These will be the next fintech companies to be acquired during next 2 years: check out the reason

By Vladislav Solodkiy, Managing partner at Life.SREDA VC

Right now, Chinese e-wallets (like AliPay and WeChat Pay) are expanding mostly through Chinese tourists going abroad – as they travel and spend more year by year, and local sellers (and banks) are gradually opening for Chinese payment systems and e-wallets. There is no value for non-Chinese clients so far in using AliPay and WeChat Pay.Thus, there is an opportunity for foreign-born mobile banks (with better local market sense and adaptation to it) to be acquired by Chinese giants in the mid-term perspective. All Indian projects (like Paytm) share the Chinese companies’ main problem – it is hard for them to expand abroad (foreign agents arrive in India as well as in China, meanwhile, new competitors spring-up). The only crucial point of competition among other players (like ApplePay, Android Pay, Google Wallet, Samsung Pay, etc) is their geographical coverage (and number of connections with local banks). Sooner or later the question will rise: what value do these wallets bring to their users? And if they are not able to develop new functions in a manner similar to that of PayPal, they will only be able to evolve by purchasing mobile banks (which have worse figures, but better solutions), remittance services, mPOS-acquiring startups, etc. Also, new players appear on the field – smartphone makers like Xiaomi and Huawei. As the client base of every player will dwindle, the issue of differentiation from competitors will soon become the most important one (and this event will mark the beginning of a long M&A period for start-ups, which test their products on local markets).

Neobanks complement many other fintech verticals, creating many opportunities for M&A deals and partnerships with high level of synergy. E-wallets have either a weak functionality (Apple Pay, Samsung Pay and Android Pay) and low level of customer retention or poor scalability (AliPay, Paytm). Direct banks are little outdated technologically now (and they need some shake-up) and have a weak geographical coverage. P2P/online-lending platforms show high marginality and growth rates, but their customer acquisition cost grows day by day and they need to obtain information about new clients in advance to lower credit risks, while offering new service for current clients, increasing customer retention. PFM/PFP services don’t attract the same attention as neobanks, but they could give the latter better differentiation and better understanding of clients’ long-term plans. As concerns mPOS-acquiring companies (Square, SumUp, iZettle), they own such a huge amount of data, not only about their merchants, but also about their merchants’ clients (purchases, card availability, contact details), that doesn’t influence their business and capitalization because they don’t serve clients of their clients in any way (except for a raw solution from Square.Cash). Almost all new neobanks (Tandem, Monzo, Starling, N26) have announced that they are going to build a product with open architecture and APIs in order to be able to integrate freely with external services and allow their clients to interact with these services, using already familiar interface. German mPOS-acquiring service SumUp integrated with Finnish Holvi. Youth American Moven – with online lending service for students Commonbond. Neobanks N26 from Germany and Monese from Great Britain – with British online remittance services TransferWise and CurrencyCloud, accordingly.

Asian messengers, such as WeChat, KakaoTalk, and Line, are much better monetized than their American counterparts are, due to their high diversification of the product range: an application enables you to order a taxi, shop online, pay bills, play games, make payments and transfer money. WeChat has 846M users, 300M of which use WeChat Pay. In the American and European countries, startups like TransferWise, Azimo, CurrencyCloud and WorldRemit are more active in remittances via messengers than messengers themselves are. Most likely, they will be finally acquired, as it was predicted by the market two years back. This would make the most sense for the messengers, which haven’t succeeded in this area. As in many other fintech sectors, the majority of the leading online remittances companies are based in the US and UK. There are some strong remittance services localized in several other countries, but in fact, they are just growing their assets to be acquired by bigger players (like Israeli Xoom was acquired by American PayPal), and can barely change the market landscape. Otherwise, the local players will have to expand their product line horizontally, rather than compete with international single-product companies for a market share. Remittances are at their core very low margin businesses and as a result, must have exponential growth of their client base or have to increase margins by offering new complimentary products. Competing by offering just quality is not enough. The move from pure remittances towards offline and payments should allow companies to increase revenue from the client base. Surprisingly, we have not seen major partnerships (or M&A) between remittance services and mPOS-acquiring players. However, there are a few examples: Ezetap has integrated with Paytm and Mobikwik in India, while Square develops Square.Cash following the same logic. South Korean Toss has announced a micro lending and PFM service for its 4 million young customers.

Large online-acquiring companies grow faster than the smaller ones. This raises a question of what sort of future awaits smaller companies. Will they be bought by traditional payment processing giants in order to strengthen their technology stack and increase competitiveness (perhaps, but at lesser valuation), acquired by leaders, such as Stripe, Klarna and Adyen, to provide them access to new markets and niches (hardly), or merged with other fintech startups to add to the ecosystem of services in respective countries (most probably)? Klarna, which has acquired the European license for banking activities, considers getting it in the USA and is developing its SME lending (in partnership for now) and offline acquiring solutions. Turnover-based lending for SMEs (PayPal Working Capital and Square Capital come to mind) and mPOS-acquiring are complementary segments for online acquiring (and vice versa – Square again).

Square is still unprofitable (with its competitor SumUp reporting profitability just recently) – as well as the majority of mPOS players. However, the success of Square.Capital (which demonstrates high level of profit margin coupled with low level of risk – just as a structurally similar PayPal Working Capital) prevents one from concerns about its profitability potential. mPOS acquiring may turn into a channel of client acquisition, a way of differentiation and a source of data for credit risk tackling for Square, while the company will make money on SME lending and complementary products. The question is rather – if, and when other players are going to scale to this segment (and iZettle has already launched its service). List of directions for “migration” of mPOS services includes not only analytics and lending, but also online transfers (including transfers for SMEs, a market with high potential, by the way), online acquiring (as is the case with Square after the latest updates of its APIs). Another complementary direction is the production of new cash registers (usually tablet-based), coupled with the development of business management software (usually cloud-based), including payments, CRM, marketing, HR and purchase management tools. So far, nobody has ventured into this direction; however, establishment of new mobile neobanks for SMEs could be a very perspective move. Geographically, mPOS projects are located mostly in the USA, UK, Germany, Brazil, India, and Australia: there are some small players in Southeast Asia, Africa, China, Japan, South Korea and West Asia; however, if they don’t consolidate in the following year, they will most probably die.

The segment of tablet-based cash-registers and cloud-based POS-management systems is highly integrated with mPOS acquiring only, whereas immense opportunities offer partnerships with such sectors as P2B- and SME-lending and online factoring. Yet again, such services don’t capitalize their client data (big data and online scoring), while they have it in quantity and quality good enough to facilitate targeted offers of other fintech services (mobile wallets, remittances, micro-lending etc.)

Talking about online SME lending services, it is worth to mention that three of the largest U.S. players, – OnDeck, Kabbage and CAN Capital, – have formed ILPA alliance to standardizes the processes and rules of the industry, the rules for companies willing to distribute debt capital. They have also launched the SMART Box, which compares prices and conditions of such websites. Industry consolidation is a vital issue, and we must give credit to these three players for their proactive role.

Online factoring is very complementary to companies involved in supplier relations automation (accounting, expenses, e-invoicing) such as: Taulia, Tradeshift, and even older business networks like Ariba and The Interface Financial Group. Automation business marginality is rather low, but the customer base is very large. It holds great promise not only for partnership but also to mergers and acquisitions. Not to mention the online accounting services like XERO and QuickBooks by Intuit (most of the new services have their decision-making process based on data from these companies). These giants are facing a challenge, which can be described by a motto “Disrupt yourself”. It feels as if they soon begin to “stall” under the weight of their past. Blockchain has got enormous application opportunities: not only in terms of transactions, but also for storage, verification, deals signature, compliance and verification of contractors, and many other related processes. As well as online insurance for this kind of transactions, suppliers and contractors, and their debt.

The past year put forward the question of all lending startups’ refinancing (so they would be able to lend money to ever-increasing client base) as the number of these startups and growth rates of these businesses make them seek for sources of external financing such as credit lines from pension, insurance and hedge funds (which are not able to invest in lending startups directly due to inherently high risks of the latter) and loans from banks with cheap money. In certain cases they also turn to portfolio securitization (when the debt of similar maturity structure and liquidity risk is assessed by external auditors, pooled and sold to investors wholesale as security) since venture financing can’t provide enough money for them. Specialized platforms offering such securities appear and facilitate trading. Just as in the case with other segments related to online lending, advices on personal finance management and planning, credit history and its improvement are complementary services. The same holds true for online lending. Affirm bought PFM app Sweep, while Payoff and Commonbond integrated with mobile bank Moven with inbuilt PFM functionality. Partnerships among services become more common. Avant has integrated with LoanDepot via API, while student-targeting Credible issues retail loans in partnership with leading online lending platforms such as LendingClub, Prosper, Avant, Upstart and Pave. Integration with online trading and investment management services is another complementary segment. Such services allow their clients not only to invest money in stocks, but also to lend it on online lending platforms. As an example, Canadian lending service Borrowell has integrated with Wealthsimple investment platform, while American online trading players think about integration with p2p-platforms.

As described above, almost all startups in this field work within the borders of one country, while the necessity to unite lenders and borrowers from different countries is becoming more and more audible. The developed markets (Japan, Korea, Singapore, Hong Kong) are well endowed with money and have low interest rates. The developing economies like India, Brazil and Indonesia are in need of capital (preferably at lower interest rates, which are still high enough for investors from the developed markets). In order to make the movement of capital possible, platforms need to work their way to international expansion and have a sufficient level of trust (brand awareness, sufficiency of the present audience and experience in risk management). Most probably, in the near future we will see the services, which will give people an opportunity to lend and borrow money across borders, leveraging advantages of the best-in-class services in each country.

The only way for price-comparison startups (aggregators of banking and insurance services) to counter this unwanted tendency is to play with forecasts: to migrate in new segments and come up with new services for their customers. Neobanks, PFM/PFP, and online scoring (credit history assessment) solutions, p2p lending platforms are the most obvious choices. These players accumulate at some point a large number of customers and a large amount of their data, but if they don’t evolve, they eventually fail after about three years of growth in average.

It is noteworthy that PFM rarely works as a stand-alone solution, but it effectively complements many other services like mobile banks (Moven’s partnership with MoneyDesktop, American Trim and Swedish Tink eager to develop their virtual banking solutions), p2p (acquisition of BillGuard by Prosper), student lending (NextGenVest, acquisition of SmartyPig by Sallie Mae), insurance (Northwestern Mutual deal with LearnVest) and wealth management (Envestnet’s acquisition of Yodlee) solutions. What is important for online-trading startups is to understand that for the majority of their clients investment is not a goal, it is a way – a way to reach their financial targets. And it is more important to help clients to define their goals – for example, with a help from PFM/PFP solutions.

The partnership of crowdinvesting platforms with stock exchanges is also worth paying attention to: it is a pre-IPO tool or trading tool for tech companies with low capitalization in comparison with the main stock exchange board (like SharesPost with NASDAQ, and SyndicateRoom with LSE). The cooperation of crowdfunding platforms with large companies is gaining scale: Amazon has launched a separate marketplace for products developed as a result of crowdfunding campaigns, while IndieGoGo has established a partnership with General Electric, Harman International Industries, Hasbro and Shock Top. Giants can now test their new ideas and technologies in a more interactive manner and using the services that contact with the most open to novelties users. Platforms also receive new major customers and engage their audience. Platforms are building an ecosystem of complementary services: IndieGoGo launches equity crowdfunding (crowdinvesting); Tilt – online remittances; KickStarter has acquired a crowdfunding startup for musicians and artists called Drip (with Patreon and Show4me present in the niche). But the scaling ability and plans of the majority of crowdfunding services generate questions and doubts. This would be a logically sound stage of development judging by the number of startups in this sector, many of those cannibalize each other in their fight over the same customers. Many countries are currently concerned with how to support and accelerate the development of their startup ecosystems (including focus on fintech) and it would be logical to provide their financial market support not directly, but through this type of platforms. For example, Indonesia is currently considering such a partnership interaction; iAngels is being implemented in Israel, while Santander Bank provides 5050 co-financing through CrowdFunder platform.

So, the demand for creation of ecosystems (or well-tailored bundles) of services around your core product and customer base is opening an unique opportunity for M&A deals for the next two years. The advantages of artificial consolidation (as opposed to organic growth):

  • The presence in three or more markets shows that the company is international. If it succeeds to supplement new services in the process of merger, the company will be diversified not only geographically, but also in terms of its product range.
  • The point is not only in “internationality”, but also in the “premium for leadership” – you greatly differentiate from your competitors by size. As a result, you find yourself in a situation where by reducing the number of market participants you create a reverse disproportion: there are more potential acquirers than objects for acquisition. Now you are setting the price. The number of those interested in your company is also growing.
  • Since everyone is developing roughly the same products, after the merger you can choose either to spend the same amount of money to develop more products, or to reduce the cost of R&D by several times.
  • The number of brands on the market is decreasing, you are becoming international and your brand becomes top-of-mind. As a result, you can spend less on advertising, as well as on HR: potential candidates are tired of large, faceless corporations, but they are also afraid of joining very small companies, and this kind of medium-size player will attract them faster.
  • You do not multiply the expansion costs for each new market (because these costs have already been incurred). And against the background of the reduction in marketing and R&D costs and growth of turnover, you become profitable (or you get much closer to the breakeven point).
  • Your potential buyers or strategic investors will spend as much time and effort on a decision to acquire a company for $50M, as on a $500M deal. Since this is not the last $50M or $500M for them, they will choose to consider the deal which will allow them to achieve a greater synergy.









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Ukraine Utilizing Blockchain in Land Transfers

The Ukrainian government is the latest in a string of governments and international groups around the world to implement Blockchain solutions to solve problems they’re facing in financial markets.

At this time, approximately 71 percent of the country is categorized as agricultural land, of which 25 percent is owned by the state. The land market, however, is very depressed, according to a recent report by the state agricultural department. The reason for this market depression is the lack of suitable financial instruments for leases and land transfers.

At this time, the lease market is being tarnished with a profound black market. This has led to dramatic lease price reductions (the lowest in Europe). The application of a Blockchain system that will protect the auctions from black market controls would provide a way to stabilize the land price slide and increase income for farmers.

The deputy director said: “In today’s resolution, we have written two things: the transfer of the State Land Cadastre to blockchain technology. It is the most advanced technology in the world to protect information. This is a pilot project that we will launch this October.”


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EY Tackles Declining IPO Market: The Decline is So Significant it Warrants Policy Action

EY presented last week at the SEC Investor Advocacy Committee meeting. The topic of the morning discussion was the decline in IPOs. As part of the presentation a report by EY was distributed.

During the dot-com peak in 1996, public listings in the US hit a record high of more than 8,000 domestically incorporated companies with an average market capitalization of $1.8 billion. But since that time, the number of domestic US-listed public companies has decreased “precipitously”, explains EY.

By 2003, there were 5,295 domestic US-listed companies. Since the 2008 financial crisis, the total number of domestic US-listed companies has largely stabilized, with listed companies ranging between 4,100 and 4,400. During this same period, foreign companies listed on US exchanges have steadily increased in number helping to offset the dearth of US listed firms. So what’s up? Why are companies deciding to remain public and avoid the prestige of trading on a regulated exchange?

Looking Behind the Declining Number of Public Companies, a paper by EY, says IPOs are down but companies are raising more money than ever when they make the leap from private to public.

Simultaneously, EY says the typical profile of today’s emerging company is often a better fit with the private market than in previous economic cycles when companies required heavy capital investments or had more predictable business models. There is an ocean of private capital chasing the next unicorn.

Additionally, private companies are able to take more risk and new, non-traditional trading marketplaces have arisen to provide liquidity for early shareholders thus easing the need to go public. VC backed mergers and acquisitions play a role too. Congress, in an odd twist, has become an enabler with the JOBS Act of 2012 that increased the accredited investor limit from 500 to 200o thus making it easier for firms to stay private longer.

But who loses out in all of this?

EY believes that capital markets are “fundamentally healthy” but important questions need to be answered. Specifically;

  • What should be the guiding objective of public policy regarding the public and private capital markets
  • Is the ultimate goal to generate capital formation in the US, regardless of whether it is in the public or private market
  • Is there a desire for more companies to go public sooner, if only to afford retail investors greater access to high-growth companies earlier in the corporate life cycle?
  • Should regulations on private capital market investment be eased to afford more investors greater access, even though doing so would serve to further companies’ ability to grow bigger and stay private longer
  • Should private capital market activity be regulated differently if restrictions on investor participation are changed?

Policy makers need to first decide how to best serve each constituent party of the equation: issuer, investor, shareholder and market maker.

Read the EY report below.


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Doing The Heavy Lifting

By Fred Wilson from Union Square Ventures

Most venture capital investments are made, over time, by syndicates. This means a group of venture capital firms develops around a company, usually built over multiples rounds. Some of the firms in the syndicate agree to (or require) having a partner from their firm join the Board of the company.

If you look at the roughly dozen boards I am on, most of them have multiple venture capitalists on them. Some also have independent directors, something I believe strongly in and have written about frequently.

Not all venture capital firms in your syndicate will be the same. Not all of the VCs on your board will be the same. Some will be challenging to deal with. Some will be unproductive and distracting. Some will be nice to have around but won’t do much. A few will roll up the sleeves and do the “heavy lifting.”

It is this latter group that is super valuable. You saw it in action last week when the partners of Benchmark apparently negotiated a change in leadership at Uber. That is hard, painful work. But someone has to do it. And I have seen the partners at Benchmark do it before. They don’t shy from the tough stuff. Nobody enjoys doing things like that, but they know when it is needed and they step up and do it.

I was talking to another VC I work with yesterday about a completely different situation. The company is doing great. We have some important decisions in front of us, all good choices to have to make, but selecting the right ones will matter a lot. This VC has been deeply engaged in the process, providing a lot of super valuable advice, and saying things that need to be said, even if they are not popular. I feel incredibly lucky to have someone like that in a syndicate with me. And I told him that yesterday.

You can put together a list of the top VCs by returns. That is done annually. It’s all nonsense. There are a ton of shitty VCs on that list. Returns matter, for sure. But what really matters is who shows up when the hard conversation has to be had. What really matters is who provides the right advice at a critical time. What really matters is who puts aside their own personal interests and does what is in the best interests of the company. What really matters is who steps into a vacuum and provides leadership when it is badly needed.

When you are picking investors, you should call around and check references. Ask about this stuff. Find out who does the heavy lifting and who goes along for the ride. Pick the one who does the heavy lifting. Because you will need it, frequently.

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Should Startups Care About Profitability?

By Mark Suster from Upfront Ventures

There are certain topics that even some of the smartest people I talk with who aren’t startup oriented can’t fully grok. One of them is whether profitability matters.

It’s common cocktail party chatter to hear people confidently pronounce that some well known startup is sure to blow up because, “How could they succeed when they’re not even profitable!”

Or you know the other one — the one where Snapchat lost $2 billion in just one quarter. Two-fucking-billion! What a disaster! Except that they didn’t actually lose $2 billion in cash. It was a stock option incentive related “expense” but I bet you didn’t know that because in an era where we only read the headlines — they must be a train wreck losing billions. (They actually lost about $175 million in cash in that quarter, FWIW. See appendix if you want to know more on this.)

In any tech startup there is a healthy tension between profits & growth. To grow faster businesses need resources today to fund growth that may not come for 6 months to a year. The most obvious way to explain this is with sales people.

If you hire 6 senior sales reps in January at $120,000 / year salary then you’ve taken on an extra $60,000 per month in costs yet these sales people might not close new business for 6 months. Your profitability will go down for 2 quarters while your growth may increase dramatically in quarters 3–12.

I know this seems obvious but I promise you that even smart people forget this when talking about profitability. 70–80% of the costs of most startups are employee costs so what you’re really talking about when a company is unprofitable is that they are growing their staff ahead of their revenue.

If you don’t have a strong balance sheet and can’t hire more people that’s fine — but understand this may lead to slower growth. Thus the trade off between profits & growth.

I often ask entrepreneurs to consider, “What’s your objective? Are you looking to potentially sell the company in the next year or two? Do you plan to run this as a smaller business but maintain healthy profits? Do you imagine eventually raising VC and trying to build a faster growing company?”

Venture capital isn’t right for many business but if you do want to raise from a VC at some point you need to understand that often investors care more about growth than profits. They don’t want high burn rates but they will never fund slow growth.


When I look at an income statement I start by focusing on the revenue line. I want to understand how many units the company is selling, whether this is increasing over time and how well they’re doing at retaining the customers that they do acquire. My first priority is to understand “growth drivers.”

If you had two companies each with $10 million in revenue today they might have vastly different prospects for the future. One company might be growing its revenue at 50% per year and the other might be growing at 5% per year.

Of course when you think about it it’s kind of obvious but when people make snap judgments about information they hear about companies or read about in the press they often don’t take the time to start to consider the details.

The Nature of Revenue Matters

Of course revenue alone won’t tell you enough. You need to understand the “quality” of the revenue.

  • Is it one product line or multiple?
  • Do 20% of the customers make 80% of the revenue or do the top 3 customers represent 80% of the revenue. (This is called “revenue concentration” and the more concentrated your revenue the higher the risk that your revenue could decline in the future.
  • Is the revenue dependent on a concentrated set of distribution partners or platforms that put future revenue at risk?
  • etc

Revenue is Not Revenue is Not Revenue

It’s also not as simple as just looking at revenue growth in dollar terms. For example, look at the following graph. You’ll notice that although both companies have the same revenue every year, Company 1 has much higher gross margins than Company 2 because the cost of sales (COGS) is much lower.

“COGS” represents the amount that each sale costs you. For example, if you sell your product through a third-party reseller who charges 30% of any sale then your COGS will be 30% of revenue (assuming no other costs of sales).

The example chart is not actually atypical. The first company represents a normal software company that sells its products directly (either via sales staff or directly off of the internet). Many software companies have 85–90% gross margins, which is why it has historically been a very attractive industry.

Company 2 might represent an “ad mediation company” where the company gets paid by ad networks for running ads on publisher websites and the company in turn must pay the publisher 85% of the revenue it collects. This is not atypical for “middle men” who often take 15–30% of the value of the sale

If you’re shaking your head and thinking, “duh” I promise you that even some of the most sophisticated people I know get off track on this issue of “gross revenue” versus “net revenue.”

We get the revenue argument, but shouldn’t all companies want to be profitable?

Not necessarily.

Let’s consider the following two competing software companies, both of which have 66% gross margins and they decide to run their company exactly the same in year one.

They both raised angel / seed money of $1.5 million to fund operations in their first year of operations. Both companies lost $1 million in their first year and thus finished the year with $500,000 in the bank. Company A lost $2 million in Year 2 while Company B broke even.

So which company is better run?

The answer is that you have no way of knowing. On quick glance a person might lament the fact that Company A is “not profitable” or is being a typical Internet startup. After all, they doubled their operating costs when they weren’t even profitable.

What did they actually do? They raised $5 million in venture capital to fund growth. They used the money to hire a bigger tech team so they could roll out their second product line. They hired a marketing team to promote their products more broadly.

They hired a biz dev team to work on deals where their product could be embedded in other people’s products as a way to increase customer demand. They got a bigger office space so their employees would feel comfortable and they could improve employee retention.

If there was strong market demand for their product then this investment might pay off handsomely.

I also wouldn’t be so quick to say that Company B is run worse than Company A. That management team might have decided that they wanted to maintain more control of their company, didn’t want new board members and didn’t want to take dilution.

The answer may not be known for many years. If the market they are targeting is very large and fast growing then the venture-backed businesses often make it harder for the non-venture-backed businesses to compete in the long-term. If the markets aren’t large then the company who managed its costs may be able to get a modest exit at a fair price and make the team wealthy precisely because they didn’t take on venture capital. The VC-backed businesses sometimes “blow up.”

As is often the case — there are no obvious or right answers.

Let’s look at years 3–5 of these two companies.

In this scenario even though Company B initially looked prudent, it turns out that the investment that Company A made in people led to a higher annual growth rate. At the end of year 5 Company A had earned $19 million in cumulative profits (gains — investment years) while Company B had made only $6 million.

You could actually argue that both companies may have good futures and often this is true. But in other cases Company A uses its growth rate to attract more capital, innovate more on its products, do more marketing, capture more customers, lure away employees and often drive down profits for its competitors over time.

This is precisely why large Internet categories often produce “winner takes most” outcomes.

So let’s consider an even more aggressive “super high growth” Internet company. You know, the kind that unknowing commentators would be quick to lambaste as being wasteful because they’re not profitable.

The company would have had to raise at least $35 million in venture capital to have funded operations like this. More likely they raised $50 million or more.

Crazy? Stupid? Should they have slowed down operating costs in order to “make a profit.”

Again, it depends. If the growth is as spectacular as it is here and if they have access to cheap capital then they’d be crazy not to have raised VC money. Most likely after year 4 they began filing for their IPO to go public and journalists would be lining up to write stories in year 5 about how “they had never turned a profit in their 5 years of operations” and how “they were going public but still losing money.”

This is the trade-off between profits & growth!

The next time somebody wants to slam Amazon for not being more profitable please explain this. Amazon is continuing to grow at such a rapid pace that of course it should take some of today’s profits and reinvest them in growth (or acquisitions).

If there is a company that can’t grow fast enough then they should do other things with their profits, like return it to shareholders.


Early I discussed why stock option incentive expenses are not really cash losses and how people often misunderstand this leading to people proclaiming that Snap lost $2 billion! when they didn’t actually lose that in cash.

I don’t want to pretend that stock-option grants have zero impact on you as a shareholder. Stock option grants dilute your ownership in the company. They work a little bit like inflation. Inflation doesn’t “feel” like you’re losing value because if you have $10,000 in the bank you still have $10,000 after a year of 20% inflation but it actually buys you less when you want to spend it. Stock-option incentives are similar in that they dilute your ownership but you still own the same number of shares. It may impact you in ways you don’t understand because the institutions who drive the price of your shares may push down the share price but you probably won’t understand the correlation.

Executives explain these incentives as necessary to motivate top talent to stay at the company, innovate and in turn drive the value in your stock and of course this is true to an extent. Like all things of course there is a trade-off between payout out rewards to owners and paying out rewards to management. In some public tech stocks the size of the payout to top executives — even when they don’t perform well and eventually get acquired — the payouts are ridiculous.

Photo credit: -Snugg- via Visual Hunt / CC BY-NC

First appeared at his blog

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WePay And The Evolution Of Payments


It was not a terribly long time ago that many very familiar companies were understood and defined, well, very familiarly, WePay Co-Founder Rich Aberman told Karen Webster in a recent conversation. Apple was a hardware company, Microsoft was a productivity software platform, Amazon was an eCommerce retailer selling books and Google was a search platform.

Today, of course, all of these firms are still doing all these things — Apple still sells iPhones, and Google is the official mechanism for answering most of humanity’s questions — but in the past decade, these firms have evolved well beyond those starting points.

“Now all these companies are competing with each other head on — and the reason for that is commerce, and the ‘pipes’ of commerce is payments. It’s amazing to see how all of this is converging,” Aberman noted.

It is also amazing to see how these massive players’ entrance into eCommerce is changing the face of payments development and innovation, he said, because what they’re doing is well beyond the traditional stomping grounds of operationally focused, pure payments players.

Take Netflix, for example, with an expertise in running a very well-developed and highly robust operational payments function. Not simple by any stretch of the imagination, Aberman said, but Netflix is traditional in that its core interests are — conversion rates, authentication rates, least cost routing — all of the things one would expect the concerns of a large multinational corporation operating a global business online to be and the payments capabilities it can offer to its subscribers.

“But that’s very different from what you’re seeing from big tech these days. They do have operational payments capabilities — teams that work on the pure retail payments side and pursue least cost routing and competitive acquirer deals,” Aberman said, further explaining that it doesn’t stop there. “These players now enable broad commerce functions … too.”

Commerce functions that look very different from retail merchants selling a service or a product to a consumer or business, and one that is instead providing a connective layer between third parties, buyers and sellers that makes transacting possible.

Those layers, Aberman noted, can be seen everywhere. Amazon is a giant marketplace that also owns Twitch, which operates a marketplace infrastructure that connects content providers with subscribers. Microsoft, the software productivity player, also runs the Xbox marketplace, which offers services like travel booking and invoicing.

Layers, third parties, buyers and sellers are all transacting on top of a platform that has to enable payments and manage risk among all of those parties.

The Existential Question

The problem with watching these really big players begin to dip their toes into the platform commerce pool, Aberman said, is that it is unclear what is going to happen next. As big tech innovation is increasingly building out payments capacity — and getting better at the highly operational dimensions of payments, such as anti-money laundering and Know Your Customer (KYC) — to support their internal needs, there’s always a chance they might decide they’d like to leverage those payments capabilities and begin to provide those services externally to the marketplace at large.

It’s something, Aberman said, that we’ve seen them do before.

“[Offering payments capabilities] could be very comparable to what happened in web services,” Aberman said. “Ten years ago, Amazon and Google had to build massive data center and server farms to support their core businesses — and at some point, they become so sophisticated at doing that, they began selling hosting as a service. And now they dominate as cloud hosting providers.”

Or not.

“These companies have nice high margin core businesses and are focused primarily on their proprietary commerce initiatives,” Aberman said. “Becoming a payments business is a pretty big step, including into the world of risk and fraud management [i.e. those anti-money laundering and KYC capabilities mentioned above], which many enterprises may decide they just don’t want to do.”

Meeting Needs Where They Are

Aberman joked that for a firm like WePay, it would be great if everyone just stuck to their knitting, leaving the high-margin business of commerce to the tech giants and the critically important job of enabling it among all of those platform stakeholders to firms whose knitting it is to manage the complexity of payments that powers those commerce experiences.

Managing that complexity, Aberman said, is to make it as easy as possible for payments to happen seamlessly among all B2B2C parties that transact across that platform — the buyers and the sellers — in a way that neither side of the transaction has to think too much about it. For WePay, he said, that means finding and incorporating the payment methods and services their partners need — so that the firm is just there for them to use without forcing them to learn a lot about payments or deal with new integrations and new relationships with providers in the process.

“If you’re a graphic artist or a plumber, you should be using merchant vertical-specific software to grow and manage your business. You want a turnkey solution that includes integrated payments,” Aberman said.

Payments, he noted, is not getting simpler. As commerce expands across channels and touchpoints are ever-proliferating, keeping payments as a useful tool — instead of a transaction-killing dead weight — will become an increasingly challenging area to manage.

“There are a lot of choices and a lot of questions to go down in the weeds as platforms enabling commerce proliferate,” Aberman explained. “Our goal is to keep our customers away from the weeds so that they can focus on making their own commerce ambitions bloom.”

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