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

Startup Vic’s SportsTech Pitch Night

Last month’s Startup Vic’s Pitch Night featured SportsTech, one of the semi-regular topics in Startup Vic’s themed pitch nights. Hosted by LaunchVic at the Victorian Innovation Hub, supported by the Sports Geek podcast and Track, Victoria University’s sports partnership institute.

In a new partnership between Startup Vic and LaunchVic, upcoming pitch nights will feature EdTech, Diversity and HealthTech. Meanwhile, back to the sport. The competing pitches were (links in the names):

Benchvote

Describing itself as a Sports Fan Engagement Platform, Benchvote has a tag line of “the Canva of creating high performing digital campaigns for sport”. Covering marketing, sponsorship and commercial, the platform claims to achieve 50%+ conversion rates on campaigns, partly achieved through a gamification aspect to appeal to fans.

The platform offers campaign templates, drives social media traffic to users’ own websites,
thereby converting that traffic into firm leads. It also has the potential to support other related verticals – including entertainment, media and betting. The proprietary nature of the solution is the combination of a SaaS model plus insights algorithms.

Asked by the judges about customisation versus scaling, we were told that it is a totally white label solution. Although the platform can support agencies as well as product providers with creative content and digital assets, the preference is to let clients do their own (given the business origins as an agency turned software company).

In terms of the competitor landscape, it’s between agency solutions and software services on one hand, and integrated platforms and single solutions on the other.

Potentially integrating ticketing data, the team are also looking at international expansion, and are in the middle of a raise.

MarineVerse

This is a VR sailing platform, that claims to be “Democratising sailing by enable people to sail in VR”. A big call.

Already running a VR Regatta competition, the team is building a community of clubs, members, and daily races. There’s also a VR sailing classroom, with the MarineVerse Cup – a two-week event – to come. Competition exists in the form of Virtual Regatta, which is actually a non-VR, e-sports platform.

Offering a $10 per month subscription model, MarineVerse is banking on the new
Oculus Crest device to boost adoption. The business has been bootstrapped for three years, and is experiencing 8% monthly growth.

Targeting a demographic of 30-55 year olds who are cashed-up and time rich, the team are also developing multiplayer races. The judges asked if there was potential to support high-performance training and use player data for predictive performance or behaviour.

Unite

A platform for sports club and team administration, Unite developed by Eastwood sports tech offers apps such as training calendars, fixtures management, media engagements, sponsor obligations and travel planning. Designed to help manage “Commitments to the team and individual level”, Unite offers a B2B subscription module (individual team players are the actual users) for professional, semi-professional, e-sport and collegiate teams.

Although TeamWorks is a major competitor, in fact there is much more competition at the grass-roots level, because peak bodies and administrators want to own the data. Currently at the working prototype stage, with an MVP. The service is designed to manage and approve player activities and such as media commitments, sponsorship and endorsements. It is built as a hosted SaaS using AWS security features, sitting behind the  club’s own fire wall.

Wedge Pro

As the name suggests, this device is all about “The Art of Wedge Play”, designed to reduce player handicap, and help with short game training, especially lifted wedge shots. According to the pitch, many amateur players suffer from poor technique, poor distance control, and lack confidence.

Apparently, there is a $2 billion global market for golf accessories, such as this physical attachment which launches a monitor linked to an app.

A 2017 winner at the La Trobe Accelerator Program, the team is looking for an app developer for data capture. While offering post-sales service and device re-calibration (for adjustments according to player height, the cord length matrix and player handicap), judges wondered if there was also the opportunity for VR applications as well as the kinaesthetic experience. Asked about distribution, the team mentioned getting the product into golf shops and pro shops (without providing any specifics), while building a brand for a suite of golf tech products.

After all the cotes were counted, the People’s Choice was Unite while MarineVerse was the Judge’s favourite.

Next week: FinTech Fund Raising

Pitch X

Organised by Academy Xi in conjunction with Melbourne Silicon Beach, the latest edition of Pitch X was hosted at YBF Ventures last week. The event sponsorship, prizes and judging panel came from Everest Engineering, Luna, Shiftiez, Lander & Rogers, LaunchLink and YBF Ventures itself.

Image sourced from Pitch X Eventbrite page

Each each start-up was given 90 seconds to pitch, followed by a one-minute Q&A with the judges. The best three presentations were then shortlisted and invited back on stage to make a 5-minute pitch, followed by a 2 minute Q&A.

Some of the pitches were really only ideas, a few had reached MVP status, and a couple were in advanced beta with actual customers. And most of the projects still at the drawing board lacked key tech skills and resources to execute on their ideas. So there was a bit of an imbalance across the initial presentations. It’s not for nothing that most successful hackathon teams comprise a hacker, a hipster and a hustler…

In order of presentation the pitches were (website links where available are embedded in the startup names):

Backyarda – “the spontaneous experience curator”, promoting unsold event inventory via Facebook Messenger. Needs a co-founder and development skills as well as seed funding. Takes a 30% sales commission, and is at MVP stage, targeting 18-35 year olds.

Virtual Amputee Experience – providing training to prosthetic users and raising empathy and public awareness. Positioned as a research tool and data acquisition model. Seeking funding for software and hardware development. It’s a spin-off from an academic research project. Judges asked about the revenue modelling and the data privacy issues.

Betabot – by Beta Launch – “Empowering teammates, Supercharging augmented teams”. Designed as a Slack plug-in. The solution is in fact a time-zone calendar management tool. (But as the MC noted, it’s also the name of a computer virus…)

The Neighbourhood Effect – “your local green living guide”. Making it easier (and financially positive) to be green. Employs gamification and behavioral science, for example a User Questionnaire model. Free version plus white label solution for local governments, and product providers. IP resides in the data mapping. Has had success in ACT via a rapid local campaign model.

The Good Bite – “providing financial independence to women who are suffering domestic violence”. A social enterprise for corporate catering, offering training and employment opportunities.

Young Adult Grief Space – “online counselling service”. Based on a P2P experience via shared narratives. Very much an idea at this stage, judges asked how sessions would be moderated, and how professional counsellors would be involved.

Pearlii – “dental checkups via selfie”. Aimed at early detection and prevention.
Uses a smart phone app to take 5 photos, then applies a diagnostic algorithm via ML and image processing. Freemium model – a basic account plus a premium profile management solution. Building their own tech/IP from scratch, and see future applications in tele-medicine, removing reliance on experts, placing trust in AI, image processing and analysis.

Inside Outcomes – “better communications between psychologists and their patients between sessions”. An app to chart personal outcomes etc. Judges asked how it integrates with existing patient management systems? Currently much of the work is done manually.

Abadog – “behavioural advice for dog owners”. Consultation via observed data and individual report delivered online. 20% of dogs have anxiety disorder. There is a lack of certification or legislated standards for best practice for dog trainers and behaviouralists. Aiming for a subscription model.

The Social Agenda – “Efficacy and Integrity in Government”. Talked about three different modules for public policy design, deliberation and decision-making. Goal is “Policy Certainty”. Wasn’t clear what the actual project involves, so hard to evaluate the concept.

Winners were:

1st prize –  Neighbourhood Effect

2nd prize – Pearlii

3rd prize – Abadog

Next week – Startup Vic’s SportsTech Pitch Night

The Future of Fintech

Predicting (or at least hypothesising upon) the Future of FinTech in 2019 at NextMoney last week were three brave souls from the Melbourne FinTech community: Alan Tsen, GM of Stone & Chalk and Chair of FinTech Australia; Christina Hobbs, CEO of Verve Super; and Paul Naphtali, Managing Partner at Rampersand. Referencing the latest CB Insights report on VC funding for Fintech, various regulatory developments in Australia (especially Open Banking), as well as the outcomes of the recent Royal Commission on Financial Services, the panel offered some useful insights on the local state of FinTech.For all the positive developments in the past 2-3 years (Open Banking, New Payments Platform, Comprehensive Credit Reporting, Equity Crowdfunding, ASIC’s Regulatory Sandbox, Restricted ADIs etc.) the fact is that innovation by Australian FinTechs is hampered by:

1) fallout from the Royal Commission (although this should actually present an opportunity for FinTech);

2) the proposed extensions to the Sandbox provisions (which are stuck at the Federal level); and

3) lack of regularity clarity on the new class of digital assets made possible by Blockchain and cryptocurrencies (cf Treasury Consultation on ICOs).

Overall, the panel agreed that the channels of distribution have been locked up in an oligopolistic market and economic structure, especially among B2B services. But things are changing in B2C, with the rise of P2P payment platforms, market places, mobile and digital solutions, and challenger brands (e.g., neo-banks).

However, there are under-serviced segments especially among the SME sector, and products and services for part-time employees, contractors and freelancers. For example, meeting the superannuation and insurance needs of the “gig economy”? (Maybe something will come out of the recent Productivity Commission review on Superannuation.)

A number of areas have already benefited from FinTech innovation and disruption – lending (origination, funding, distribution), robo-advice (at scale but not yet offering truly tailored solutions), and P2P payments (and which largely happened outside of the NPP).

When it comes to disrupting and innovating wealth management and financial advice, there is still a distribution challenge. Whatever your views are on the Royal Commission findings and recommendations, there is clearly a problem with the status quo. But is the appropriate response to “smash the banks” or to enable them?

One view is that we are going through a period of un-bundling of financial services. Personally, I think customers want ease of use and interoperability, not only standalone products that are best in breed. For example, if I have established sufficient identification to open and maintain a bank account with one ADI, shouldn’t I be able to use that same status to open a deposit, savings or transaction account with another ADI, without having to resubmit 100 points of ID? And even use that same ID status with an equivalent ADI overseas?

There is often a tension between incumbents and startups. Whether it’s procurement processes, long-term sales cycles, stringent payment policies (notwithstanding the BCA’s Supplier Payment Code) or simple risk aversion, it is very difficult for new FinTech companies to secure commercial supply contracts with enterprise clients. Even though a Blockchain platform like Ripples is working with major financial institutions, most times the latter don’t readily engage with FinTech startups.

Then there is the problem with “tech for tech’s sake”. For example, don’t offer “smart” solutions that actually make it harder or more complex. And don’t build great tech products that offer lousy UX/UI.

A key issue is defining “trust” – whether at the sector level (on the back of the Royal Commission); or at the individual level (the current environment of personal privacy, data protection, identity theft): or at the product level (e.g., decentralised and “trustless” platforms). As one panelist commented, despite the news, “headlines don’t change behaviours”. We love to bash our banks, but we rarely switch providers (mainly because it is far more difficult than it actually needs to be…) And the backlash against social media companies has not resulted in any major movement to unfriend them (witness the response to campaigns like QuitFacebookDay…).

So what are some of the predictions for the next few years (if not the next few months)?

  1. Within 5 years, the 5th pillar will be a challenger bank.
  2. A period of un-bundling followed by re-bundling
  3. A trend for “Financial Wellness” (especially financial education and literacy, not just wealth management and accumulation)
  4. A switch in personal asset allocation/accumulation from mortgages to superannuation – (i.e., new brands like Verve want to be your lifetime financial partner, so that “we invest together”)
  5. Superannuation funds will obtain banking licenses (or maybe one of the FAANGs will?)
  6. Personal Statements of Advice vs ASIC’s MoneySmart – who’s going to be paying for financial planning, advice, products and distributions?
  7. Capitalizing on the lack of trust among incumbents and centralised platforms
  8. More diversity and inclusivity in access to products and services
  9. Payments FinTechs that will disrupt lending (if they can solve the problem of
    going international)
  10. The growth of RegTech – a model of agile governance supported by great UX
  11. The equivalent of open banking for Personal Financial Management services
  12. Banks as data fiduciaries

Next week: An open letter to American Express