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

The fate of the over 50s….

In recent months, a number of my friends and former colleagues in their 40s and 50s have found themselves being retrenched. Nothing surprising in that, you might say – it’s a common fate of many middle and senior managers to be “delayered” by their organisations. And of course, redundancy is now something that everyone in the workforce must expect to face at least 3-4 times in their career.

What is surprising is that in most cases, these friends and associates have been taking deliberate steps to remain relevant, by retraining and upskilling, by keeping up to date on business trends, or by engaging with new opportunities via meetups and networking events. Nevertheless, their employers have found reason to cut their positions – and despite a bar on age discrimination, the likelihood of some of these older workers finding comparable roles is greatly reduced.

This scenario is not helped by the challenges younger workers are experiencing in finding their ideal job, at least during the first few years of their careers. I would probably dispute this assertion, for the simple fact that many younger workers do not really know what career they intend to pursue, or are not aware of what options are open to them. Plus, apart from areas like medicine, science and engineering, secondary and tertiary education should be less about getting formal qualifications and more about learning how to learn, how to engage with new ideas, how to explore different concepts, how to acquire different experiences, and above all about being prepared for life….. (In my own case, I probably didn’t find my “true” career path until about 5 years after joining the workforce – a process helped by undertaking some further training when the time and circumstances were right for me. But this “delay” did not prevent me from gaining valuable experience in a series of jobs – especially as employers did not expect younger new hires to stay more than 2 years in the same role.)

Some of the corporate job-cutting is no doubt driven by economic and financial necessity, in the face of automation – and this is a trend which probably puts older workers at a disadvantage, if they are deemed less able to learn or adapt to the new technology. But as I have argued before, being older should not mean being obsolete.

One friend noted that in transitioning to a new role, there was a higher expectation that they would adapt and learn the ropes more quickly than a younger new hire. Again, this puts older workers at a disadvantage as they will be cut less slack than a rookie in a similar role.

So it seems that older workers are seen as less able (or less willing?) to learn new technology; but at the same time, they are expected to deal with change and disruption more easily then some new entrants to the workforce. There is also a growing expectation that the older you are, or the longer you have been in your previous role, the longer and harder it will be to find a suitable new position. (Again, in my own case, after I left my last corporate gig, I spent 5 years doing a range of consulting projects and contract roles, before finding myself working in a totally new industry – one that is at the cutting edge of disruptive technology, and didn’t really exist at the time I left the corporate world.)

Finally, I was struck by the comment of a former colleague who is being tempted back into the workplace, having made a conscious decision to take earlier retirement:

“I like being retired. I also know that one day you’re the hero and the next day you’re considered part of the problem.”

Next week: Beyond Blocks, Tokyo




Tech Talk on Crypto

There’s an adage about not investing in something you don’t understand. There’s another about not betting more than you can afford to lose. And then there’s crypto, which in the words of TV commentator, John Oliver represents “Everything you don’t understand about money combined with everything you don’t understand about computers.” So it was with great interest that I attended last week’s General Assembly’s Tech Talk on Crypto, presented by a team from

This intro to crypto was actually very illuminating, as much for the audience questions as the presentation itself.

To begin with, there was an attempt to explain the underlying technology of Blockchain; which, thanks to a certain YouTube video, seemingly reduced Blockchain to a trading platform or networked database. There was also an analogy to the internet itself: first, we just had protocols like TCP/IP; then we had web browsers; next we had e-mail clients; now we have Netflix.

Next was a reference to Bitcoin‘s mining infrastructure, its associated monetary policy, and the specifics of Bitcoin’s tokenomics. And then we jumped straight to Ethereum and the development of smart contracts – with particular reference to their potential to disrupt/transform the legal profession and the insurance industry.

There was brief mention Venezuela’s “petro”, a government-issued, oil-backed cryptocurrency, as evidence of further disruption in financial markets (although the petro has raised a number of concerns in some quarters). And, in a week when revelations about Facebook and Cambridge Analytica dominated the news, the speakers talked about Blockchain applications displacing even core social media, offering more privacy and control over our personal data and content.

The first of the audience questions were about crypto valuations. “The market decides”, which prompted some comments about market volatility and speculation. There were also some comments about regulation, tax, privacy and security.

Next question: “What about hacking?” “That’s more of a problem with exchanges, than user wallets.” That lead to a brief discussion of different types of wallet, which I’m not sure everyone in the audience fully understood.

We then moved on to look at other types of coins, and specific Blockchain use cases (such as remittance services, patient healthcare records, identity, P2P solar energy trading, voting, education etc.). In particular, Golem (crypto-powered network computing), Brave (crypto-enabled web browser), Steemit (earn crypto from your content) and TenX (an everyday crypto payment solution) were projects that the presenters liked.

Finally, to underscore how little some people understand about fiat currency and traditional financial markets, one attendee, struggling to fathom how the price of Bitcoin was determined, insisted that with equity markets, “the Stock Exchange sets the price…”

Next week: Startup VIC’s Retail & E-Commerce Pitch Night




APAC Blockchain Conference

The 2nd APAC Blockchain Conference was held in Melbourne last week. According to the organisers, the previous event attracted about 150 people. This year, registrations were around three times as many. The Blockchain story is only just beginning, if the level of interest and the range of conference topics are anything to go by. Here are a few random observations from the two-day event.

A story is just what we got from Robert Kahn, speaking on the role he played in developing the TCP/IP protocol, and the evolution of “Digital Object Architecture” as a way to identify any type of data, regardless of the technology used to create, store or retrieve it.

From NEO founder Da Hongfei we heard about dBFT (Delegated Byzantine Fault Tolerance), and ANZ’s Nigel Dobson outlined the use of Blockchain and DLT (distributed ledger technology) to remove transaction inefficiencies in commercial property lease guarantees. Civic Ledger CEO Katrina Donaghy talked about her work on “Civic Commodities” (government-issued permits and licenses) and “Sustainable Commodities” (water trading, patent registrations).

Gingkoo CEO William Zuo and Novatti‘s Blockchain Head Peter Christo introduced their collaboration on a Blockchain-based cross-border payment platform. There was a presentation on Hcash by Andrew Wasleyewicz, which talked about the “7 H’s” of their solution. While the quirkiest (and possibly most engaging/authentic presentation of Day 1) came from ConsenSys‘s Blockchain expert Lucas Cullen, who told us “7 Reasons Why Not To Use Blockchain Technology” (compulsory listening for any hapless corporate CTO under board pressure to come up with a DLT strategy…).

In between was Data 61‘s Zhu Liming who talked about some of the wider implications and opportunities for Blockchain in his capacity as Chair of the Australian Blockchain and DLT Standardisation Committee. There were also some insights from Gilbert & Tobin‘s COO Sam Nickless on how lawyers must embrace the new technology to avoid becoming disintermediated.

A diverting interlude from economist Lord Desai suggested that “Bitcoins are not coins, and cryptocurrencies are not currencies”. Many might agree, but we already know they are a new asset class in their own right, and need to be treated as such.

Standards (both technical and regulatory) were the topic of a panel discussion comprising mainly lawyers and regulators. The remaining panels on Day 1 (representing commerce and industry) addressed key themes of Blockchain scaling, interoperability, privacy, security and commercial deployment.

Day 2 began with an interesting keynote from former ASIC Chair, Greg Medcraft, now at the OECD. Mr Medcraft is no stranger to the debate on cryptocurrencies and ICOs, but chose to focus his remarks on the benefits, risks and opportunities for Blockchain. On the plus side, Blockchain can reduce the number of intermediaries in a transaction, it provides traceability and transparency, it increases the speed of payments (and reduces the cost), it offers data security, and it provides greater access to markets (e.g., SME supply chains). He foresees fiat and asset-backed digital currencies, and government support for Blockchain solutions in areas such as identity, provenance, supply chain and AML. Plus, for consumers, there should be greater trust and security, better financial access and inclusion, lower costs and better products. Key risks remain, however, in data privacy, security (ID, authentication, cyber-attacks), and consumer and investor protection. Policy makers need to be pro-active and forward-looking, keep up to date on these rapid developments, and co-ordinate across industry, sectors and globally. Citing some of the issues associated with ICOs, Mr Medcraft then urged regulators to exchange information with their counterparts and identify best practice, avoid regulatory arbitrage, create greater legal certainty, and raise awareness of the risks and rewards.

Victor Wang from the China Wanxiang Group followed up with a presentation that re-cast Blockchain as a new economic model, drawing on his reading of “Das Kapital”, and introduced the concept of GBP (“Gross Blockchain Product”). According to this theory, Blockchain is a means to redistribute and reallocate resources and assets; it is transforming the cost of transactions and value exchange; it is creating new assets; and it is building new products and services, as well as the delivery mechanism itself.

We heard from Zuotian Luan of Fortuna Blockchain on the future of OTC derivatives, and how decentralized exchanges are addressing legacy problems of counter-party and credit risk, operational efficiency, and lack of liquidity. He sees a “decentralized margin system” as a long-term solution that will reduce the costs of posting and managing collateral on traditional OTC exchanges.

There was an interesting discussion on the future of capital markets themselves, reflecting the perspective of traditional exchanges, clearing houses and custody providers, plus tZero. (As an aside, I was pleasantly surprised to see so many representatives of the “back office” at the conference, including trust banks and share registries. However, there didn’t appear to be anyone from the brokerage or advisory side, and no-one from the ASX, even though their Blockchain project to replace/enhance CHESS has been widely lauded as being in the vanguard of this new technology.)

Finally, a quick plug for my colleague, Fran Strajnar, CEO and co-founder of Brave New Coin who moderated a panel on ICOs. I think he summarized the tone of the discussion really well, when he said this is probably the only financial services sector that is asking for regulation. “Tell us the rules and let us get on with the job.”

Next week: Tech Talk on Crypto