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

Equity crowdfunding comes to town

Earlier this month, the Australian Securities and Investments Commission (ASIC) announced it had approved the first seven crowdsourced funding platforms (CSFs). It seems that after much debate, equity crowdfunding is finally open for business.

Image: Aaron Pruzaniec, sourced from Wikimedia Commons

Although not named in the ASIC media release, the seven successful applicants are:

There are significant limitations to the CSF legislation – namely:

  • the type of eligible companies (only smaller, public unlisted companies);
  • the amounts individual investors can invest (up to $10,000 per company per 12 month period); and
  • how much companies can raise (no more than $5m in any 12 month period)

Also, there is no indication as to whether other CSF license applications are still pending, or which applications may have been rejected. It may also be difficult to assess the relative merits of each platform, since there only appears to be one class of license.

Meanwhile, legislation is already in the pipeline to extend the CSF regime to proprietary companies – which would significantly expand the potential number of issuers.

Compared to some of the largest initial coin offerings (ICOs) over the past 18 months, a $5m capital raise looks like small change. If anything, ICOs took the decade-old crowdfunding experience and supercharged it with Blockchain, cryptocurrency and decentralized issuance platforms. But then, regulators tend to lag markets and technology; plus, their primary focus is protecting the interests of less sophisticated retail investors (as well as market stability).

It’s also worth remembering that a limited crowdsourced funding model has been available in Australia for several years, almost as long as crowdfunding itself: Enable Funding (formerly ASSOB) was established in 2007, but with a much more restricted license than the latest CSF legislation. (And in other countries, early-stage companies have been able to more easily raise equity capital via market listings on secondary boards of the main exchanges – e.g., Mothers in Japan, GEM in Hong Kong, and AIM in London.)

The new CSF regime (and whatever else comes in its wake) does raise a few interesting points:

1. Although expressly confined to equity issuance in the form of common shares, by giving it a more generic name, does this mean CSF will be used for other types of securities (bonds, structured finance)?

2. What expectations has ASIC placed on the number of raises, and the total amounts to be raised, over the next 3-5 years – how will it measure or define the success of CSF?

3. More importantly, where is investor money expected to come from – will investors switch from property or other assets?

4. How will the increasing practice of issuing digital tokens as traditional securities (and potentially vice versa) add to the demand for CSF platforms and services?

It’s very early days, of course, and very small scale, but judging by the response so far to one of the first companies to take advantage of the CSF legislation, investors like what they are seeing.

Next week: Australia Post and navigating the last mile

 

 

 

 

 

 

FF18 pitch night – Melbourne semi-final

As part of the Intersekt FinTech festival, Next Money ran the Melbourne semi-final of their 2018 Future FinTech pitch competition.

Ten startups presented, in the following order, in front of a panel of judges representing different parts of the Melbourne startup ecosystem:

BASIQ

Describing itself as “the future of finance”, and quoting the trendy mantra of “Data is the new oil”, BASIQ is an API marketplace for financial data. Designed to counter-balance “the Faustian pact” of big data, social media and search, and to compensate for the information asymmetry of bank-owned data, BASIQ espouses open banking, even though it is backed by two bank-related VC funds (NAB Ventures & Reinventure – see last week’s blog). With a focus on the needs of app developers, the commercial model is based on a licensing fee per user per transaction. Leveraging the AWS security layer (presumably to maintain privacy and data integrity), the pitch also mentioned “screen scraping” – so it wasn’t clear to me whether the data is only coming from publicly available sources? Currently, the platform only connects to financial institutions in Australia and New Zealand.

Breezedocs

A participant in the FF17 Semi-Final earlier this year, Breezedocs is a robotic document processing solution. In short, it can read/scan, sort and extract relevant data from standard documents that need to be presented by customers in support of a loan application. Operating via an API, it can work with multiple document types and multiple formats: data can be structured, semi-structured, or even unstructured. The benefits for lenders and brokers are reduced loan approval times and increased conversion, with much
better CX for the loan applicant as well. The goal is to help the standard loan origination process to go paperless, and could be extended to life insurance, income protection insurance, and immigration and visa applications.

Doshii

Doshii ensures that apps and POS solutions can connect to one another, via a common POS API platform. Apparently, there are 130 different POS providers in Australia, and many merchants use multiple services. Now backed by Reinventure, Doshii has a focus on the hospitality sector. The biggest challenge is physically connecting a POS to the API, so Doshii has developed a SDK. However, so far, only five of the 130 providers have signed up.

egenda

I hope I got this right, but egenda appears to be the new product name for the WordFlow solution for board agendas and meetings. Offering an “affordable web-based solution for every meeting”, the product is currently being trialed by a number of universities. The platform can convert PDF/word files into HTML, transforming and enriching them into a single secure website.
The panel asked how egenda compares to say, Google productivity suite or IntelligenceBank. A key aspect seems to be that egenda is platform agnostic – so it doesn’t matter the source of the document (or where it needs to be published to?). A key challenge in managing board papers is that it’s like herding cats – so a single but highly functional repository would sound attractive?

HipPocket

This US-based app is looking to launch in Australia. A phone-based financial decision app linked to a user’s bank account, it is designed to help with personalised goal-setting, budgeting and financial engagement. Asked whether it can support long-term goals, the pitch referred to data that suggests an increasing number of people are effectively living from pay-day to pay-day, and have no capacity to meet even the smallest of unexpected  bills. Having attracted a grant from the Queensland government, they are currently experimenting with different customer acquisition models, but they hope to prove that with daily engagement, it is possible to build a long-term relationship.

ID Exchange

With a tag line of “privacy protection power”, ID Exchange addresses a key issue of the “consent economy” – how to control who has access to your personal data, and how much, and for what purpose. With the whole notion of “trust” being challenged by decentralised and trustless solutions such as Blockchain applications; the plethora of data connections with the growth of IoT; and the regulatory framework around KYC, AML, CTF, data protection and privacy, there is a need for harmonised solutions. Under an “OptOut/OptIn” solution (from the website, it looks like this is a partnership with digi.me?), the idea is that users take more responsibility for managing their own data. ID Exchange offers a $20 subscription service – but unfortunately, based on the pitch, it was not clear what does this actually meant or included.

Look Who’s Charging

This is a platform for analysing credit and charge card transactions, to identify anomalies and reduce disputed charges. Currently with about 7.5% market penetration (based on merchant volumes?), it can help with fraud checks and spend analysis, by combining AI, crowd-sourcing and data science. But from the pitch, it wasn’t clear where the data is coming from. Also, a key part of the problem might be the data mismatch between card acquirers (merchant services) and card issuers (banks and financial institutions). Given that the growth in credit card fraud is coming from online shopping and CNP (card not present) purchases, it would seem that a better solution is to tighten procedures around these transactions?

Plenty

Plenty describes itself as a “financial GPS”, and is designed to address the issue of poor financial awareness. Only 20% of people see a financial planner, but now with robo-advice tools, even personalised advice can be scalable. Essentially a self-directed financial planning tool, it is free for customers to create a basic financial plan and when searching for a mortgages. For a subscription fee, customers can begin to access other products and advisors, which generates commission-based fees to Plenty.

Proviso

Another of these FinTechs to have featured in this blog before, as well as competing at FF17, Proviso makes “financial data frictionless”, in particular the loan application process. With 250,000 users per month, and 150 financial institutions signed up, their success can be ascribed to the way they standardise the data and the UX. Plus, they can access more data, from more sources, quicker. And then there are the analytics they can offer their institutional clients. In the future, there will be open banking APIs, plus insights, such as the categorisation of transaction types, affordability analysis, and decision-metrics.

Trade Ledger

This is a new platform that supports SME lending based on receivables, that also reduces the effort for SMEs seeking this form of financing. Given that cashflow issues are inextricably linked to insolvency risk, Trade Ledger has developed a unique credit assessment method, and is product-type agnostic. It also aims to offer automated solutions, with an emphasis on the digital UX of products, and use machine learning to generate a predictive probability of default (PPD). Currently the biggest challenge is in the multiple variations of bank credit and lending processes and models that need to be integrated or streamlined.

Of the ten pitches on view, I have to say that none really had a “wow” factor (although if Trade Ledger can scale their PPD model, and if ID Exchange spent a bit more time on defining their key message, both could be huge products). They were mostly worthy ideas, but still defined by current banking and finance procedures. Maybe these platforms need to do more with the transactional and customer data they generate or process, to uncover more opportunities. Or think about what they could do to disrupt adjacent markets? Anyway, on the night, Proviso proved the favourite with the judges.

Next week: Conclusions from the Intersekt Festival

 

VCs battle it out in the reverse pitch night

As part of the Intersekt FinTech Festival, the organisers, FinTech Australia partnered with Startup VIC and NAB to host a “Reverse Pitch Night”.Turning the tables on the usual pitch night, four VCs were invited to pitch to a panel of startup founders.

Representatives from Rampersand, Reinventure, YBF Ventures and NAB Ventures battled it out on stage to demonstrate why founders should want to work with their firms. Since I have been involved in pitching or presenting to two of these funds, and I know people involved with all four firms, I will aggregate these reverse pitches, highlight the common themes and try and pick out some of the key points of differentiation and/or competitor advantage.

Following a similar startup pitch format (problem, solution, team, achievement and future growth), each VC stressed the importance of getting the “right money”, and identifying the ways in which VCs can help with growth and people as well as capital. So it’s as much about how VCs can add overall value, rather than just the size of the cheques they can write.

Despite the supposed differences, there were a lot of similarities. There was much talk about how the VC model is broken, yet I didn’t see much in the way of novel funding or structuring solutions. Also, with NAB and Westpac directly involved in two of the funds, and ANZ linked to a third, isn’t this compounding the problem – aren’t banks part of the problem?

While having access to a bank’s balance sheet may result in larger cheques, the average size of individual investments looks to fall within a similar range. And of the deals that were referenced, a number were co-invested by the same funds and/or the same international partners. So doesn’t that itself restrict or constrain the variety of deals that can be struck?

On the positive side, most of the VCs allocate a substantial proportion (50%) of their funds for follow-on rounds. Some funds actively help to incubate the companies they invest in, even though they may still only take a minority stake. So the focus is on building a portfolio, and helping to scale the right companies. In one case, the VC has only invested in five out of 1,000 opportunities, so clearly there is a challenge with the screening process, or we just aren’t seeing the right startups.

Or maybe the smart startups realise they don’t need/want VC money in the first place? Only one of the four VCs specifically mentioned working with a startup that has launched an ICO – surely the most disruptive development to hit traditional VC funding in a long while?

Finally, given this was a FinTech-related event, I didn’t see any evidence of how these firms are using better technology to manage VC funding.

Surprisingly, given the reaction from the audience, the panel judged Reinventure to be the winner.

Next week: FF18 pitch night – Melbourne semi-final