DEA’s Reading Digest (03/15/2020)
20 min readMar 16, 2020
A. Stories, strategies & expert opinions
Every company will be a fintech company
- In the not-too-distant future, I believe nearly every company will derive a significant portion of its revenue from financial services.
- So, why is this fintech explosion happening now? The “as a service” infrastructure is coming to banking. To understand why this is such a big deal, we need to look at how complex the banking stack is today. Ever wondered what it takes to start a bank? Here’s a simplified version of what it looks like on the consumer side. In this highly regulated industry, first you need to apply for a license, which could take years. Instead, most of the new companies are finding a sponsor bank (effectively borrowing a license).
- Then you need a core system (analogous to a large database) that logs where your customers’ money is and how it is moving around. You need to integrate with a series of payment systems so customers can take money out of their accounts. To make loans, you would need to know information about your customers via the credit bureaus. There are multiple regulatory agencies that you need to comply with, likely driving more partnerships for KYC (know your customer) and AML (anti money laundering). And because we’re dealing with money, you need to guard against fraud, which requires more software. So now we’re looking at over a dozen partnerships.
- But what if, similar to what Amazon did to compute and storage, companies focused on each layer of this complex stack and provided that step as a service? That’s exactly what’s happening.
- Banks are required to comply with a set of laws that’s intended to prevent money laundering.
- It’s a cumbersome process: At one of the large banks, 30,000 of 120,000 employees work solely in compliance. The vast majority of those workers are assessing suspicious activity and filing suspicious activity reports as a result of anti-money laundering regulations.
- More surprising, then, is the fact that less than 3 percent of that laundered money is actually caught. This presents a big opportunity for technology to provide this function as a service.
- Many of us think of fraud as stolen identities, but there’s actually a much more pernicious type of fraud: completely fabricated or synthetic identities.
- You can pick almost any nine-digit number that doesn’t start with nine at random and it could be a legitimate social security number. Say you then go apply for a loan. The first time, the lender will ping the credit bureau who will return “No, we’ve never seen this person.” But the next time you apply for a loan, the lender will ping the credit bureau, and the credit bureau will recognize that yes, there’s been an inquiry. Chances are, you can find a lender that, for a high enough cost and a low enough dollar rate, will give you a loan. These synthetic, made-up people pay back the loan, ladder up, and borrow more and more money until they bust out.
- Regulation and payment systems differ around the world. In some cases, the financial services stack is entirely different. For example, a country like Mexico, where 80 percent of payments are in cash, needs a layer that incorporates cash payments into the online system.
- Every company, as we saw with Uber, Lyft, Shopify, Mindbody, should be thinking about how to leverage financial services to better serve their customers, better retain their customers, and drive more margin.
Visa, Plaid, networks and jobs
- When Bank of America dropped 60,000 Bank Americards on its customers in Fresno, California, in 1958, they had an immediate reason to give this new- fangled financial product a try.
- Merchants began to sign on. Not the big merchants, like Sears, which had its own proprietary credit card and saw the bank’s entry into the credit card business as a form of poaching. Rather, it was the smaller merchants who first came around. Larkin remembers visiting a drug store in Bakersfield, hoping to persuade its owner to accept BankAmericard. “When I explained the concept of our credit card,” he says, “the man almost knelt down and kissed my feet. ‘You’ll be the savior of my business,’ he said. We went into his back office,” Larkin continues. “He had three girls working on Burroughs bookkeeping machines, each handling 1,000 to 1,500 accounts. I looked at the size of the accounts: $4.58. $12.82. And he was sending out monthly bills on these accounts. Then the customers paid him maybe three or four months later. Think of what this man was spending on postage, labor, envelopes, stationery! His accounts receivables were dragging him under.”
- A store owner who accepted the credit card was, in effect, handing his back office headaches over to the Bank of America. The bank would guarantee him payment — within days instead of months — and would take over the role of collecting from the customers. As for the bank, in addition to taking its 6 percent cut, the card was a way to get its hooks into businessmen who were not yet Bank of America customers.
- Visa sits in the middle of banks, consumers, and merchants:
- There are some obvious parallels to be drawn between Visa’s network, particularly in its earliest days, and Plaid, the fintech startup Visa acquired.
- Plaid has its own three-sided network, but it operates a bit differently than Visa’s:
- Many banks in the U.S. do not have APIs (Application Programming Interfaces) that offer a programmatic means of accessing a particular account; those that do are not consistent with each other in either implementation or in features. Plaid gets around this by effectively acting as a deputy for consumers: the latter give Plaid their username and password for their bank account, and Plaid utilizes that to basically log in to a bank’s website on the user’s behalf.
- That is not an interface for Chase; it is Plaid, effectively training end users to enter their bank credentials in an app and/or on a site that is not their bank! Oh, and because this is very much a hack, Plaid fails between 5 and 10 percent of the time.
- Developers, it should be noted, aren’t particularly bothered by this: in fact, they are paying Plaid for every successful log-in. Users, meanwhile, are likely unaware about just how much access and data they are giving away, but at the same time, have a real desire to access new financial services that require a connection to their bank account.
- This hints at the best case scenario for Visa from this acquisition: a new financial network, with Visa at its center, transforming the consumer financial services industry just as the credit card transformed the consumer retail industry.
The end of the beginning
- In this understanding of tech dominance, the driver of generational change is a paradigm shift: from mainframes to personal computers, from desktop applications to the web, first on personal computers, and then on the web. Each shift brought a new company to dominance, and when the next shift arrives, so will new companies rise to prominence.
- What, though, is the next shift?
- What is notable is that the current environment appears to be the logical endpoint of all of these changes: from batch-processing to continuous computing, from a terminal in a different room to a phone in your pocket, from a tape drive to data centers all over the globe.
- Today’s cloud and mobile companies — Amazon, Microsoft, Apple, and Google — may very well be the GM, Ford, and Chrysler of the 21st century. The beginning era of technology, where new challengers were started every year, has come to an end.
- That is exactly what happened with the automobile: its existence stopped being interesting in its own right, while the implications of its existence changed everything.
Leadership isn’t about having the answers
- What’s the thing folks most often misunderstand about leadership?
- That a leader is supposed to have all the answers. It screws up the leaders themselves and it disempowers the people they are trying to lead.
- That was one of the most important things they drilled into me in the Navy. That leadership isn’t about having the answers. It’s about character.
- How do you know if a leader’s character warrants following?
- You ask yourself, ‘Do they say what they mean? Do they mean what they say?’ and ‘Can I trust them?’.
Why B2B marketplaces are red-hot
- A growing interest among VCs in B2B marketplaces.
- I would highlight three red-hot companies in particular: Choco, Rekki, and Faire (disclosure: Faire is a Lightspeed portfolio company). These are examples of high-growth B2B marketplaces that earned competitive financing rounds.
- What makes these types of startups both possible and hot today?
- Consumer feels dry: consumer is increasingly harder to get right.
- Global markets and the Slack & Zoom effect.
- Generational change and adoption.
- Software and fintech enablement: At a high level, these new companies are using various techniques — such as giving away free software to attract and onboard supply; or using financial products like lending or factoring to monetize the GMV flowing through the system rather than taking a percentage rake.
How to de-risk your startup and become ‘definitely fundable’
- If a company can show the right growth metrics, it will “definitely get funded” in Silicon Valley.
- What makes for a “definitely fundable” business in San Francisco?
- Something in a big market
- At least one of the founders is an engineer
- A company that has already reached $20k MRR
- Once a company has reached $20k MRR, it should show a “reasonable” month-over-month growth rate of at least 15 percent
- The growth rate is key for VC funding: “Flat or negative growth rate is almost completely unfundable,”.
- But before entrepreneurs even go after growth strategies, Immad says the focus should be on retention. “A lot of growth doesn’t have to do with adding new customers. If [current] customers keep buying more, that’s where a lot of growth can come from.”
- It’s all about de-risking your business to investors.
When is it the wrong time to scale your startup?
- Determining when to scale and when to pull back is one of the most difficult things you need to do as a CEO. If you scale too quickly, you can end hurting a lot of people. If you scale too slowly, you can miss your opportunity.
- At all costs, you want to avoid what I call a “bet the company” decision. A bet the company decision is literally a decision where your company will go away if you’re wrong.
- The likelihood that your original idea will work exactly as you thought it would is really low. There’s always some tweaking or pivoting of your original idea that will happen.
- Two important micro-signs to look for when you are looking if this is the right time to scale:
- A. You need customer feedback. In the early days of your company, relentlessly pursuing customer feedback should be at the top of your goals. You need to know why customers are buying your products. The goal at the early stage isn’t for every customer to love everything about your product. That will never happen. The goal is for enough of the customers to be giving you enough positive feedback that you know you are onto something
- You want a repeatable and predictable sales process. You’re looking for your customers to buy in a logical and repeatable fashion. Logical and repeatable does mean that a consistent number of customers are buying from you over a significant period of time. And, more importantly, your customers are buying through a repeatable and potentially scalable methodology you are using.
- Cash is about the only thing you have complete control over as a CEO. And the general rule here is pretty simple. Always conserve your cash. Always.
- Your ability to continue recruiting top-notch people should be the limiting factor on your growth. Hiring mediocre people or people that don’t fit your culture might not initially hurt your company. However, in the long run, hiring mediocre people will significantly hurt your company.
Unlocking value creation among API-first companies
- The notion of modularized access to critical infrastructure that enables key business operations is nothing new — AWS and the rise of cloud computing as a replacement for on-premise servers was the original wave of API-first companies. Modularized access to payment processing (Stripe, Ayden), telecommunications (Twilio, MessageBird), search (Algolia, Coveo), banking data (Yodlee, Plaid), and many other business operations soon followed.
- API-first companies fall within two buckets — direct and flowthrough businesses. A direct API provisions access to a hard asset that it holds internally — AWS, Stripe, and Scale AI are all examples of this. A flowthrough API pulls data from a multitude of other companies — Plaid and Mulesoft are examples.
- For API-first companies, we think there are three particular problems that are being generally being solved: dullness/democratization, complexity and fragmentation. Dullness/democratization has the smallest moat, but removing painful workflows from internal developers and/or enabling anyone in an organization to do what once required technical expertise can be valuable. Complexity typically occurs when it’s technically hard to time-consuming to build due to regulatory reasons, regulatory systems, or just true technical complexity beyond the norm. Fragmentation applies for flowthrough businesses, and the greater the abundance of supply on both sides, the more valuable the problem being solved.
- The challenge for API-first companies is when NPV is so high, customers inevitably see value in building out this capability internally. We evaluate this dynamic by looking at how core to the customer ethos this problem is. Practically, we ask “is this required to deliver service and/or without it, would the buyer provide a markedly worse experience for their end customers?”.
How the Dutch use architecture to feed the world
- The Netherlands is the world’s second-biggest exporter of agricultural products. This is remarkable when one considers that the only country which tops the Netherlands, the United States, is 237 times bigger in land area.
- Dutch agriculture is defined by vast landscapes of greenhouses, some covering 175 acres, which dominate the architectural landscape of South Holland. In total, the country contains 36 square miles of greenhouses, an area 56% larger than the island of Manhattan.
- Underneath the sea of illuminated glass roofs, tech-savvy farmers use hydroponic systems and geothermal energy to generate unparalleled yields using little resources. Dutch greenhouses use 1.1 gallons of water per pound of tomatoes produced, in contrast to the 25.6-gallon global average, with some farmers producing over 100 million tomatoes per year from 14 hectares of land.
Why founders should take more risks
- Behind every iconic company is a radical, risk-laden idea. But as the startup ecosystem has grown, we’ve seen a decreasing appetite for risk & an increased emphasis on predictability and familiarity.
- To build iconic companies, Founders must take more risks, not less.
- Two types of risk Founders trade-off between are market risk and execution risk. Market risk is the risk that people may not want what you’re building. Execution risk is the risk that you might not be able to execute your idea better than the competition.
- Startup ideas with higher market risk are usually the best option for first-time entrepreneurs looking to avoid incumbents and competitors. By contrast, experienced entrepreneurs will often choose to take on more execution risk because they have more confidence in their ability to execute.
- Market risk: Market risks are outside of your direct control as a startup.
- Product risk: Do people want your product? Early on as a founder, it’s best to take whatever steps you can to minimize market risk before you start a company and raise capital. The longer it takes you to get to product-market fit, the harder everything else with your startup will become. The best evidence of low market risk is obviously the existence of thriving businesses that already exist and provide a similar product. But, as we’ll discuss further below, the less market risk you can perceive because of the presence of competition, the more execution risk you tend to take on. The best market-risk companies have strong evidence that there will be demand for their product and low to non-existent competition.
- Scale risk: Is there a big enough market? The size of the market for your product is (mostly) outside of your control, but one of the biggest avoidable risks I see founders take is starting companies where the potential market is too small for the economics of a venture-backed company. Startups that raise VC money must have the ability to (profitably) scale in order for them to be successful.
- Competitive risk: What is the competitive landscape? Another market-related risk to consider is the risk of competition. Big ideas with high market risk usually have limited direct competition, but sizable indirect competition from adjacent market categories. Defensibility is the biggest factor in how valuable a company eventually becomes, and network effects are the best form of defensibility.
- Timing risk: Is this the right time? The last significant risk outside of your direct control is timing. The three preconditions that you should look for in a market to know if the timing is right to start a startup: economic impetus, enabling technologies, and cultural acceptance. When a market reaches a critical mass of these three preconditions, there is an inflection point in the available market size so large that it can determine the success or failure of a given company.
- Legal risk: What is the regulatory environment? Most iconic companies in tech end up having to navigate the obstacle of regulation.
- Execution risk: Execution risks are more in your direct control than market risks, so taking on execution risk is betting on your own ability to execute in 3 basic areas: recruiting a world-class team, having the technical capacity to build the product itself, and fundraising aptitude.
- Team risk: Can you recruit world-class talent?
- Product execution risk: Can you build it?
- Fundraising risk: Can you fundraise?
- Investors tend to be biased toward companies with high market risk, but low execution risk.
- Why? Because the early-stage VC model is built on high variance investments. Most Funds are made by taking big risks for the chance of getting a huge outcome.
- The math looks something like this: if I invest in a market risk company, it might have a 10% chance of having a huge $1B+ outcome, vs. investing in an execution risk company with a 30% chance of a $200M outcome.
- Companies with massive defensibilities, i.e. network effects, have the most potential to become huge, iconic companies. But these companies usually have a lot of market risk and are doing something non-obvious that no one else is doing.
- Another thing to be aware of is that investors are also less prone to taking team risk, but more prone to taking technical risk. If you have an amazing team but it’s unclear whether what you’re proposing can actually be done, investors might still back you, as we see with companies like Magic Leap.
- Investors tend to believe that everything is possible given enough time, money, and the right people.
- The Varian Rule can also be used to extrapolate future trends in consumer business. Named for Google’s chief economist Hal Varian, this rule holds that “a simple way to forecast the future is to look at what rich people have today; middle-income people will have something equivalent in 10 years, and poor people will have it in an additional decade”.
B. Startups & market trends
Pyka and its autonomous, electric crop-spraying drone lands $11M seed round
- Pyka is taking on the largely human-powered spray business with an autonomous winged craft and, crucially, regulatory approval.
- The craft Pyka has built is more traditional, resembling a traditional one- seater crop dusting plane but lacking the cockpit. It’s driven by a trio of propellers, and most of the interior is given over to payload (it can carry about 450 pounds) and batteries. Of course, there is also a sensing suite and onboard computer to handle the immediate demands of automated flight.
Shipfix raises $4.5M seed for its dry cargo shipping platform
- Shipfix, a relatively new startup aiming to drag the dry cargo shipping industry into the digital age, has raised $4.5 million in seed funding.
- Shipfix connects to its clients’ email to extract and anonymously aggregate “billions of data points using deep learning technology.”
- The idea is that, rather than spending hours scrolling through your inbox every morning to take the pulse of the market, you can search and filter structured market offers instantly via Shipfix.
- Shipfix customers are primarily anyone chartering/fixing a ship, such as charterers, ship owners, ship operators, freight forwarders and “lots of brokers.”
Amazon partners with thousands of mom-and-pop stores in India
- Amazon said on Saturday it has partnered with thousands of neighborhood stores — locally known as kirana stores — across India to use them to store and deliver goods.
- Amazon, which piloted the program dubbed “I have Space” years ago, has partnered with more than 20,000 kirana stores.
- These mom-and-pop stores offer all kinds of items, pay low wages and little to no rent. Since they are ubiquitous (there are more than 10 million neighborhood stores in India), no retail giant can offer a faster delivery.
Instacart upgrades its pickup service with new features, adds alcohol pickup option
- The grocery pickup service has been steadily growing alongside Instacart delivery, having tripled the number of states and doubled the number of grocery partners offering a pickup option in 2020.
- Today, Instacart is upgrading Pickup with the addition of a new digital storefronts feature, plus better tools for managing pickups, including alerts to signal the store you’re on the way, better mapping tools and more.
Visa is acquiring Plaid for $5.3 billion, 2X its final private valuation
- Visa announced today that it is buying financial services API startup Plaid for $5.3 billion.
- Plaid develops financial services APIs. It is akin to what Stripe does for payments, but instead of facilitating payments, it helps developers share banking and other financial information more easily.
Nigeria’s Paga acquires Apposit, confirms Mexico and Ethiopia expansion
- Paga has created a multi-channel network to transfer money, pay-bills, and buy things digitally. The company has 14 million customers in Nigeria who can transfer funds from one of Paga’s 24,411 agents or through the startup’s mobile apps.
- Paga plans its Mexico launch in 2020.
Challenger business bank Qonto raises $115 million round led by Tencent and DST Global
- French startup Qonto has raised a $115 million Series C funding round led by Tencent and DST Global.
- Qonto is a challenger bank, or a neobank, but for B2B use cases. Instead of attracting millions of customers like N26 or Monzo, Qonto is serving small and medium companies as well as freelancers in Europe.
- The company has managed to attract 65,000 companies over the past two years and a half. The product is currently live in France, Italy, Spain and Germany.
- Qonto obtained a payment institution license in June 2018 and has developed its own core banking infrastructure.
- When it comes to payment methods, Qonto gives you a French IBAN as well as debit cards. You can order physical or virtual cards whenever you want, customize limits and freeze a card.
Crisp, the demand forecast platform for the food industry, goes live
- Crisp aims to solve the global food waste problem via demand forecasts.
- Integrated with almost any ERP software a company might have, Crisp ingests historical data from these food brands and combines that data with signals around other demand drivers, such as seasonality, holidays, price sensitivity and other pricing information, marketing campaigns, competitive landscape, weather that might affect the sale or shipment of certain produce or other ingredients.
- And the more customers it gets, the better it is at predicting demand on a very specific level.
- The prospect of a collaborative demand forecast platform, which is pulling signals from across the entire industry, is going to be more accurate than siloed demand forecasts produced by a single vendor or brand.
Lighter Capital secures $100M to grow its equity-free financing business
- Lighter Capital announced today that it has secured access to $100 million to lend to growing startups. The firm is best-known for its work with revenue-based financing, in which expanding companies repay borrowed funds out of future receipts.
- With the VC method, venture capitalists raise funds from wealthy capital pools, disbursing the funds in pieces to various private companies for an ownership stake. Those growth-focused firms then try to scale rapidly.
- In alt-VC, various forms of debt are put to work, tailored to companies that are growth-oriented, often existing outside of the realm of what traditional banks would consider lending-ready. Startups that are working in software- as-a-service (SaaS) or e-commerce are often considered ideal candidates for alt-VC in its various forms.
Community-based fresh food store QianDama secures $142 million USD Series D
- Founded in 2012, QianDama is a wholesale retailer of agricultural products, from meat to vegetables and fruits. It is advocating for freshness.
- The stores will start clearing their stocks by 7 pm each day, slashing their prices every half an hour. The ‘zero inventory’ is applied to its entire supply chain.
- In the 2012 to 2018 period, the Guangzhou-based company opened an average of three stores per day, amounting to over 100 stores each month.
Yet another Chinese e-commerce company catches the investors’ eye
- Pupu Mall is a retail technology company that focuses on creating a mobile 30-minute instant delivery one-stop shopping platform. The company was founded in 2016 and is based in Fuzhou in China. The company applies a “front warehouse plus online operation” retail model. Instead of opening brick-and-mortar stores, Pupu Malls operates small independent warehouses around residential communities to conduct commodity turnover, short-term storage, sorting, and distribution.
- The products are delivered to buyers at their house within 30 minutes after the order is placed via Pupu App or Wechat mini program. Pupu Mall covers all kinds of fresh products such as vegetables, meat, milk, seafood, snacks, fruits and other daily necessities.
