Do we need a #FinTech safe harbour?

As part of the recent FinTech Melbourne Meet Up, there was some discussion on the regulatory challenges startups face when trying to validate an early-stage concept. The notion of a safe harbour or “regulatory sandbox” has gained some momentum, with ASIC’s Innovation Hub, and a commentary by Deborah Ralston, of the Australian Centre for Financial Services, who is also inaugural Chair of ASIC’s Digital Finance Advisory Committee.

If we assume that the main purposes of financial regulation are: system stability, minimum professional standards, consumer confidence, investor protection, market transparency and risk mitigation, then I doubt anyone can deny the benefit of a formal and robust compliance regime. However, technology and innovation are combining to challenge and disrupt the inherent inefficiencies that can accrue within a static regulatory environment (especially one that is reactive, rather than pro-active), which is largely designed to monitor legacy frameworks and incumbant institutions.

While the ASIC initiative is not the same as obtaining an ATO private tax ruling, it does at least show that the regulator is keen to be more consultative in helping startups test new ideas. But the reality is the cost of initial compliance and licensing can be a barrier to a new venture, before the concept has even been market-tested. So perhaps there is an opportunity to ring-fence emergent FinTech ventures, so they can explore real-world applications, but limited by market scope, number of participants, transaction values and timeframes. (Such a model already exists for private equity offerings….)

As it stands, in the case of P2P lending platforms, a startup might find itself having to be licensed and regulated as a financial services provider, an approved consumer credit provider, an authorised depository institute and possibly a licensed financial planner as well. That’s a lot of compliance for a new business that might not even have a single customer.

From my own experience, what constitutes “financial advice” is subject to very wide interpretation. Several years ago, I was responsible for introducing a new financial product to the local market – a bond pricing information service. The service was aimed only at institutional investors (not retail customers), based on collated and published data supplied by existing market participants. Nor was it a real-time data feed; rather, it delivered intraday and end of day prices calculated on actual traded bonds. Yet the regulator determined this constituted “financial advice”, even though no trading recommendation or investment decision was inherent in the data. It was also designed to offer a more transparent and objective process for pricing portfolios of less liquid or rarely traded securities, where mark-to-market solutions are unavailable or inappropriate – thereby providing some clarity to market participants.

Meanwhile, the responses to shady advice and other malfeasance inflicted upon retail investors by “established” financial institutions and “traditional” financial planners usually take years to work their way through the legal and regulatory processes of investigation, mediation, settlement and prosecution. (And if anyone wants to understand what actually caused the GFC, well before the term FinTech had been coined, check out John Lanchester’s book “Whoops!”)

Next week: What I want from a mobile banking app.

A Tale of Two #FinTech Cities – Melbourne vs. Sydney….

Inter-city rivalry between Melbourne and Sydney is nothing new. The fact that neither city is the national capital only adds to the frisson. The usual debates as to which is the better for sport, culture, beaches, food, weather, property prices, live music, public transport and coffee normally mean Melbourne edges out Sydney in most categories. (But then, I’m probably biased – however, having lived and worked in both, I think I am reasonably objective.)*

When it comes to startups, and FinTech in particular, the debate is beginning to hot up. At a recent FinTech Melbourne Meetup the topic was “is there room for both?”. The speakers, Toby Heap for Sydney, and Stuart Richardson for Melbourne, remained tactful and diplomatic, as it’s not really appropriate to talk about which is better – more a case of choosing “which is the right location for your own particular FinTech”. So, the debate avoided mere point-scoring, and tried to establish some commonalities, as well as provide some considered views on the benefits inherent within the key differences.

Both cities have a growing reputation for startup success, built on some core foundations: groups of angel investors and VC funds with an increasing FinTech focus; several accelerator programs, incubators and co-working spaces; and a community of founders and aspiring tech entrepreneurs.

From an industry perspective, two of the four Pillar Banks are headquartered in Sydney, and two in Melbourne. More insurers have their HQ’s in Sydney compared to Melbourne (apart from health insurance, where Melbourne hosts the largest market providers), while Tier 2 and regional banks (by their very nature) are more likely to be located outside either city (not including wholly owned brands of the Big 4).

As for pension funds and asset management, particularly in relation to Australia’s superannuation sector, Melbourne is clearly the bigger player, particularly for the largest industry funds (based on their historical links to the trade union movement). In addition, Melbourne is home to some substantial family offices, as well as specialist asset managers, including overseas firms. After all, Melbourne’s establishment wealth comes from the nineteenth century gold boom.

When it comes to markets, Sydney wins out by virtue of housing the main equities exchange, as well as being a hub for futures, fixed income and forex. Sydney also hosts more investment banks, including local branches of foreign players.

In some respects, the differences can be likened to the market roles and dynamics of London vs Edinburgh, New York vs Boston, Frankfurt vs Munich, or even Hong Kong vs Singapore, for example.

For me, however, the key distinction between Sydney and Melbourne can be summarised as: “Sydney trades, Melbourne invests”.

* Note: Content in Context is taking a well-deserved break. Starting this week, the next few posts will feature some brief blogs on different aspects of FinTech. Normal service will be resumed in early November

Next week: do we need a #FinTech safe harbour?

Sharing the love – tips from #startup founders

Startup Victoria, with support from inspire9, BlueChilli, PwC and the Australian Computer Society brought together a mix of expert speakers who shared their insights, experience and advice for aspiring startups. The evening took the form of a series of lightning talks, and again demonstrated the contribution and importance of the Lean Startup Melbourne Meetup events to the local startup community.

First up, Adam Stone from Speedlancer reflected on his experience of the 500 Startups accelerator program, via 6 simple lessons:

  1. Make sure you connect, network and avoid all marketing BS in your pitch
  2. Achieve the target of three growth hacks a week
  3. Work out your Unit Economics
  4. Remember to hustle – it’s important to secure market tests and investor meetings
  5. Play ping-pong (a lot)
  6. Target angel investors rather than VCs

Next, Kristeene Phelan, who was the first regional employee at Etsy, explored the theme of communication, when working with global and remote development teams:

  • Choose your collaboration tools carefully, and have a backup for your backup
  • Know your international time zones (and daylight saving changes…)
  • Compromise the scheduling of cross-border conference calls
  • Slow it down when talking live to multicultural and multilingual teams
  • Get the team together in person whenever possible, and also make time for 1:1 dialogue – face to face time is important

Then, Thomas Banks, Creative Director at the Centre for Access made a very personal and impassioned presentation on website accessibility: about 99% of websites are inaccessible to people with disabilities, underscoring the importance of having an inclusive approach to web and app design.

Geoff Dumsday talked about the significant work CSIRO is doing in accelerated innovation. Most of us probably know about CSIRO’s role in inventing WiFi and polymer banknotes. But perhaps less well-known is the fact that CSIRO work with around 1600 clients, including 350 multi-national companies, and have over 300 commercial licenses in use for technology and inventions coming out of the work their scientists and researchers do. As Australia’s innovation catalyst, CSIRO is enhancing the entrepreneurial culture through evidence-based R&D. Such as the invention of non-animal gelatine for use in biomedicine, food and cosmetics.

LIFX co-founder Daniel May pitched the need to make products that add value or make a difference to the world. As examples, he referred to his new project, AgreeTree, which is trying to take the pain out of drafting commercial contracts; and also to the work of the Asylum Seeker Resource Centre and how it is engaging entrepreneurs via an accelerator program.

Finally, Layla Foord from Envato covered the topic of building successful teams, especially when hiring early-stage employees. Using the theme of “pitch in, not mark territory”, she emphasised leveraging attitude and mindset over job titles.

This smorgasbord of ideas and content was a useful reminder to aspiring founders and entrepreneurs that while a great idea (backed by a solid business plan, market traction and protectable IP) will help get you motivated, the human touch is vital to gaining momentum for your project.

Next week: #FinTech – A Tale of Two Cities: Melbourne vs Sydney

The art of #pitching – the long and the short of it… Pt.2

Last week, I commented on a short-form pitching event hosted by General Assembly. This week, I report on Startup Victoria‘s latest pitch night, “Pitch in Melbourne”, which may become a more regular fixture on the startup circuit. It seems we can’t get enough of these events….

Screen Shot 2015-09-13 at 9.37.32 pmIn contrast to “Out of the Garage”, “Pitch in Melbourne” was a more in-depth, long-form  pitch event, with only three teams competing (for a prize of $50,000 in seed funding), and all of them are currently going through accelerator programs. Their presentations were about 10 minutes each, with ample time for Q&A with the audience and panel, ably assisted by MC Leni Mayo.

The underlying idea was to reveal some of the thinking that prospective angel investors apply when considering new proposals. Even with the opportunity to listen in on the judges’ deliberations (who were effectively choosing where to invest some of their own money), it was still a slightly artificial exercise, because in reality, few investments are made after just a 15-minute presentation.

The pitches were reasonably proficient, although the market sizing, opportunity assessments and financials were a bit thin. One startup appears to be making potentially serious money, another has validated their model with a commercial client, while the third is still working out a go-to-market strategy:

SweetHawk has featured in this blog before, and is building integrated voice solutions for e-commerce and m-commerce. During beta-testing, SweetHawk has helped a venue booking agency to deliver more business to its clients. As a result, the team believe it will have most success with high-value, complex and non-commoditised products and services, where talking to prospects means much, much higher conversion rates from enquiries to firm sales. The service pricing model looks like it needs more work, and more market segments would need to come on board to demonstrate the commercial application. Experience also tells us that big-ticket B2B items are less likely to be bought on-line, and rarely after only a single touch point. Plus, companies usually have strict policies around employees paying for enterprise purchases with their individual corporate credit cards, require purchase orders to be raised in advance, and often outsource their buying to third-party procurement services.

parkhound perhaps likes to think of itself as part of the sharing economy (“an AirBnB for car parking”), except that it’s trying to create long-term contracts, not overnight deals. It also faces strong competition, not only from other providers within Australia and overseas, but potentially from AirBnB itself as it develops a similar add-on service following its recent deal with ParkMonkey. There’s also the prospect of that other darling of the shared economy, Uber bringing its app technology to car parking as well. So far, parkhound has signed up a solid inventory of spaces, and is starting to acquire some more substantial corporate accounts. However, spaces in commercial buildings and residential developments normally require dedicated hardware and other technology solutions such as smart boom gates to allow non-residents and non-tenants to gain access to secure areas. One suggestion from the panel was to sign up more residential spaces close to train stations – although such a strategy risks “off-platform leakage”, by cutting parkhound out of the picture if householders choose to go direct to market (e.g., via Gumtree or similar). Finally, there is evidence that car ownership is in decline among some sections of the population, and the prospect of driverless cars could mean we will only need between 10%-30% of the current number of vehicles on the road.

nuraloop are building customised headphones that are attuned to our own ears, incorporating some proprietary technology called earSync (“a virtual Cochlear”) that is designed to enhance the user experience when listening to music. I’ve seen the team pitch before (with some success), but despite the medical, scientific and engineering pedigree of the team, it seems they are only interested in the product application for music. Sure, getting TGA status is complex without medical evidence, but other options in the area of OH&S might not be so onerous to pursue. However, a bigger concern for the judges was the fact that the founders are not clear whether they are developing a hardware product, or seeking to licence their IP to other manufacturers. The good news is that most of the audience indicated they would subscribe to the crowdfunding campaign, and nuraloop won the audience choice.

Although it wasn’t entirely clear which pitch won the $50,000 (if indeed any of them did – specific term sheet negotiations weren’t going to be discussed publicly), I think it would have been a close call between SweetHawk and parkhound. One judge even suggested the two of them should be collaborating – but he was possibly biased. Despite the different startup domains, the judges were assessing the validity of the business models, the level of novelty/disruption, the teams’ strengths and capabilities, the commercial attractiveness of the idea, and above all the ability to execute and scale.

Both these events demonstrated that pitching is not easy, that there is a balance to be achieved between a slick sales presentation and a detailed analysis of the product/market fit. It’s certainly not just about the “idea”, and teams will be challenged if they can’t substantiate their claims or don’t come across as authentic or convincing. Ultimately, there’s no such thing as a perfect pitch (it’s all very subjective), but it helps when preparing to become pitch perfect!

Next week: Counterparty risk post-GFC