FinTech Fund Raising

In the wake of the Banking Royal Commission, will FinTech startups capture market share from the brands that are on the nose with customers? And will these upstarts manage to attract the necessary funding to challenge the deep pockets and huge balance sheets of the incumbents? This was the underlying theme of a recent panel discussion hosted by Next Money Melbourne.

The panel comprised:

Nick Baker from NAB Ventures, typically investing $1m-$5m in Seed to Series C rounds, self-styled strategic investor with a particular focus on RegTech, Data and Data Security, and AI/Deep Learning

Ben Hensman from Square Peg Capital, writing cheques of $1.5m-$15m into Series A onwards, more of a financial investor, mainly in businesses starting to scale. Sees that the industry is ripe for disruption because of the mismatch between profit pools and capital pools, compared to the size of the economy.

Alan Tsen an Angel investor, making personal investments of $10k-$25k, mostly into teams/founders that he knows personally and has had an opportunity to see the business evolve fairly close up.

Key topics included:

Open banking – Will this be the game-changer that many people think it will? Are the banks being dragged kicking and screaming to open up their customer databases? What will be the main opportunities for FinTech startups? While customers often express an intention to switch banks, the reality is that few actually do. In part because current processes make it relatively difficult (hence the current Open banking initiative, which will later be extended to utilities); in part because there is little to no differentiation between the major banks (in products, costs and service). Also, it seems that banks are quietly getting on with the task in hand, given that resistance is futile. My personal view is that banks may have a significant role to play as custodians or guardians of our financial and personal data (“data fiduciaries”) rather than directly managing our financial assets. For example, when it comes to managing the personal private keys to our digital wallets, who would we most trust to hold a “back up of last resort” – probably our banks, because even though we may love to hate them, we still place an enormous amount of trust in them.

Full stack financial solutions – Within FinTech, the panel identified different options between full stack startups, compared to those that focus on either the funding layer (sourcing and origination), tech layer, and the CX layer.

Neo-banks – Welcome source of potential competition, but face huge challenges in customer acquisition, brand awareness and maintaining regulatory capital requirements.

Unbundling the banks – Seen as a likely outcome from the Royal Commission, given that we have already seen the major banks largely exit the wealth management and advice business. But the challenge for FinTech startups will be in developing specific products that match and exceed current offerings, without adding transactional friction etc.

Identifying Strong FinTech Teams – There needs to be evidence of deep domain expertise, plus experience of business scaling. Sometimes it’s a fine balance between naivety and experience, and outsiders versus insiders – bringing transferable external experience (especially with a view to disrupting and challenging the status quo) can easily trump incumbent complacency.

Funding Models – While most VC funding is in the form of equity, some VCs offer “venture debt” (based on achieving milestones) which can be converted to equity, but while it can lead to founder’s equity dilution, it may represent a lower cost of initial capital for startups. The panel mentioned the so-called “Dutch model” (because it has been used by Dutch pension funds) that local mortgage company Athena has brought to the market. Rather than seeking wholesale funding or warehouse financing to back their home loan business, Athena allows institutional investors such as superannuation funds, to lend direct to homeowners. This means that the funds receive more of the mortgage interest margin than if they were investing in RMBS issued by the banks and mortgage originators. Athena is mainly geared towards refinancing existing mortgages, rather than new loans, but also offers a new approach to mortgage servicing and administration.

Generally, VCs prefer simpler structures rather than, say, funding milestones, because of the risk of misaligned goals, and the impact this may have on subsequent price rounds. There are some models that create a level of optionality for founders, and others which are royalty-based, or which use a form of securitisation against future cash flows.

Meanwhile, the panel were generally not in favour of IPOs, mainly due to the additional regulatory, compliance and reporting obligations of being a public company. So it would seem their favoured exit strategy is either a trade sale or a merger, or acquisition by a private equity fund or institutional investor.

Next week: Crypto House Auction

Talking Innovation with Dr Kate Cornick, CEO of LaunchVic

As a nice segue to last week’s blog on Techstars, I was fortunate to hear Dr Kate Cornick speak, just before the latest LaunchVic grants were announced. Organised by Innovation Bay, hosted by Deloitte, and facilitated by Ian Gardiner, the fireside chat plus Q&A was a useful insight on a key part of the Victorian Government’s innovation strategy.

launchviclogo innovationbay-feat-800x500At the outset, Dr Cornick stressed that LaunchVic is not an investment vehicle, and it doesn’t fund individual startups. Rather it seeks to support initiatives that help grow the local startup eco-system. (See also my blog on the consultation process that informed LaunchVic’s formation.)

Commenting on why Victoria (and Australia) has the potential to become a world-class centre for innovation, Dr Cornick pointed to a number of factors:

  • A collaborative culture
  • Positive economic conditions (comparatively speaking)
  • Governments (mostly) open to innovation
  • Strong research base

However, a few of the obstacles in our way include:

  • The notorious tall poppy syndrome, whereby Australians are suspicious, sceptical and even scathing of local success – except when it comes to sport and entertainment!
  • An inability to scale or capitalise on academic research
  • Insufficient entrepreneurial skills and experience to “get scrappy”
  • Lack of exposure for highly successful startups (c.$20m market cap) that can help attract more investment

From a startup perspective, Australia also has the wrong type of risk capital: institutional investors are more attuned to placing large bets on speculative mining assets, typically funded through public listings, and with very different financial profiles. (Or they prefer to invest in things they can see and touch – property, utilities, infrastructure, banks.)

So there is still a huge gap in investor education on startups and their requirements for early-stage funding. Part of LaunchVic’s remit is to market the local startup community, promote the success stories, and foster the right conditions to connect capital with ideas and innovation. After all, Australia does have one of the largest pool of pension fund assets in the world, and that money has to be put to work in creating economic growth opportunities.

As I have blogged before, we still see the “expensive boomerang”: Australian asset managers investing in Silicon Valley VCs, who then invest in Australian startups. Although when I raised a question about the investment preferences of our fund managers, Ian Gardiner did point out that a few enlightened institutions have invested in Australian VC funds such as SquarePeg Capital, H2 Ventures and Reinventure.

Dr Cornick also provided a reality check on startups, and added a note of caution to would-be founders:

First, it tends to be an over-glamourised sector. For one thing, founders under-estimate the relentless grind in making their business a success. And while eating pizza and pot noodles might sound like a lifestyle choice, it’s more of an economic necessity. Thus, it’s not for everyone (and not everyone should or needs to build a startup…), so aspiring entrepreneurs would be well-advised to do their homework.

Second, the success of any startup community will be reflected by industry demand. “Build it and they will come” is not a viable strategy. And I know from talking to those within the Victorian Government that unlike their inter-state counterparts, they are not willing (or able) to fund or invest in specific startups, nor in specific ventures such as a FinTech hub. Their position is that industry needs to put its money where its mouth is, and as and when that happens, the Government will look to see what support it can provide to foster and nurture such initiatives – particularly when it comes to facilitating between parties or filling in any gaps.

Third, don’t expect too many more unicorns, and don’t bank on coming up with simple but unique ideas that will conquer the world – meaning, new businesses like Facebook, Uber and Pinterest will be few and far between. Instead, drawing on her earlier comments about research, Dr Cornick predicts that it will be “back to the 90’s”, where innovation will come from “research-based, deep-tech solutions”.

If that’s the case, then the LaunchVic agenda (for the remaining 3 years of its current 4 year lifespan) will include:

  • Getting Victoria on the map, and positioning it as a global innovation hub
  • Raising the bar by educating startups and investors
  • Bringing more diversity to the startup sector, by providing greater access, striking better gender balance, and building a stronger entrepreneurial culture
  • Introducing a more transparent and interactive consultation process
  • Continuing to support the best accelerator programs that focus on startups
  • Making more frequent and smaller funding rounds, each with a specific focus

Asked what areas of innovation Victoria will be famous for, Dr Cornick’s number one pick was Healthcare, pointing to the strong research base coming out of both the Monash and Melbourne University medical precincts. Also in the running were Agriculture, and possibly Cyber-security. (Separately, there is a list of priority industries where the Government sees growth, employment and investment opportunities.)

If one of the biggest hurdles is commercializing research, Dr Cornick suggested that Universities have to re-think current IP practices, including ownership and licensing models, developing better career options in research, and doing more to re-calibrate the effort/reward equation in building research assets compared to building companies and commercial assets.

Finally, Dr Cornick offered an interesting metaphor to describe the current state of Victoria’s innovation potential:

“We have everything we need for baking a cake, but the missing ingredient is the baking powder to make it rise.”

Next week: Gigster is coming to town….

 

 

 

 

 

 

 

Life Lessons from the Techstars founders

Melbourne’s startup community is very fortunate to host some of the leading names in the startup world, who are more than willing to share their experiences and insights in front of packed, eager (even adulatory) audiences. The most recent visitors were Brad Feld and David Cohen, renowned entrepreneurs, and co-founders of the global Techstars accelerator and startup programmes. By the sounds of David’s recent blog, they really liked Melbourne (may have something to do with tennis…). But aside from talking about startups and the local eco-system, they had plenty to say about “startup life” as well.

techstarslogoDuring a fireside chat and Q&A facilitated by Leni Mayo, hosted at inspire9, with the support of Innovation in the Wild in conjunction with Startup Victoria, we learned a lot about what it takes to build a startup community, the role of government, limitations of current VC funding models, plus lots of personal tips on work/life balance etc.

First, based on the so-called “Boulder thesis”, there are four key elements to building a successful startup community:

  1. Entrepreneurs must act like leaders
  2. There has to be a long-term perspective (20 year horizon)
  3. The community has to be inclusive of anyone who wants to participate, and
  4. The leaders have to create activities for everyone to engage

There was also a discussion on why they chose Boulder as their base – which was slightly harder to explain. There was mention of the size of the population, the critical mass of wealthy investors and successful entrepreneurs, the liberal attitudes and culture, and the proximity to Denver (but at the same time, it’s not Denver?). Perhaps it’s something in the water?

Second, the community must rely on network effects, and not attempt to impose structure. That can be particularly hard when trying to co-ordinate scarce resources, attract potential investors, and win the ear of government. But I understand that a community should be capable of being a self-organising entity, as long as there is a clear and shared purpose?

Third, the role of government should be to get engaged (but stay out of the way?). The best thing our elected representatives and their bureaucrats can do is “shine a light on success”. This was particularly pertinent when our guests talked about some of the startups based in the same building where we were meeting: despite being very familiar with these companies in the USA, they had little idea that they were based in Melbourne.

Fourth, the community members have to “act what you want to be” (sort of, “be the change you want to see”?). I take this to be about being authentic, acting with integrity, giving back, and affording people due respect and recognition. Part of this is about having the right settings on culture, and taking responsibility for setting the tone of the community.

Fifth, given that some aspects of the current VC funding model are broken (fewer unicorns, fewer simple but big ideas emerging, too many short-term investment horizons, over-ambitious expectations on returns?), and if we want investors to behave in a certain way (especially if we need them to take a longer-term perspective), we have to educate them, engage them, bring them on the journey.

Finally, it was with remarkable candour that both guests spoke about achieving work/life balance, maintaining healthy relationships with their spouses, families and friends, and learning how/when to switch off. Mostly, they make specific time to take breaks, schedule date nights, compensate for the quality family time when they will be on the road, reflect on what is and isn’t working in all aspects of their lives, and continue to question/challenge themselves. The use of personal coaches and business mentors was also discussed, and it was refreshing to hear that such successful people acknowledge that sometimes they need help, and they certainly don’t have all the answers themselves.

Next week: Talking Innovation with Dr Kate Cornick, CEO of LaunchVic

 

101 #Startup Pitches – What have we learned?

During the past 3 years of writing this blog, I have probably heard more than 100 startup founders pitch, present or share their insights. Most of these pitch nights have been hosted by Startup Victoria, with a few on the side run by the Melbourne FinTech Meetup and elsewhere.

Image sourced from Startup Victoria Meetup

Image sourced from Startup Victoria Meetup

Based on all these presentations, I have collated a simple directory of each startup or pitch event I have covered or mentioned in this blog, as well as a few key accelerators and crowdfunding platforms.

What have we learned over that time?

First, apart from the constant stream of new startups pitching each month, it’s been impressive to witness the Melbourne startup community collaborate and support one another.

Second, some of the international founders who have spoken are among the rock stars of startups – and we are fortunate that they have been willing to spend time in Melbourne.

Third, a number of the local startups who have pitched during this time have become well-established and well-known businesses in their own right.

This all means that besides creating great products and services, and being willing to share their experiences, the founders have helped aspiring founders and entrepreneurs to appreciate the importance of:

  • product-market fit;
  • working with agile processes and lean startup models;
  • tackling prototyping and launching MVPs;
  • learning what to measure via key metrics;
  • figuring out funding; and
  • knowing when to pivot or fold.

Looking at the cross section of pitch nights, panel discussions and guest speakers, there are some significant trends and notable startups to have emerged:

Industry focus: Not surprisingly, the pitches are heavily biased towards FinTech, MedTech, Education, Digital Media, Enterprise Services and Consumer Services. There are a some key startups focused on devices (e.g., SwatchMate and LIFX); a smattering in recruitment, fashion, gaming, health and well-being, property services, social media and even logistics. But there are surprisingly few in environmental technology or services.

Business models: Two-sided market places abound, as do customer aggregators, sharing platforms (“the Uber for X”, or “the AirbnB of Y”), freemium apps and subscription services (as opposed to purely transactional businesses). There are also some great social enterprise startups, but surprisingly no co-operative models (apart from THINC).

Emerging stars:  Looking through the directory of startups, some of the star names to have come through during this time, based on their public profile, funding success, awards (and ubiquity at startup events….) include:

CoinJar, LIFX, Tablo, SwatchMate, etaskr, DragonBill, Culture Amp, Eyenaemia, Timelio, Moula, nuraloop,  Konnective, OutTrippin and SweetHawk.

Acknowledgments: Some of the startups and pitches in the list are just ideas, some don’t even have a website, and some didn’t get any further than a landing page. However, I have not been able to include all the startups that turned up at Startup Alley, nor the many more startup founders I have met through these events (but whom I didn’t get to see pitch or present), nor the startup ideas that were hatched during the hackathons I have participated in. And there are a few startups that I could not include because I heard them pitch at closed investor events. Finally, I am and have been very fortunate to work with a number of the startups listed, in various capacities: Brave New Coin, Ebla, Re-Imagi, Slow School of Business and Timelio. To these startups and their founders, I am extremely grateful for the opportunities they have given me.

Next week: Putting a Price on Value