough (the “Series A Crunch”), but closing a Series B is even tougher. You have to show great metrics at all levels. Series B is the “show me round”.

So when we see a big Series B round in the white hot InsurTech sector we pay attention.

In this post we look at the trends and insights behind the news that a Singapore-based health InsurTech venture called CXA Group has closed a $25 million Series B round from Facebook’s co-founder Eduardo Saverin’s B Capital Group and Singapore’s EDBI.

This news illustrates 6 major themes:

– Innovation Capital goes where it feels welcome

– Innovation capital goes where there is opportunity and that is shifting to Asia

– Singapore just scored a goal in the Fintech Hubs Global Tournament.

– The UHNWI Super Angels will shake up the “permanent aristocracy” of top tier VC Funds.

– The role of Government in building Fintech hubs

– This could be Zenefits done right

Note on terminology: we refer to Innovation Capital as the combination of cash + connections + know how that has historically been called Venture Capital. For reasons explained later, the historical term – Venture Capital – has outlived its Sell By Date.

Innovation capital goes where it feels welcome

This is not complex. Countries with zero capital gains tax on long term investments will attract a lot of Ultra High Net Worth Individuals (UHNWI aka Family Offices). Eduardo Saverin is an example – a Brazilian who famously renounced his US Citizenship in 2011 to take up residence in Singapore.

What is new is the blurring of lines between these UHNWI Super Angels and traditional Institutional Venture Capital. More on that later.

Innovation capital goes where there is opportunity and that is shifting to Asia

Asia is the 21st century growth story.

This statement wins the “Captain Obvious Award”. What is interesting is the time lag between when the growth shifts and when the innovation capital shifts. For a while, Innovation Capital in the middle aged world (America) and the old world (Europe) knew how to invest and saw the growth shifting to Asia. It was American VC money flowing into Asia. The next iteration, happening now, is when Asian VC money flows into Asia. This deal illustrates that shift.

Singapore just scored a goal in the Fintech Hubs Tournament.

This deal demonstrates that Singapore is becoming a major Fintech Hub, leveraging smart regulation and its position at the heart of the Asia growth story.

The UHNWI Super Angels will shake up the permanent aristocracy of top tier VC Funds.

The lead investor is credited as “Eduardo Saverin’s B Capital Group”. If the PR said “Eduardo Saverin” then this would be classed as an Angel round. Whether B Capital Group has other investors is not that important because a single UHNWI individual or family has plenty of capital to deploy.

For a long time, we had Angels who led the way by investing early and then politely inviting the big funds to invest. This led to what the Ivey Business Journal describes as a permanent aristocracy of top tier funds.  The Super Angels with an institutional fund, such as Eduardo Saverin’s B Capital Group can give that permanent aristocracy a run for their money. Some of the partners of those top tier funds are now also setting up as Super Angels and just investing their own money. Like Hedge Funds that become Family Offices, they no longer manage other people’s money, they just invest their own money. This is partly driven by tax, as people see the political writing on the wall that signals the end of carried interest fees being taxed as capital gains.

This is why we see the term Venture Capital as past its sell by date and prefer the term Innovation Capital. What we normally think of us VC – funding early stage innovation – is being done by Angels and too many VC Funds have become part of the asset management industry  focussed on AUM fees and short term exits.

The role of Government in building Fintech hubs

Co-Lead on the deal was the corporate investment arm of the Singapore Economic Development Board call EDBI. This post looks at the increased role of governments in Fintech regulatory competition as governments calculate the economic return on innovation. Whether direct investment (“picking winners”) is the right way is debatable, but expect to see more government activity in Fintech.

This could be Zenefits done right

CXA is going after the employee benefits industry (pegged at $100 billion in Asia) with a free SaaS platform monetized via lead generation. If that sounds familiar, think Zenefits, the hyper-growth success that hit the speed buffer (for reasons described here).

CXA goes to the next level by helping employers unlock wellness through prevention and disease management.

The health InsurTech opportunity is no longer only about America.

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Embrace uncertainty to give your fintech start-up the edge

If there is one thing I’ve learned during my time working for a growth company, it’s that you have to get comfortable with uncertainty. In start-up and growth-stage land, uncertainty is a place you should actively want to inhabit.

As I write that, it strikes me how counter-intuitive this concept is to the daily rhetoric we are exposed to via our media and business peers. Uncertainty is the destroyer of stock markets, economic policies and sound decision making. Give me road-maps, requirements documents, hierarchies and the three year road-map. Most people crave certainty – it’s human after all.

And while there is some truth to the ripple effect of the downside of uncertainty in particular domains, the negative press the word has received has possibly blinded many in business to its hidden, positive traits. Especially when it comes to creatively outwitting your competition.

While uncertainty with respect to ‘what is the purpose of our company’ is negative, uncertainty at a ‘how do we get from A to B’ can be a healthy thing. Why? Because it forces you to continuously experiment and tinker with your operational model until your growth engine is humming satisfactorily. In fact, continuous innovation requires you to be completely uncertain as to whether your tinkering will make anything any better at all – that’s the point of hypothesis testing. For many people, that’s a really scary place to be. ‘I don’t know if this will work’ is a brave phrase in business.

When you move from a quasi-regulated institution to a fully-regulated institution, as we are at Tyro, plenty of headaches arise. Many fintech’s will encounter this as they move into a more banking-esque world. Lack of consistent data on your customers or systems that don’t interface smoothly is one such headache, creating unforeseen blockages in your growth engine. And, thanks to Murphy’s Law, they usually arise the day before you plan to launch something.

But when you’re still small, you don’t have the luxury of time to fix them over 3 -6 months. You need to think up creative solutions fast, some hacky, some possibly more elegant, to unblock those growth stoppers within days. And you need to have the courage to try the hacks, uncertain as you are as to their effectiveness. They will sometimes surprise you, in a good way. And that’s why I love the phrase, ‘why don’t we test it and see what happens’. Kills it in meetings every time.

People often ask me, ‘what will X look like in 3 months?’, or ‘how will the sales process for Y operate in the future?’ They ask me that because they want to build processes that are future proofed around this. I get it. But when you can’t give this to them, because you’re really discovering as you go yourself, this can be hard for many people. Especially if they are not used to ‘feeling’ their way towards a shared goal.

But if everyone can align around the fact that there are degrees of uncertainty as they collectively march towards that common goal then, as a team, you can achieve amazing things. Not only this but you’ll all somehow feed off each other and become far more open to thinking up more creative solutions to get there. This is because as a team you’re autonomously forging your own path and not following dictated directions.

I like uncertainty. I enjoy continuously being surprised by things no one ever envisaged would work. It’s like a continuous state of discovery, or a learning adventure that never really ends. I believe this mentality, when executed on at a start-up or growth-stage company is a distinct advantage. Even more so in financial services, where your opposition will for a long time to come have unavoidable tissue rejection, right throughout the organisation, to the very word.

But that means you have to choose your teams incredibly carefully. You need to place those that like the cut and thrust of the new in the parts of the engine where there is a high degree of uncertainty, and move the more stable ones to the periphery where the cogs move smoothly against each other and only need a little oiling now and then.

Simon Sinek has a great quote that sums up what I think I’m trying to get at. ‘We crave explanations for mostly everything, but innovation and progress happen when we allow ourselves to embrace uncertainty.’ Couldn’t agree more.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

A little bit of P2P is all I need – Mambo in Lending

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Ladies and Gentlemen, the lending sector merits a Mambo song and I’ve started the lyrics for you all to create your own version.

A little bit of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long

 

A little bit of Monica in my life
A little bit of Erica by my side
A little bit of Rita is all I need
A little bit of Tina is what I see
A little bit of Sandra in the sun
A little bit of Mary all night long
A little bit of Jessica here I am
A little bit of you makes me your man 

There are dozens of platforms for your Sandra, Tina, or Mary; and most of them offer ways for retail to access the primary market of loans, be it consumer loans, small business, student, invoice, real estate loans etc. However, it remains tedious and complicated to manage portfolios be it 10k or 100k or more. Diversification leads to having to deal with Thousands of orders and even then, retail can’t optimally spread holdings across the FICO spectrum and at the same time be diversified with respect to other risk factors (e.g. industry concentration, geographic concentration etc.).

Bottom line it is really hard work to manage a portfolio of P2P loans on a platform. Monica, Erica, Rita,… are high maintenance! Hector, a NY based retail investor on the Prosper platform, attests to that too in Back to the future of P2P Lending, we interview one of those peers.

Add on to that reality that often retail will be “politely” front-run by those managing loan portfolios with the quantitative support that retail doesn’t have.

Most mass affluent retail investors that could allocate 100k or more to P2P loans (viewing it as a fixed income alternative with a reasonable expected risk-adjusted return compared to high yield) would and should be looking to diversify beyond one single platform.

No matter how wonderful Monica is, it is very sensible to have Jessica or Mary also on one’s side. It reduces platform risk and it reduces lending subsector concentration risk (smallbiz, invoice, real estate). These are even more important in a market that has taken a step backwards in terms of its progress in developing a secondary market. Remember that in the US lending market right now, we only have Lending Club that hasn’t shut down its secondary market business. Prosper did. At the same time, note that Small Business loan platforms like Funding Circle require 50k minimum which makes it very hard for retail to include it in a diversified loan portfolio.

Add on to that the Faith and Trust that retail needs to have to any and all of these platforms in terms of their credit assessment algorithms, because realistically speaking there is no way for a retail investor to perform any due diligence on that front.

With all these considerations in mind, I go back to humming

A little bit of P2P is all I need

A little of Prosper in my life

A little bit of Lending club by my side

A little bit of Funding Circle is all I need

A little bit of Lending Home all night long

This is the exact mix of platforms included in a soon To Be Issued fund by LendingRobot, a SEC registered investment advisor. They have been assisting investors to manage P2P loan portfolios over the past 5 years. They have recently offered an automated service for 45bps per year that employs ML algorithms. This has been in the form of a managed account up to now. Lending Robot will soon launch a hedge fund for accredited investors that employs the ML algo and invests in these 4 platforms.

In the US, there aren’t many listed vehicles for retail to invest in the marketplace lending space. There are a few publicly traded stocks (if the equity part of capital structure is what you are looking for)

Market capitalization in Bil

Lending Club – LC

$2.4

Lending Tree – TREE

$1.33

Yirendai – YRD an ADR from the East

$1.17

OnDeck – ONDK

$0.3

There are plenty of quasi-lending bets that a retail investor can also consider through ADRs of Chinese companies in the Internet of Finance space which has heavy lending components. The likes of Alibaba, JD Finance, Tencent could be considered but of course, these are broader plays. Renren (RENN) is one that retail may have missed because the brand is associated with a social internet platform with a focus on games, social commerce, social networking etc. The market cap of this tech platform is close to $14bil. Did you know however, that Renren has significant equity holdings in SOFI, Lending Home? Lendacademy reported

“Renren has participated in SoFi’s series B, D, E and F rounds for a total investment of over $242 million. According to the 2015 year end report, “The Company held 28.85% and 21.20% equity interest of SoFi as of December 31, 2014 and 2015, respectively.” 

I suggest that it would be better to consider buying SoftBank, the Japanese telco & internet giant (SFTBY ADR) because through the Vision Fund ($100billion!) they have invested heavily in SOFI.

“the conglomerate – Softbank- convinced SoFi to eliminate the idea of an initial public offering (IPO) and allocate the $1 bln investment to accommodate SoFi’s growth.” Source

Moving to another part of the capital structure, River North Marketplace just recently (in Sep 2016) launched a closed-end fund RMPLX which investors can buy any day but you can only redeem four times a year (AUM $40mil). Lots of diversification offered:

“buying from a few different originators, we get diversification there from an idiosyncratic risk that might arise at one originator, as well as we get different types of loan segments, so unsecured consumer, small business and specialty finance… there’s diversification in those different segments. Then, again, to further thinking about diversification, there is diversification across geography. We have loans in all 50 states. We have a variety of different credit characteristics, so there’s lots of diversification in this pool.”

In the US, retail investing in marketplace lending requires and will require for a while, Monica, Rita, Jessica, Tina and Mary on our side. Lets keep Mambo humming and diversifying as we are chasing investments that can generate yield on a reasonable risk-adjusted basis.

Europe offers more closed-end funds that make sense to consider for UK residents but are have additional complexities for other Europeans due to differential taxation and currency risks. Orchard platform, a leading Fintech focused on the secondary P2P loan market for institutional (NsrInvest is more for retail) tracks these funds in their weekly snapshot.

orchard-snapshot

 

Premium/Discount (rounded) NAV in millions
P2P Global Investments (P2P)

-20%

£608 Mixed with equity
VPC Specialty Lending (VPC)

-17%

£293 Pure multi sector loans
Funding Circle Income Fund (FCIF)

+7%

£172 Pure SME loans
Ranger Direct Lending (RDL)

-8%

£160 Multi sector (pure) loans
SME loan Fund (SMEF)

-7%

£49 Pure SME loans

A glance at this ranking, explains why Funding Circle will be looking to raise more shares this year (ordinary upon approval of existing shareholders or C shares). Seems also that the SME focused fund structures are favored over the multi-sector ones (including consumer loans etc). This snapshot also leads us to continue mambo humming in lending with Monica, Rita, Jessica, Tina and Mary on our side.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

 

Announcing our Chief Commercial Officer

I am delighted to announce that we have appointed a Chief Commercial Officer to grow our business.

Julia Spiegel brings lots of entrepreneurial experience in both the commercial and non-profit worlds, with a strong focus in brand development, marketing, sales management, and event planning. Julia is global in her experience and outlook, which is critical as Daily Fintech subscribers (over 16,500 as I write) come from 130 countries. Julia is an American, currently residing in Switzerland, having lived and done business in Singapore, India and the United States.

Julia is fascinated by how history and geography play a role in the development of different cultures. She brings an openness, respect, and curiosity to working across regional and business cultures, looking for common interests to unify groups towards shared goals. Julia is keen to help grow the Daily Fintech brand and business with a clear understanding of the value that our content brings to our readers.

Contact information:

julia at DailyFintech dot com

Calpers and the quiet data driven disruption of Private Equity

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Private Equity is a classic clubby insider high margin business. If open data and networks always disrupt these types of business, then Private Equity is overdue for disruption. 

This post offers:

  • A brief history of Private Equity.
  • Private Equity in context to other asset classes.
  • Two big problems facing Private Equity.
  • The disruptive power of open performance data and what Calpers is already doing to bring about this change
  • One disruption scenario.
  • One venture going after this space.

This post is specifically about investing in mature, profitable private businesses. This is in contrast to early stage investing which is already being disrupted by crowdfunding networks for both accredited and non-accredited investors. Private Equity deals are usually control deals (vs early stage that are normally minority equity), so we usually refer to this as Private Equity Buyout. 

A brief history of Private Equity Buyout

Private Equity Buyouts has gone through three iterations:

  • Version 1: Lean Conglomerate. This was pioneered by Hanson Trust in the 1970s. They bought underperforming old companies and put in financial discipline and a new CEO who got a piece of the action after the business was sold. Hanson Trust was an operating company with diverse businesses, so the right name is conglomerate, but they kept Head Office very small and they were always willing to sell a business if the price was right. Their mental set was closer to a Fund than an operating company, so the appropriate tag is Lean Conglomerate. Many other firms did well applying the Hanson Trust model in different markets (often learned while working at Hanson Trust). For example, Misys took the Hanson Trust model and applied it to software and now there are many such software conglomerates.
  • Version 2: Leveraged Buyout Funds. This cut the HO function down even further so that Conglomerate morphs into Fund, but the practices and techniques were similar. KKR was the pioneer in the 1980s. These Funds use leverage to juice returns and force cost cuts. Using strong cash flows to pay down debt, a Fund could sell after 5 years without even changing the business and still get a good return.
  • Version 3. Take Private. This requires more work than the Leveraged Buyout model. It is about fixing what is dysfunctional in public markets – an obsession with quarterly earnings. Transformational change requires more than one or two quarters. One example is the $11.3 billion 2005 Sungard deal. Sungard, like Misys, had grown through acquisitions and at a certain point the result was too messy and the business needed to be revamped out of the eye of public investors.

Private Equity in context to other asset classes.

Private Equity is small in total assets compared to asset classes such as Public Equities and Fixed Income. Private Equity is one part of Alternatives which was $7.2 trillion in 2013 vs $56.7 for Traditional Investments. But note the growth rates.

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However, Private Equity is big in one area which is Fees. In this FT article it is revealed that one pension fund alone (Calpers, more on them later) paid $2.4 billion in fees to PE Funds.

High growth and high margins means that any entrepreneur listening to Jeff Bezos (“your fat margin is my opportunity”) should be paying attention.

Problem 1: Software is eating the world.

Private Equity Funds pitch themselves to Investors as being more conservative/less risky than their wild cousins doing early stage equity. They will do rigorous analysis of the past 10 years or longer to see how predictable the cash flows are. No dangerous projections based on new products for them, their models are rooted in real world actual results of proven products.

That sounds good, but is based on a fundamental error which is the assumption that the future will be like the past. The Digital Era overturns that assumption.

Consider the printed telephone books aka “Yellow Pages”. They were a license to print money for a long time and many Private Equity Funds bought into them for that reason. Now it is hard to find people who use printed telephone books for anything other than doorstops.

Or consider hotel chains after AirBnB or Private Banks after Robo Advisers. How do you model future cash flows in those scenarios?

Problem 2: capital oversupply

When everything else changes, you can count on the law of supply and demand as a constant. Private Equity has been such a good business for so long that investors have been pouring money into the best funds (who then get high fees on AUM and the ability to do the mega deals). The problem is that this results in a lot of capital chasing the best deals (what Private Equity guys call “dry powder”) which raises prices on entry and that depresses returns on exit.

Calpers – its the data stupid

Into this closed, clubby world (”if you have to ask the price you cannot afford it”) comes Calpers (California Public Employees Retirement System) with their Private Equity Program Fund Performance Review. This is data transparency in action. It is only one investor but that investor is so big that it is a significant data point. You can sort all the PE funds online by all these different criteria.

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Our thesis is that this data will drive a lot of innovation. Entrepreneurs will be able to show what they offer vs the competiton by referring to this data. It is like an Index for the Private Equity business.

Disruption scenario

Our thesis is that disruption will come from Family Offices, managing money for the Ultra High Net Worth Individuals (UHNWI) and their families. In the US alone there are 3,000 single-family offices with assets under management between $1 trillion and $1.2 trillion.

Four key points about Family Offices:

  • They like the high returns of Private Equity and don’t worry about the lack of liquidity with money “locked up” for years (because they are managing money for multiple generations).
  • They are agile because they don’t have any “explanation risk” (if something goes wrong they can learn from it and move on, they don’t have to explain their actions to investors).
  • They don’t compete with each other.
  • Many are still run by entrepreneurial families (who are used to taking measured risks to get better returns).

This makes the Angel List model of following a proven investor applicable to Private Equity. This is already happening in a small way with small networks of like-minded Family Offices working together on deals (referred to as “club deals”). This is where the entrepreneurial genes of the Family Office counts. Let’s say Family Office A made their money in Pharma and Family Office B made their money in Software. Family Office A follows Family Office B’s lead in Software and vice versa.

Angel List obviously works at the early stage end, but the brilliance of their innovation is that they take of all the “boring plumbing admin” stuff like reporting. That can apply to any form of asset management, including Private Equity.

Axial

One company going after the Private Equity space is Axial. They recently raised a $14m Series C and are led by a proven entrepreneur called Peter Lehrman who was part of the founding team at Gerson Lehrman Group (technology platform for on-demand business expertise).

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Wrap of Week #6: Regulatory competition, Robos & systemic risk, Xero & SMEs, N26, Reinsurance as a service.

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We started the week with a focus on policymaking and regulations. Fintech Regulatory competition heats up as governments calculate the economic return on innovation.

We prompted great discussions after sharing our insights regarding the comments of the Governor of BOE. Read I am with French when it comes to robo-advisors.

Consumer banking is being transformed; N26 is using an app store to become a digital universal bank.

In Insurtech we are moving from vertically insurance companies that control the whole stack to a horizontal stack with services at the application layer by consumer facing born-digital ventures. Read Reinsurance As A Service.

Fintech for small businesses is a huge opportunity. Read Xero opens the door for fintech banks to become SME advisors.

The Fintech Genome platform

Join any of the conversations on the Fintech Genome. The global community is sharing insights, creating great conversations, and business is starting to happen.

Check the latest topics that include ICOs, binary options, crowdfunding, digital asset marketplaces, etc

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N26 is using an app store to become a digital universal bank

hifi-separates

N26 is the challenger bank to watch. With a $40m Series B in June 2016 in the bag, Berlin-based startup N26 has a banking license and is now active in 17 countries across Europe. This shows the power of a European banking license that works across the Eurozone.

Although they don’t have any branches, N26 are investing in multi-lingual customer support by phone, because Europe might have one currency but it has lots of languages. Their Series B lead investor, Horizons Ventures is an Asian fund, so they should get access there as needed. Via another investor, Peter Thiel,  they can get connections as needed in America.

N26 could be the first digital universal bank. That is a seriously big deal.

That requires a lot of functionality.  The only way to get there is  to partner through an appstore.

The Back End needs attention

Being mobile is great, but not if it creates a security problem. I would prefer a klunky UI that keeps my money safe. At the end of 2016, stories of a security flaw surfaced.

According to the Fortune post, “Vincent Haupert, a research fellow and PhD student in the computer science department of the University of Erlangen-Nuernberg, told the Chaos Communications Congress in Hamburg how he and two colleagues found N26 security defenses riddled with holes that could have been used to defraud thousands of users”.

In a statement, N26 thanked Haupert for alerting the company to “a theoretical security vulnerability” and advising it on fixes, which N26 said it completed this month.

In addition, N26 has replaced Wirecard with their own back end.

Global expansion plus lots of back end work must stretch the team. This is why they have gone the partnering route for critical customer facing functionality.

Transferwise

The deal that has been announced is with Transferwise, enabling N26 customers to “transfer Euros into 19 exchange rates at the real exchange rate”.

You can see the logic for both parties. N26 gets new features quickly, Transferwise gets distribution. One can imagine other deals with Robo Advisers and Market Place Lenders.

This is a high stakes game where scaling speed is everything. If N26 can offer real distribution they will get lots of app partners and that will accelerate the virtuous circle network effects. N26 have to go global fast in order to keep their partners motivated.

From App Store to Rebundling

If each service is standalone but linked to your main account that is good. If each unbundled service can be rebundled to create new functionality, that is great.

We may see N26 taking on the global universal banks.

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