Fintech startups – Can they make any money?

Extracts from, “Here’s the huge question facing fintech startups — can they make any money?”

Something strange happened to a few hundred customers of startup, app-only bank Number26 last week — their accounts started closing.

With no explanation other than to cite terms and conditions allowing unexplained account closures, Berlin-based Number26 emailed a clutch of its 160,000 customers to tell them their accounts would shortly be shutting down.

Many customers took to Twitter to complain. This, after all, is a bank that promised to be more like “Uber or Spotify” than a High Street lender.

Number26 told BI in an emailed statement that the account closures were for “various reasons”, including suspicious activity, but admitted at least some of the closures were for a very weird reason indeed — customers using their services too much.

…Essentially, Number26 let users withdraw money for free on the assumption that they wouldn’t really do it very much. But people did use it and it ended up costing Number26 too much money.

This odd incident gets to the heart of a key question asked over and over about the fintech (financial technology) sector — can any of these guys actually make money?

…Many startups have underpinned their promises with services delivered either at cost or with razor-thin profit margins. Think of TransferWise, which charges just 0.5% on top of the mid-market rate on many international money transfers, and Revolut, which lets people spend money at the best rate abroad on its card with no commission.

But these kinds of models aren’t exactly money spinners. While TransferWise’s revenues and total transfers are rocketing, the startup made a loss of £11 million in the year to March 2015, up from just £2 million the year before.

Even Funding Circle — the biggest UK peer-to-peer lender, which takes a cut of loans made over its platform — lost £10.8 million in 2014, the most recent year accounts are available for.

…But critics say many of the business models are unsustainable and simply being supported by the financial teat of venture capital money. The likes of TransferWise and Revolut can only afford to offer such cheap services because of a plentiful supply of free and easy cash from investors that subsidises prices, so the argument goes, not because of any real technical innovation.

…We could be about to see which side is right. VC cash is drying up —with investment in UK fintech startups collapsed 41% in the first quarter of the year. That could spell trouble for business models conceived during the boom times.

On local markets etc

An interview by Cherry Zheng from last September (with a nice photograph to boot!):

*** INTERVIEW BEGINS ***

European venture capital firms universally hold a prudent attitude towards the entry into Chinese market. As a result, only a few of them entered China. On the other hand, quite a large number of them, which include Amadeus Capital Partners Limited (“Amadeus”), are always observing the Chinese market actively and forming relationships with local VCs and major corporations

Amadeus invests venture capital in new technologies from offices in London and Cambridge, UK.  Since its inception in 1997, Amadeus has backed more than 60 companies in the UK and continental Europe, covering computer hardware and software, mobile and fixed communications technologies and medical technologies. Amadeus manages a total of GBP288 million of assets, raised through five funds including two seed-stage funds.

In his role as Business Development Partner for Asia at Amadeus, Shantanu Bhagwat (“Shantanu”) has 18 years of broad international experience in the broad technology sector, in Europe as well as in Asia, where he once worked in Japan and India. Shantanu has already visited China several times and continues to find opportunities to get familiar with this country and understand the developments even better.

On “The Funded” and putting a mirror to one’s face*…

I was going to check out The Funded* today but discovered that Jason has beaten me to it!

The site does not have many European funds but does briefly mention London Seed Capital, Atlas and Index – sadly nothing on Amadeus.

I have nothing to add to what Jason has written except to re-emphasise the following (this is for entrepreneurs and start-ups):

If you’ve dealt with (and preferably received funds from) a VC, I would recommend you post your experience on The Funded.

As for me, I will try and see if we can get a nice entry for Amadeus 🙂

.

P.S. Thanks to Barak for a great title and to Loken for the link (in response to my earlier post) 

Its NOT always about the numbers…

In my last post, I mentioned about how overseas VC investments in China have now out-paced US VC investments in UK.

That however was only part of the story…

In one of its March print editions, Red Herring published “Europe’s Next Wave”  which showed that in spite of the rush to China and India, innovation, VC money and deals are thriving in Europe like never before.

The article mentioned the recent research by INSEAD towards creating a “global innovation index” which “identified five European countries in the top 10—the U.K., France, Germany, Switzerland, and the Netherlands—and 11 in the top 20″.

 Anne was quoted in the article as saying, “Deals are getting larger and more like U.S. deals finally, and that is giving European entrepreneurs a better chance of winning in the global game” and Hermann mentioned: “The deal flow is better than I ever dreamed of”.

Opaque, Cliquish, Stingy and Greedy…

…yes, we are talking of VCs!

On a more serious note, there is some pretty *hot* discussion going on at Vecosys (Sam Sethi’s post on VCs, Innovation ecosystem etc) and on Fred’s site re. the Broken Ecosystem for innovation etc..

Compelling read for anyone interested in the startup and VC scene in UK/ Europe…

Fred is also soliciting first-hand experiences of entrepreneurs and start-ups while dealing with VCs/ Investors….Jump in here…

No longer catching up with Silicon Valley…

A few days ago, Shefaly sent me this link of a BBC News story: From Oxford to Silicon Valley.

In her own words, it is, “Very interesting (and)…although nothing new, but to see it being said again by a young man in 2007 makes it worth paying attention to. “

The piece is written by Kulveer Taggar, CEO of boso.com and he writes about why he moved to Silicon Valley and why California is the place for those with entrepreneurial spirits. 

Kulveer cites a few reasons behind his move:
• Chance meetings and chance conversations
• Expensive London
• Competition for talent in London (with I-Banks and consulting firms)
• Difficulty in raising capital

He also mentions how in California:
• The spirit of co-operation is strong.
• “Networking” isn’t something that has to be organised or encouraged, it just happens.
• The weather is great and the vibe is friendly, optimistic and ambitious!
• Big thinking is encouraged and not frowned upon as is sometimes the case in London

While Silicon Valley no doubt is “a great place to start a company because there is more capital, a bigger talent pool , and because the most important companies and people are here”, I really think that Kulveer is a bit harsh at times, e.g. “The risk appetite amongst British investors is low, and it was also frustrating that I often ended up educating investors about the internet in general.”

While composing a response to this, I chanced upon this post by Saul Klein, “Y Europe can seed growth of its new stars”…After reading that, there was really nothing left to say…

Below are some excerpts from Saul’s excellent post…but do try and read the original in full and also the comments….lots and lots of good thoughts there…

European VC beats European BuyOuts!

Simon Cook (Esprit) forwarded a couple of interesting insights from the latest EVCA report on European VC and BuyOut returns:

1. “(on a)…5 year rolling IRRs, Euro Buyout +6.1%, US Buyout +5.4%, Euro VC -3%,US venture -6.7%”…so European VC performance appears better than US although still negative (presumably because of the J curve effect)
2. “…with a net IRR of 36.5% the venture funds returned BETTER results than the buyout funds at 31.7% on this one-year horizon”…wow! 

I know, I know there is a lot you can quibble about but there is at least some cause to cheer…!

Nic has written a more thoughtful post about this here.

Of “talking tins” and “intelligent clothes”…

Plastic Logic, one of our portfolio companies became the media darling of Europe on the back of its $100m financing round that concluded a few weeks back.

My personal favourite was this headline, “Could a tin talk you into having beans for tea?”

I love PlasticLogic because it represents the archetype of a disruptive technology with enormous potential…another one in our portfolio is PowerPaper …and yet one more is Solexa …(I can go on and on !)

Curiously, Polymer Vision announced their own funding round just a day after PlasticLogic…too much of a coincidence?

What ails European Venture? – II

Last month, I posted some data from Cambridge Associates which showed European Venture Capital to be one of the worst performing amongst the asset classes they look at.

A few days ago, I heard about Simon Cook’s slides that showed European Ventures were doing at least as well as their US counterparts (exception: Google). I finally managed to have a look at them on the flight to New Delhi yesterday.

Simon has showed a strong set of data and no wonder it has caught the attention of a lot of people looking at European Venture (see e.g. $1bn entry on Fred Destin’s Blog and alarm clock). I particularly liked the last five slides…worth a dekko.

I later sent an email to Simon asking, “Why can’t LPs see the returns yet?”

In his response, Simon gave at least four reasons for why cash returns from European ventures are still elusive:

1. the fragmented nature of stock markets in Europe (particularly for growth stocks; I take it he was referring to AIM, Nuer Markt etc.) and lock-up/ lock-in periods.
2. the (still) small number of VCs (barely 20) who have consistently delivered $100m+ exits (I am happy to say that both Esprit and Amadeus are in this small group)
3. the nascent stage of the market and lack of a comparable run-up to what was witnessed in US leading to 2001
4. lack of enough data (apparently CA’s data on European Ventures is based on less than half a dozen data points) and European conservatism/prudence (re. valuation)

These are valid points and I believe at least part of the reason why European venture is not perceived as a success is because it is not talked about as such (by the practitioners themeselves)…

Simon’s slides go some way in correcting that perception.

5 VCs at Nobu…& not 1 deal done (shame)

Thanks to Jason’s initiative and persistence, we did manage to pull it off…

Getting more than 2 VCs in a one place at the same time is difficult in the best of times…

So getting 6 of us (Jason, Fred, Nic, Paul, Max + me) to agree to come together at one place- almost at the same time…especially when all of us are so incredibly busy (writing blogs, mostly!)…was a heroic feat. Thanks Jason!

Fred wrote a nice post about the evening…and also put a photo of the bar (looks even nicer when inside!)..

We talked about some of the common pains of blogging:
1. (risk of) marital discord…No, I just made it up…
More seriously, (i) creating “rich” posts and (ii) user friendly tools…Jason is going to check out Flock’s 1.0…I will eagerly await his review.

Most importantly, as Fred wrote, “There are not enough entrepreneurs and VC’s participating in this to create really sustained conversations“…

I share that sentiment…and have some ideas around improving the situation…

Watch this space…