Why the KIK ICO is the one to watch


NagarjunaSagarDamThe Filecoin ICO is chewing up a lot of bandwidth this week, but I think that KIK is the one to watch.

Starting with Filecoin, there is lots to like – great team, ambitious tech goal, key protocol for decentralised Internet, but I would not bet on it for these reasons:

  • lower cost digital storage is not high on most people’s worry list.
  • Jeff Bezos (AWS) is a fierce competitor who wins price wars and takes on Walmart and China. He coined the line – “your fat margin is my opportunity” – and he has not left any fat margin to exploit.
  • the Filecoin tech is unproven and the marketing challenge (needing to scale to billions to be meaningful) is horrible
  • there are other viable vendors in the beat AWS by going P2P game such as Storj.

I hope Filecoin make it but the odds look lousy.

KIK is interesting because it has nothing to do with blockchain or decentralisation. It is one of many viable companies that would like IPO as an alternative to trade sale, but that are dammed up in front of a wall that excludes all but the most massive companies. KIK did a Pre ICO round that looks a lot like a Pre IPO round in ye olden days. This is a sign of ICO transitioning to mainstream – real securities sold to real investors in a legal framework. Whether it is a good deal and a great business is another matter. The key is that ICO is replacing IPO as a viable exit and competing with M&A and PE. That is a mega trend shift. Traditional exchanges and all who work in that ecosystem are facing disruption.

Will be watching this one with keen interest.

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

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After the ICO gold rush, it is time for Innovation Capital to change the world through Digital Cooperatives


During the August holidays I spent some time in a lake house in the Rocky Mountains where the history of Native Americans, Homesteaders, Miners and Moonshiners was much in evidence. It seems quaint in hindsight because we know what came after (big cities, mechanised farming, massive wealth creation). It was not quaint at the time. It was rough and tough, just like the ICO gold rush of 2017.

The Ethereum releases of Frontier, Homestead, Metropolis and Serenity track this same trajectory. Ethereum is currently somewhere between Homestead and Metropolis. Ditto the disruption to Innovation Capital that the ICO gold rush of 2017 is signalling. We are in the homestead/gold rush/moonshine era and will be moving into the big city/mechanised farming era.

That trajectory implies a few big company winners.Our thesis is that the disruption to the Innovation Capital business that the ICO gold rush of 2017 is signalling heralds something much more interesting, which is a more sustainable version of capitalism that will benefit the many not just the few. This mega trend shift is what we call Digital Cooperatives.

The ICO disruption to the Innovation Capital business. 

Disruption has winners and losers. The winners in this case is everybody – the 99% if you like. The losers will be the few firms who currently control the spigots of the Innovation Capital business.

I don’t use the term Venture Capital because that term now denotes one business model for Innovation Capital – the 2 and 20 compensation model for VC firms, mostly clustered around Sand Hill Road in Silicon Valley. I refer to that now as Wall Street West, which works closely with the firms across the country in Wall Street East that do the big money transactions (IPOs, big M&A, Bond Markets). In the founding days of VC and Silicon Valley, it was utterly different from Wall Street. As VC grew in economic importance, the bonds between the two tightened, with talent and deals moving easily between the two worlds. This wealth creation mostly bye-passed Main Street. The future of Digital Cooperatives will be about the Main Street real economy. It will be exciting for the 99% and boring or even disturbing for the 1%.

Software is eating the world. Software drives the economy and is disrupting every market. This means that software is now too important to be left to a few firms on Sand Hill Road and Wall Street.

The job of Innovation Capital is to fund innovation that changes the world. The VC to IPO model did that brilliantly for a long time, but it is increasingly broken (see this post for more) and has been ripe for disruption for some time. The ICO is the first step in that direction. Like all disruptive innovation it arrives first with a lot of sketchy characters. The ICO gold rush of 2017 makes The Wolf Of Wall Street seem tame and that is hard bar to vault over!

Like all disruption, the ICO appears wild and chaotic and filled with sketchy characters, with ventures that are totally unregulated and often skirting the law. In short, we are in the Napster era. What comes after will be more like iTunes and Spotify, not free but much cheaper and more convenient and totally legal. When was the last time you saw a retail store selling CDs? Who mentions Napster other than as a historical footnote?

I see three fundamental drivers of change from the ICO disruption:

  • A better way to manage early stage technical and market risk.

  • A shorter path from garage to liquidity.

  • The enabling innovation coming from the protocol layer.

These three fundamental drivers of change will enable a more sustainable version of capitalism via Digital Cooperatives. First lets look more closely at those three fundamental drivers of change.

A better way to manage technical and market risk

VC Funds manage risk. Like any investor, they like the upside potential and want to minimise downside risk. VC want to invest when as much of the risk as possible has been eliminated. This is what the LPs pay the GPs to do.

VCs have to time that entry carefully. As one VC put it to me “we want to come in just before an entrepreneur can get a bank loan”. The boom in mega PE/VC funds is partly explained by bankers reluctance to lend post GFC. If you have to wait longer for a bank loan, that mega equity round may look more attractive – even if the preferential equity terms give founders some agita.

Preferential/Convertible Equity is a hybrid Debt/Equity instrument for a good reason. Debt makes risk management easier for passive investors (even if it wipes out common equity owned by founders and management in the process).

Risk management is what LPs expect from GPs. They want the massive upside without the massive risk. That makes sense as long as entrepreneurs have no other option. Thanks to ICO,  entrepreneurs do now have another option.

This focus on risk management means VC GPs work hard to avoid two types of risk. You can look at the ICO market through the prism of these two types of risk: Technical Risk & Market Risk.

Technical Risk.

If you invent a cure for cancer (or longer lasting/cheaper/safer batteries or other change-the-world technology), the market is huge and ready. There is lots of technical risk, but there is no market risk.

Professional investors have had a “run, don’t walk” attitude to technical risk. Imagine Vitalik Buterin pitching a Sand Hill Road VC for Ethereum in 2014. Would they have seen a future Bill Gates? Probably not; the first filter of technical risk would have killed the deal. Bill Gates did not raise money until Microsoft was already profitable. In contrast look at the individuals who bet early on Ether in 2014; they had some ability to assess the technical risk of building a decentralised computer, because they were developers first and investors second.

Now imagine a Biotech or Cleantech venture with a massive market but lots of technical risk. Biotech or Cleantech scientists who can assess that technical risk can use ICO mechanisms to vote with their wallets by buying in early. Those scientists will be the technical smart money voting on Technical Risk. Professional investors will follow that technical smart money.

Market Risk.

Most ventures funded by VC have zero technical risk. Look at ventures such as Facebook, Twitter, Uber and AirBnB; the early technology was trivial.

When it comes to market risk, that risk gets taken by founders, friends and families and the occasional Angel; they have to get the venture to Product Market Fit before VC will invest. If you build an app and find a market, VC cash will help you scale; VC today is growth equity after market risk has been eliminated. The problem occurs when everybody wants to fund after market risk has been eliminated; that will cause the innovation funnel to dry up.

Fortunately the ICO model also helps manage market risk, because the early visionary users are also the investors.

Again Ethereum is a useful case study. Ethereum’s early visionary users/investors also built the early DAPPs; they had the tech chops to do so, as well as the financial motivation because they owned some ETH. In contrast, in some 2017 ICOs, the early investors are speculators who don’t use the product. They speculate based on some hype in a YouTube video; these ventures will probably fail. A promising sign is when, like Ethereum, the early investors also build stuff with the new technology coming from the ICO; that is when passion, expertise and capital are aligned.

The progression from the Napster era to the iTunes/Spotify era means coming to terms with the complex legal, technical, tax, organisational and marketing issues related to launching something like an ICO that includes a beneficial interest in the venture that means that a) it is a better deal for investors b) it is definitely a security and will be regulated as such. The companies that lead this next wave of innovation will not shy away from securities regulation; they will embrace it. This won’t be easy but the prize is a big one.

Although the legal, technical, tax, organisational and marketing issues related to an ICO that is legally a security are complex, they will be fixed because the prize is so big. The reason is that the next phase of the ICO market does not simply change the early stage. More critically also the next phase of the ICO market also changes the late stage. In the late stage one word matters most – liquidity.

A shorter path from garage to liquidity

The future of ICO is more than crowdfunding.

The simple reason is liquidity. If you invest in a private company via crowdfunding, you are locked in until there is an exit or until you do some complex bilateral negotiation where you will tend to be at an informational disadvantage. There have been some opaque grey markets in private shares but they are nothing like public equities in terms of transparency, price discovery and liquidity. In contrast, you can trade ICOs almost like you can trade public equities; you have to learn a few new techniques, but it is possible. The ICO market has price discovery, shorting and all the other market mechanisms that enable liquidity.

Liquidity is a game-changer. It is why the O in ICO is like the O in IPO. The difference is time and statistical probability. The journey from garage to IPO is at least 10 years vs instant liquidity for an ICO. The statistical probability of an early stage venture getting to liquidity is less than  1% in IPO vs 100% for ICO. Ventures can languish in small cap hell on both markets but that means below $2bn in IPO world and below $200m in ICO world.

Liquidity has measurable value as shown by the liquidity discount given by the tax man.

Liquidity is a game-changer because it makes early stage so much more accessible to Josephine Q Public. A Fund or a Professional Angel can live with illiquid investments. Everybody else wants something like the stock market where they can check price and sell if needed without getting anybody’s permission; whether they choose to be active traders or buy and hold investors is a choice they can make.

Sorry, I would like to make you rich but the SEC won’t allow me to do that

The ICO market of 2017 has been like the Casablanca scene – “I am shocked, shocked, to learn that investing has been going on here”. The ICO issuer has to pretend that a Coin has no beneficial interest that makes it even remotely like a security. That pretence makes it totally legal, indeed sensible and respectable, to offer worthless Coins to unaccredited investors (Josephine Q Public) while offering equity and other security like beneficial interest to accredited insiders (aka Funds and Professional Angels).

The SEC has been fighting the last war. Rather then bemoan that fact and call for the SEC to change (and grow old waiting), entrepreneurs will figure out how to legally offer security like beneficial interest with all the low cost/convenience of the ICO model. Steve Jobs did not tell consumers to stop downloading free music or tell music labels to stop suing customers; Jobs offered a cheap/convenient and legal service called iTunes.

Some commercial ventures simply need a better funding model. Some ventures also need a different operating model, which brings us to impact investing and digital cooperatives.

First, lets look at the last of the three big drivers of change – the enabling innovation coming from the protocol layer.

The enabling innovation coming from the protocol layer.

The current phase of the ICO phase of is based on one picture (which comes from Fred Wilson of Union Square Ventures):

fat app layer

fat protocol layer

There are two possibilities here:

One: this theory is wrong. The big value creation in the Decentralised Internet will be at the App level of the stack, just like it was in the Centralised Internet era.

Two: this theory is correct and there is some massive opportunity at the protocol layer.

My thesis is that there is no value capture at the bottom of the stack, but a lot in the middle and that the value creation at the top of the stack will be done through Digital Cooperatives (which we will come onto later in this post).

First, why do I believe there will be no value creation at the bottom of the stack? This is what I call the commercial TCP/IP layer mirage.

The commercial TCP/IP layer mirage.

TCP/IP is often used as an example to describe the protocol layer opportunity in the ICO market. What if you could invest in a commercial equivalent to TCP/IP for the decentralised Internet?

TCP/IP obviously enabled massive value creation – at the app layer. You could say “value creation was at the protocol layer but value capture was at the app layer”.

The reason that the commercial TCP/IP layer investment thesis is a mirage is simple. Internet protocols such as TCP/IP, SMTP or HTTP would not have got the same traction if some commercial entity controlled them and was extracting a fee.

Ethereum is the closest thing we have to a protocol layer for decentralised Internet. The Ethereum founders debated vigorously what model to follow. They opted for a non-profit Foundation model. I doubt it would have got the same traction if it had been a commercial venture at its core.

Wintel was a different era that won’t be repeated. Nobody will ever repeat the level of dominance that Microsoft and Intel had at the bottom of the stack. Chasing that dream is a recipe for burning  capital.

However, just up a notch from the bottom of the stack is the middleware layer. This is where a lot of enabling innovation is happening.

The middleware layer of the Decentralised Internet

During similarly early days of the Centralised Internet, in the mid to late 1990s, we had a market that generically was called middleware (between the app layer at the top and the OS/DB at the bottom). If you can remember things like Web Application Servers you have carbon-dated yourself.

The Decentralised Internet era has a similar middleware layer emerging. This time the services relate to things such as Identity, Provenance, Data Validation, Exchange and Payment that a) all apps need and b) will be done quite differently in the Decentralised Internet era.

The App Layer benefits massively from using these middleware services. The mantra is “write less code”.

The App Layer will be great for the world, less so for VCs, because so much of it will be non-profit or owned by cooperatives. For the kind of value capture that VCs like, the middleware stack will be great. The App Layer will have a bigger impact but will not primarily be funded by VC. The App Layer will have a lot of what we associate today with  Impact Investing, but even this will be changed by Blockchain.

Impact Investing

Family Offices (Single and Multi) usually have a big Impact Investing focus. The idea is to “do well by doing good”, by investing in ventures that will generate a reasonable economic return while also changing the world for the better. Impact investing makes sense for them because Family Offices are investing for multiple generations and they want to leave their future generations with a better world, not just with money.

Whatever the social mission (saving the environment or financial inclusion or reducing inequality through economic empowerment or better health or eduction or…), impact investing is about getting the balance right between profit and social good. Impact ventures are for profit in the sense that they generate profits by selling goods and services for more than they cost; they are not dependant on philanthropy to sustain themselves. They pay employees and contractors through this profit. They may also distribute some profits to shareholders who funded the early stage, but this is not the shareholder primacy world of the past. That is why impact ventures are often and incorrectly labelled non-profit. They are for profit; it is just that producers (employees and contractors) and customers are as important as investors.

Technology and ICOs are impacting this by bringing the idea of Digital Cooperatives into focus as a way to a more sustainable version of capitalism.

Capitalism in Crisis

Capitalism as we know it today is in crisis. Communism failed visibly after the collapse of the Soviet Union. It is clearly a failed system/ideology. Sadly, when Capitalism lost it’s natural enemy, after the collapse of the Soviet Union, Capitalism also started to fail. During the Cold War, the West had to convince people in both the developed and developing world that their system was better for the people by spreading wealth broadly. After the Berlin Wall collapsed, wealth went to a smaller and smaller group of people. Without a stake in the capitalist system, people moved to populism of both the left and the right and this came to a head in 2016 with Brexit and then the resurgence of the left wing of the Labor Party in the UK and the election of Donald Trump in America. Populism of left and right could destroy capitalism, which will be a disaster because the alternative (communism) has already been proven to fail.

The best hope for a revised and sustainable version of Capitalism comes from the concept of a digital cooperative where producers, customers and owners are aligned. We can see the early signs of this in some of the best ICOs. The ICO model is ideally suited as the funding and governance mechanism for Digital Cooperatives.

Digital Cooperatives

The idea of Cooperatives is not new. It works in many markets; think of Community Banks and Coop grocery stores for example. These are Customer Cooperatives; the shareholders are customers.

One example of a Customer Cooperative is Vanguard. The customer in this case is a shareholder of the funds. There are no outside investors. This structure allows Vanguard to charge very low expenses and this is what Efi Pylarinou on Daily Fintech dubbed the Vanguard effect. It makes Vanguard the real disrupter in the Wealthtech segment of Fintech. When they started in 1975, their average expense ratio was 0.89%. By 2014 this had dropped to 0.18%. Given their scale, network effects and customer ownership structure, nobody can undercut Vanguard on price and in a commodity such as ETF, price is the deciding factor. The growth numbers (tell the story:

  • 32 years to reach $1 trillion in assets
  • 8 years to get to $2 trillion
  • 3 years to get to $3 trillion.

At the top of the WealthTech stack are the Single (SFO) and Multi Family Offices (MFO) where the shareholders are the owners. Intermediaries to SFO and MFO still get paid if these intermediaries deliver value, but they do not control the game in the same way that intermediaries serving the less wealthy control the game.

In short, ownership matters.

In the analog era there were many Worker Cooperative experiments. They mostly failed due to a simple alignment of interest issue. If employees are owners it is too simple to get employees to vote for a pay increase that will make the business unprofitable; it is a tragedy of the commons. The resurgence of left wing populism is bringing back these ideas, but they are likely to fail for the same reasons.

A Producer Cooperative aligns better with the reality of the Gig Economy (which is the norm in the Rest of the world). The Producer Cooperative is based on free agents such as doctors or drivers. We have profiled some examples on Daily Fintech (such as a Dentist Cooperative). The idea of a Producer Cooperative is simply that the ownership of these gig economy networks remains primarily with those who provide the services in those networks. These free agent entrepreneurs will be much more thoughtful about when and how to raise prices than a salaried employee might.

There are also User Cooperatives.

Imagine if Mark Zuckerberg’s next door neighbour at Harvard had the same simple brilliant idea for a social network and built a good enough product, but decided to offer the first few thousand users a big % of the equity. He or she would be very wealthy (albeit not as wealthy as Mark Zuckerberg) and few thousand people who made it happen would have had their lives changed.

In the case of social networks, the User is also the Producer; they produce for free in return for getting a free service. They are also the Product being sold to advertisers. So a User Cooperative is slightly different from a Producer Cooperative.

A Digital Cooperative (whether Customer or Producer owned or some combo) applies digital efficiency to the simple idea that ownership should be shared among those who create the value.

A well designed ICO enables a Digital Cooperative. Again the Ethereum ICO is an example. The early Ethereum investors were also the  early producers and the early customers building the DAPPS. Through this simple alignment of interest, Ethereum overcame both technical and market risk.

In many cooperatives, the ownership is incidental. You care about the good prices at a Community Bank/Vanguard/Coop Grocery; your ownership stake is incidental. The ICO with its liquidity makes that ownership more valuable but it is still not the primary consideration. The ICO with its liquidity will enable many more Digital Cooperatives to thrive. It may become the primary form of company in the future.

The ICO disruption took everybody by surprise.

That is why they call it disruption. If a lot of people forecast a trend, it is less likely to be disruptive.

Many people wrote about how the VC to IPO innovation capital business was broken; but although the problem was obvious, no real change happened for decades and the status quo seemed locked in forever. Many people wrote about how Ethereum would enable new crypto economic markets and governance structures, but that seemed highly theoretical and geeky. Many people wrote about how real time settlement using blockchain would change how the capital markets operated, but that seemed limited to the B2B realm. Nobody connected all three dots to show how a completely new permissionless network would emerge so rapidly in 2017 offering:

  • A better way to manage technical and market risk for investing in early stage ventures.
  • A shorter path from garage to liquidity to enable ventures, both for profit and non-profit, that would never have seen the light of day in the old model.
  • The enabling innovation from the middleware layer of the protocol stack that reduced the time/cost to create the world-changing applications of the Decentralised.
  • A new form of impact venture, the Digital Cooperative, that promises an inclusive, sustainable model for the future of capitalism.

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

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.

Aigang brings ICO gold rush to Insurtech with a plausible blockchain concept


Call it double disruption. Real time claim to cash using blockchain could disrupt Insurance. That is disruption number one. ICOs could replace large parts of the traditional innovation capital business – early stage VC and IPOs.  That is disruption number two.

That makes Aigang an interesting concept to study. The fact that it is only concept – not a product, let alone a profitable business – is part of the second disruption story.

Tigger is all excited about how all this innovation will create a better world. Eeyore says this will all end in tears. ICO speculators shovel in cash to make a quick buck while retweeting  Tigger. Eeyore sits on the sidelines waiting to be able to say “I told you so” and buy later for pennies on the dollar.

Who is right here?

To help initiate a conversation, this post looks at the:

  • Concept
  • Technology
  • Team
  • Jurisdiction
  • The deal for “investors”

The concept – real time claim to cash for small claims

Conceptually this makes sense. This post explains why claim to cash time is so critical and why blockchain based smart contracts is the enabler. The post was written in May 2016 and Aigang was formed in 2017 so they may have read it or simply tuned into the same innovation radio waves. This bit explains the basics:

“Auto Payout Based on a Trustless Smart Contract

This holds out a win/win promise. Customers know that payout is automatic and immediate (no more hassling for payout during the most stressful times when the bad event has actually happened). Insurance companies get two benefits:

Elimination of fraud. The Insurance company does not rely on the customer’s version of truth. There is independently verified data.

Elimination of claims processing cost. This is a consequence of elimination of fraud.

For this to work, it has to be binary simplicity. An algo has to make a yes/no decision instantly. Something with complexity (such as who is at fault in an accident or whether a medical procedure is covered) needs human intervention.

One example of where we see that binary result is flight insurance. The flight was either cancelled or it was not. Blockchain systems use external data sources (e.g via the Oraclize service ) to get this proof of what happened. A Proof Of Concept for this flight insurance use case was coded during a weekend at a hackathon using Ethereum – proving that technical risk is not the prime concern.

We expect to see lots of use cases where this binary rule applies where really low cost insurance can be offered (thanks to elimination of fraud and claims processing). This is classic disruption at the edge – where disruption usually gets traction. For example, there are lots of use cases within the sharing economy. These are on demand or just-in-time insurance use cases.”

Aigang is going after a sensible early market in the “really low cost insurance” segment – mobile phone batteries. It is small enough to enable real time settlement and” human real time” (less than a few seconds) changes user behaviour.

It looks like Aigang can get the battery data automatically from your mobile device. Yes this is also an IOT play. Eeyore was heard muttering about random buzzword generators – ICO, Blockchain, IOT, Insurtech, but Tigger responded by saying that the concept makes sense.

The investors will be P2P. The crowd will be the new Lloyds Names. Hmm, how does that fit with Solvency 2? Will the crowd take unlimited liability like Lloyds Names? This can only work outside the regulatory framework.

The technology

Ethereum – brilliant plaform, still with bleeding edge risk. As Aigang put it:

“Built on Ethereum testnet, the application is not fully functional yet, and there are chances that the users attempting to send funds from their Ethereum wallet could lose their funds.”

On the plus side, they do have a fairly active GitHub as per Token Market.

What is your risk appetite? This has technology risk at the platform level and at the application level. If you don’t really understand Ethereum or trust somebody who does, this is not for you.

The team

They look good on pixel. But they have not got a product in the market, so that is all one can say. One assumes they are all getting paid in equity and tokens. If the ICO succeeds they will become a real team.

They also offer “bounties” to contributors. No, I did not ask for or want a bounty for writing this post.  This is like 1999 when landlords would take equity for rent.

The jurisdiction

Singapore. One assumes Aigang will block IP addresses from America and make big bold signs saying “no Americans please” in order to stay out of SEC clutches.

This is far outside the regulated world. This is not a sandbox experiment. Aigang  plan to offer a product outside the regulated world. This post by a VC in 2014 explains why this strategy makes sense drawing on lessons from Skype.

The deal

This is not being revealed yet. In ye olde innovation capital game, a concept stage venture with  MVP still in development like Aigamg would raise $50k to $500k. $50k would be for a first time entrepreneur. $500k would a proven entrepreneur wired to top Angels and VCs. Two years later, 10%  of these would do a $5m Series A and a year later about 50% during loose money times would do a a $50m Series B. Aigang will probably raise $50m out of the gate.

Will it be a great deal for token  investors? I doubt it. Maybe for equity investors who have a lot of appetite for risk and if the price is right.

Will it change the world and unleash a new wave of Insurance claim to cash innovation using Blockchain? I think so.

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

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.

Midas Touch Interview with Sam Evans of Eos Venture Partners on the future of Insurtech

sam evans eos

Venture Capitalists make their living by getting the timing right on trends. Too early is not good. Too late is not good. Getting it right is hard. That is why the best make so much money. That is also why it is interesting to interview those with that Midas Touch.

There are generalist VC. There are Fintech specific VC. Even more specific is an Insurtech specific VC. We decided to interview somebody leading that market – Sam Evans of Eos Venture Partners.

The Bridge Funding model

Eos see themselves as a bridge between the Insurance incumbents (Insurance carriers, Reinsurance and Brokers) and the entrepreneurs. In VC terms, the LPs (Limited Partners) are Insurance companies. Those LPs expect financial returns for sure and Eos Venture Partners will get paid based on those returns. However the strategic returns are more important.

B2B2C and Level 3 Partnership Maturity

Sam talked about the problems of the B2C model for startups (high CAC and the needs for a big marketing budget) and the problems of the B2B model (long and uncertain sales cycles).

Sam did not call it B2B2C, but that is effectively what the alternative that is neither B2C or B2B is called. This is what we refer to as Level 3 in Partnership maturity in the mega trend we have been calling the “great Fintech convergence” (see this post from December 2015).

  • Level 1: Incomprehension. The other party just looks strange and it is hard to imagine a productive conversation. Men are from Mars, Women are from Venus. Incumbents are older white men in suits and ties. Entrepreneurs are Millennials in casual clothes (skewing too male, but that is another story). Of course all stereotypes are wrong but they do impact how we see things.  Whether the incomprehension is based on fear or disdain, the reaction is the same – inertia. Incumbents seek to overcome the incomprehension problem by funding Accelerators and Hackathons. There is still a problem getting that understanding from the few people interacting with the startup ecosystem to the mainstream line of business managers – but it is a start.
  • Level 2: Funding. Banks take minority equity stakes in Fintech ventures through their Corporate Venture Capital (CVC) unit. This is the level that most relationships have reached. (Funding while still in Incomprehension mode is clearly dangerous).
  • Level 3: Strategic. This is where the relationship drives needle-moving revenues and profits for both parties. This may or may not include an equity relationship; the strategic relationship comes first.

Startups also go through three levels of understanding:

  • Level 1: Incomprehension. Incumbents are dinosaurs and our amazing UX will crush them (B2C). Or they are customers and as long as they pay top dollars upfront for our technology we love them (B2B).
  • Level 2: Funding. Lets pitch them for our Series A.
  • Level 3: Strategic. We want revenue share – that is a scalable model. So we know that means we also have to share risk. We will have a pragmatic discussion about branding.

This is what Sam Evans was referring to when he describes being a bridge.

How Insurance and Banks are different

Banks were slow to react to the threat/opportunity of Fintech. The first answer was Level 2. Clearly this does not scale. Not all Banks can have a Corporate VC unit. Even the best have to work hard to get great deal flow and eventually face the strategic dilemma of which comes first – financial or strategic returns. Big Bank’s Corporate VC unit have to gain the trust of entrepreneurs who might worry that Big Banks want to learn from them and then build in house or buy a struggling competitor. In other words, Big Banks could be competitors or partners. Small Banks don’t have an option to be competitors; they are partners that entrepreneurs can feel comfortable with. Yet it is inconceivable that lots of Small Banks will set up their own Corporate VC unit (or maintain them in tough times when the best ventures are funded).

Insurance incumbents moved much faster when Insurtech came along. This is particularly true of Reinsurance. This is the trend we call Reinsurance As A Service.

4 Investing Themes

Sam identified 4 types of opportunities that they seek:

  1. AI in Life & Health using “quantified self” data (wearables and other devices such as wifi connected scales). This exploits the crazy situation today where premiums are based on occasional batch snapshots based on a medical exam. For more, see this post.
  2. Commercial Insurance. This has many sub segments such as Cyber and Flood Insurance. Sam gave one example of the latter that resonated and it was very simple. Assessing risk based only on geo code (eg Zip Code in America) misunderstands risk of the house on the river vs the house on the hill. The opportunity windows is particularly open in SME Insurance – see this post for more.
  3. Claims Processing. Sam gave us the data that this accounts for 60-70% of the cost. It is also a big UX driver as speed/simplicity of claims process is what gets customers talking positively or negatively about their carrier. This has some hard tech problems, because getting it wrong leads to fraud. For more please see this post.
  4. Digital Distribution. Eos is working in partnership with a tech company called Convista who have developed a digital front office solution called One Digital Office (ODO). ODO acts as a distribution channel for Eos portfolio companies and can also be used as the platform to launch new Digital Distribution products. Digital Distribution covers what we have been calling the Robo Brokers as well as simple comparison services (which are scaling fast in blue ocean markets where there are  a lot of de novo customers getting insurance for the first time (India, China, Africa etc).

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

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.

ICOs After The Gold Rush

After the gold rush

I love Neil Young’s After The Gold Rush. It encapsulated an era in a similar way to John Wesley Harding by Dylan. Yes, I know, I carbon dated myself there. That was time of getting real after wild excesses – which is what the ICO market is now going through.

In this post I try to peer through the fog to see what we might transition to after the ICO gold rush.

First, lets look past all the scams and market manipulation that seems like an even weirder version of Wolf Of Wall Street.  Lets look at the good part of the ICO phase, at the good ventures that would never have got funded the old way.

Bless those Bubbles

Whatever you call this phase – bubble, craze, hot market, irrational exuberance, gold rush – these frenzied deals enable innovation while burning through truck loads of investor cash. They are bad for (most) investors, but good for innovation and progress in society. This has been true for every wave of innovation from rail to Internet.

I categorise ICOs into:

  1. Total Scam.
  2. Hopeless but honest venture.
  3. Could be a great venture, but the value is in the equity more than the coin. When I see VC buying equity but selling coins to Jo Q Public, it is not hard to figure out who is the sucker at the table.
  4. Could be a real currency like BTC or ETH. This is about 1 in 1,000 – 999 failures but 1000x return on one or two winners. One candidate is Trutheum (see thread on Fintech Genome on Trutheum). Also possibly Civic and Filecoin (but I need to dig more into them).

The intent between 1 & 2 is different, but the net result is the same (burning through truck loads of investor cash). You can use simple filters for these.

Category 4 is an interesting game. You could invest in all Altcoins at ICO in the hope that you catch the one that makes it. This is not easy in practice. Murphy’s law says that the one in 1,000 venture that makes it all work does it’s initial raise in some different form and your basket won’t catch it and you are left with 999 duds and no 1,000x winner. Or you could do fundamental analysis to find that one in 1,000 winner; but this is really, really hard. The reality is that there are very few protocols. People often reference TCP/IP but there is only one TCP/IP and it is not used for speculation. I called this a mirage as long ago as December 2014. After 8 years, Bitcoin is maybe a really valuable protocol (I think it is, but risk is still there). I love IPFS and Filecoin, but it is unclear what problem it is solving. It is hard to see AWS storage price as one of the big problems of our time. Nor  do I buy that current Internet protocols are fundamentally flawed. For example, content addressing is better than location addressing but content addressing is possible today. Compare that to the scale of problem that Bitcoin and Ethereum set out to solve.

In short, Category 4 is “good luck, you will need it”.

Category 3 is where there is lots of opportunity and “only” 100x risk/return profile. That is what we explore next.

Regulated IEOs

Our thesis is that the next phase of the market will move to Equity or what might be termed IEOs (Initial Equity Offerings). Once they become legal, entrepreneurs will be able to offer equity in ventures that have liquidity without waiting 10+ years to get on NYSE or NASDAQ. That is fixing a big, big problem. The Innovation Capital business today is fundamentally broken.

Regulation may or may not catch scams; I would bet on the ingenuity of scammers more than the diligence of regulators. Do your own diligence even on a regulated platform.

IEOs will enable honest entrepreneurs to raise capital more easily. This will be a big breakthrough. Today the fundraising process is totally broken for entrepreneurs. As the VC business grew big and professional, entrepreneurs kept on being told the bar had been raised:

“Come back when you have an MVP.

Ok, here it is.

Come back when you have PMF.

Ok, here is evidence from our early adopters

Come back when you have Revenue.

Ok, here are our metrics showing our Revenue

Come back when you have Profits

Ok, here are our metrics showing our Profits

Come back when your Profits are growing at faster rate.

Ok, here are our metrics showing our Q-Q profit growth rate

Ok, we are ready to invest.

No thanks. we don’t need you now.”

The sort of ventures getting funded through ICOs would never have got through that gauntlet. So we would not have Ethereum for example. Sure 90% will fail, but so what because the 10% that make it will change the world and make you rich. It is the old fashioned VC mantra but in the last decade so much money went into VC that it was no longer VC, it had become Wall Street West.

In the traditional funding model, these are ventures that would have either not got funding the traditional Angel/VC route or would have got $100k Seed and then fallen into the Series A Chasm due to lack of capital to execute properly. In ye olde Dot Com bubble they would have raised $25m to $200m in a regulated IPO. Now they are raising $25m to $200m in an unregulated ICO. “Plus ça change, plus c’est la même chose”. Just under 20 years, one letter is different.

Which ones to invest in in category 3 is the big question. Personally I am happy to wait and not get hustled by FOMO. I don’t usually buy at IPO. I prefer to wait until there is blood in the streets (for example when Lending Club crashed). Just a market crash is not enough. The fact that the price was once $1,000 does not make it a bargain at $100. The best time to buy the good ventures from the Dot Com era was around summer 2002 and into early 2003 (when Apple and some other great companies were trading at cash value). I missed Bitcoin totally in 2009 because I was not hanging out on crypto forums. I was deep into Ethereum in 2014 but did not pull the trigger to buy a life changing amount. Maybe there is something like that offering a 1000x return today, but I don’t see it yet.

Raising money from Angels and VCs, unless you live in Silicon Valley and are wired to the big money guys, has been a lousy process. It is worse still if you are a woman or a minority. So the ICO is the entrepreneur’s revenge. But the ICO has overshot the runway and entrepreneurs are now giving investors a lousy deal and they can use SEC as cover to offer this lousy deal. Good ventures should be able to offer equity as well as coins and not just to “accredited investors”. The ability to give early adopters a financial stake in the future is a game-changer. Today only cash capital is rewarded. What if cash capital and social capital and intellectual capital were all aligned? Imagine Mark Zuckerberg’s next door neighbour at Harvard with the same simple brilliant idea offering the first 1,000 users a big % of the equity. He or she would be vastly wealthy and 1,000 people who made it happen would have had their lives changed. And Mark Zuckerberg and Peter Thiel would just be ordinarily wealthy folks not celebrity billionaires.

The regulatory rollout to enable IEOs will grind along slowly and be painful for the platforms going through the process, but the platforms that make it through the process will be very valuable. It will take time but we will get there. That will unleash a whole new wave of innovation. Ventures that are too risky for traditional VC because they have technology risk may get funded through IEOs. Imagine a high risk Biotech venture. If scientists could invest they can evaluate risk better than a bunch of finance guys on Sand Hill Road. Ditto for clean energy and other things that really matter to us. The earliest investors in Bitcoin and Ethereum were totally naive on finance but could evaluate technology risk.

After the Neil Young’s Gold Rush, popular pressure did finally end the war in Vietnam. After the ICO Gold Rush, we may get more funding for life-changing innovation.

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

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


  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).