Having worked in the FinTech space many years ago, invested in the space for over a decade, and met with hundreds of talented teams in this area, I have observed the following ten traits among the most successful companies:
Rule #1: Unlock Economic Value Most traditional financial service firms have invested heavily in branch networks that create expensive cost structures which result in higher prices to customers. Mass-marketing channels and poor customer segmentation also result in higher costs and marketing expenses which translate to higher prices. Online-only financial services can unlock significant economic value and pass this along to consumers. Lending Club offers borrowers better rates and more credit than they can get from traditional banks, while offering lenders better rates of return than they can get from savings accounts or CDs. SoFi is disrupting the world of student loans with better rates to student borrowers and superior returns to alumni lenders relative to comparable fixed income investment opportunities.
Rule #2: Champion the Consumer Consumers are disenchanted and distrustful of existing financial institutions. Let’s take this historic opportunity to champion their interests and build brands deserving of their love. The team at Simple has envisioned a new online banking experience that puts the consumer first via transparency, simplicity and accessibility. Its blog reads like a manifesto for consumer-friendly financial service delivery. LearnVest is another company on a consumer-first mission to “empower people everywhere to take control of their money.” Its low-cost pricing model is clear and free of conflicts of interest that are rampant in the financial sector. There is plenty of margin to be made in championing the consumer. The speed at which consumer sentiment spreads online these days creates an opportunity to become the Zappos or Virgin Airlines of financial services in relatively short order.
Rule #3: Serve The Underserved In my last post explaining why the FinTech revolution is only just getting started, I described how the global credit crunch left whole segments of consumers and small businesses abandoned. Some segments at the bottom of the economic ladder have never really been served by traditional FIs in the first place. Greendot was one of the pioneers of the reloadable prepaid cards bringing the convenience of card-based paying online and offline to those who lacked access to credit cards or even bank accounts. Boom Financial is providing mobile to mobile international money transfer at unprecedented low rates and ultra-convenience from the US to poorly served markets across Latin America and the Caribbean, and eventually globally. No need for a bank account, a computer, or even a trip downtown to dodgy money transfer agent locations.
Rule #4: Remember the “Service” in Financial Service Just because you are building an online financial service does not mean that your service is only delivered by computer servers. When dealing with money matters many people want to speak to a live person from time to time or at least have this as an option just in case. Personal Capital delivers a high tech and high touch wealth management service via powerful financial aggregation and self-service analysis tools, but also provides live financial advisors for clients who want help in constructing and maintaining a diversified and balanced portfolio. These advisors are reachable via phone, email, or Facetime video chat. As a rule of thumb every FinTech company should provide a toll-free phone number no more than one click from your homepage.
Rule #5: Put a Face on It Chuck Schwab, Ken Fisher, John Bogle, Ric Edelman. These stock market titans may have very different investment styles but they knew that consumers want to see the person to whom they are entrusting their money and as a result they each plastered their face and viewpoints all over their marketing materials, websites, and prolific publications. If your startup wants consumers to entrust you with their nest eggs, you ought to be willing to show your face too. This means full bios of the management team, with pictures, and clear location for your company as well as numerous ways to be contacted. It’s also a good idea to make sure that your management team have detailed LinkedIn profiles and that a Google search for any of them will yield results that would comfort a consumer.
Rule #6: Be a Financial Institution, not a vendor The real money in FinTech isn’t in generating leads for FIs or displaying ads for them. That can be a nice business, but the real margin is in making loans, investing assets, insuring assets, or settling transactions. In just a few years Wonga has a become a massive online lender in the UK by instantly underwriting and dynamically pricing short term loans. Financial Engines and a new crop of online investment advisors make and manage investment recommendations for their clients. You do not need to become a chartered bank or an investment custodian as there are plenty of partners that can provide this behind the scenes, but if you can brave the regulatory complexity and develop the technology and skills to underwrite and/or advise exceptionally well, the opportunities are huge.
Rule #7: Use Technology Creatively The incumbents have scale, brand history, brick and mortar presence, and armies of lawyers and lobbyists. If FinTech startups are going to disrupt the incumbents, you will need to work magic with your technology. How clever of Square to use the humble but ubiquitous audio port on smart phones to transmit data from their swipe dongle and for using GPS and the camera/photo album to make everyone feel like a familiar local when using Square Wallet. MetroMile is a FinTech revolutionary disrupting the auto insurance market by offering pay per mile insurance so that low mileage drivers do not overpay and subsidize high mileage drives who tend to have more claims. They do this via a GPS enabled device that plugs into your car’s OBD-II diagnostic port and transmits data via cellular data networks in real-time. Start-ups playing in the Bitcoin ecosystem such as Coinbase and BitPay are certainly at the vanguard of creative use of technology and are tapping in to the mistrust of central banks and fiat currencies felt by a growing number citizens around the world who trust open technologies more than they do governments and banks.
Rule #8: Create Big Data Learning Loops Of all the technologies that will disrupt financial services, Big Data is likely the most powerful. There has never been more data available about consumers and their money, and incumbent algorithms like Fair Isaac’s FICO scores leave most of these gold nuggets lying on the ground. Today’s technology entrepreneurs like those at Billfloat, ZestCash, and Billguard are bringing Google-like data processing technologies and online financial and social data to underwrite, advise and transact in a much smarter way. Once these companies reach enough scale such that their algorithms can learn and improve based on the results of their own past decisions, a very powerful network effect kicks in that makes them tough to catch by copycats who lack the scale and history.
Rule #9: Beware the Tactical vs. Strategic Conundrum One challenge when it comes to financial services is that the truly strategic and important financial decisions that will impact a person’s financial life in the long run, such as savings rate, investment diversification and asset allocation, tend to be activities that are infrequent or easily ignored. Activities that are frequent and cannot be ignored, like paying the bills or filing tax returns, tend to be less strategic and have inherently less margin in them for FinTech providers. Real thought needs to go into how you can provide strategic, life changing services wrapped in an experience that enables you to stay top of mind with consumers so that you are the chosen one when such decisions get made. Likewise, if you provide a low margin but high frequency services like payments you must find a way to retain customers for long enough to pay multiples of your customer acquisition cost.
Rule #10: Make it Beautiful, Take it To Go A medical Explanation of Benefit is possibly the only statement uglier and more obtuse than a typical financial statement. Incumbent FI websites are not much better and over the past ten years many large FIs have heavily prioritized expansion of their branch networks over innovating and improving their online presence. As a FinTech startups you have the golden opportunity to redefine design and user experience around money matters and daresay make it fun for consumers to interact with their finances. Mint really set the standard when it comes to user experience and beautiful design, while PageOnce pioneered mobile financial account aggregation and bill payment. To deliver a world class consumer finance experience online today one needs to offer a product that looks, feels, and functions world class across web, mobile and tablet.
The Occupy Wall Street protestors are gone (for now), but the real revolution against banking is still taking place at breathtaking speed, thanks to a new breed of technology entrepreneurs. The financial services industry, long protected by complex regulations, high barriers to entry and economies of scale, is ripe for disruption. Here’s my take on the macro environment, how consumer attitudes are changing and why technology and available talent make now the best time to challenge the status quo.
Global credit markets clamped shut in late 2008 and froze entire sectors of consumer credit. Mortgages became less available, millions of credit cards were revoked, lines of credit dried up, and banks essentially abandoned the small business and student loan markets. This left tens of millions of households in the position of “underbanked” (have jobs and bank accounts, but little to no credit) and the “unbanked” (no traditional banking relationship at all.) This credit crunch fueled demand for startups like Wonga, Billfloat, and OnDeck Capital to establish themselves and grow rapidly, and the reloadable prepaid card market pioneered by GreenDot and NetSpend soared. While credit has eased for certain segments in certain markets, there are still big opportunities to fill credit voids, especially at the lower end of the market.
The last few years have seen significant changes in banking, payment, tax, investment and financial disclosure regulations. While complex legislation such as the Dodd–Frank Wall Street Reform and Consumer Protection Act is hardly intended to unleash entrepreneurial innovation, and virtually no single person can comprehend it in entirety, it does contain hundreds of provisions that restrict incumbent business practices, and typically when there is change and complexity there are new opportunities for those that can move quickest and are least encumbered by legacy. Other regulations such as the Check 21 Act which paved the way for paperless remote deposit of checks, and the JOBS Act crowd funding provision are examples of technologically and entrepreneurially progressive laws that create opportunities for entrepreneurs and tech companies. Inspired by the success of pioneers such as microfinance site Kiva and crowd funding sites like KickStarter and indiegogo, I expect that once the JOBS Act is fully enacted and allows for equity investments by unaccredited investors we will see a surge of specialized crowd funding sites with great positive impact on deserving individuals and new ventures.
Within a few weeks of Occupy Wall Street in Sept 2011, protests had spread to over 600 U.S. communities (Occupy Maui anyone?), hundreds of international cities (did I see you at Occupy Ulaanbaatar Mongolia?), and every continent except Antarctica. Regardless of what you think of such protests, it is safe to say that as a whole we are more skeptical and distrustful of financial institutions than virtually any other industry. Clay Shirky’s term “confuseopoly”, in which incumbent institutions overload consumers with information and (sometimes intentional) complexity in order to make it hard for them to truly understand costs and make informed decisions, is unfortunately a very apt term for the traditional financial services industry. There is thus a crying need for new service providers who truly champion consumers’ best interests and create brands based on transparency, fairness, and doing right by their customers. Going one step further, peer-to-peer models and online lending circles enable the traditional practice of individuals helping one another without a traditional bank in the middle, but with a technology enabled matchmaker in the middle. Perhaps the ultimate example of bypassing the mistrusted incumbents is the recent acceleration in the use of Bitcoin, a digital currency not controlled by any nation or central bank but by servers and open source cryptograpy.
As a Product Manager for Quicken back in 1995 I remember sweating through focus groups with consumers shaking with fear at the notion of online banking. Today it is second nature to view our bank balances or transfer funds on our smartphone while standing in line for a latte. And while Blippy may have found the outer limit of our willingness to share personal financial data (for now), there is no doubt that “social” will continue to impact financial services, as evidenced by social investing companies eToro and Covestor. You can bet it will be startups that innovate around social and the incumbents who mock, then dismiss, then grope to catch up by imitating.
I think we will look back in 20 years and view the smartphone as a technical innovation on par with the jet plane, antibiotics, container shipping, and the microprocessor. While the ever improving processing power and always-on broadband connectivity of the smartphone are the core assets, it has been interesting to see such widespread capabilities as the camera, GPS, and even audio jack used as hooks for new FinTech solutions. While there are over a billion smartphones worldwide, the ubiquity of SMS service on virtually all mobile phones means that billions more citizens have mobile access to financial services 24×7 no matter how far they live from physical branches. Cloud and Big Data processing capabilities are further fueling innovation in financial technology typified by the myriad startups eschewing FICO scores in favor of new proprietary scoring algorithms that leverage the exponential growth in data available to forecast credit worthiness.
Financial institutions have long employed armies of developers to maintain their complex back office systems but until recently the majority of these developers worked in programming languages such as COBOL which have little applicability to startups. While COBOL has not gone away at the banks, more and more of the technical staff spend their time programming new features and interfaces in modern languages and web application frameworks that provide highly applicable and transferable skills to startups only too happy to hire them for their technical training and domain experience. In addition, successful FinTech companies from the early days of the internet such as Intuit and PayPal have graduated experienced leaders who have gone on to start or play pivotal roles in the next generation of FinTech startups such as Square, Xoom, Kiva, Bill.com, PayCycle, OutRight, Billfloat, and Personal Capital.
Network Effects are magical. They are the pixie dust that makes certain Information Technology businesses, especially on the Internet, into juggernauts. They can be found in both consumer and enterprise companies. Network Effects are special because they:
Network Effects are like a flywheel–the faster you spin it the more momentum you generate and enjoy. But not all markets lend themselves to Network Effects. They are not the same as Economies of Scale where “bigger is better.” To be certain, Economies of Scale can give strong competitive advantage and defensibility to the first to get really big (or Minimum Efficient Scale as the economists call it.) For example, SAP and Oracle benefit from having massive revenue bases which enable them to employ armies of engineers who develop rich feature sets and also to hire huge sales forces. However large these companies are today, though, their growth rates, especially in their early years, were far more modest compared to those Network Effect companies whose growth resembled a curved ramp off of which they launched into the stratosphere.
There are four main types of Network Effects:
Example include Operating Systems like Microsoft Windows, Apple App Store, and Amazon Web Services.
Each of these four types of network effects can be extremely powerful on their own. Yet, even more power is derived when a business can harness multiple types of network effects in synergistic ways. Google, Apple and Facebook do this for sure, but a less well known example is Venrock portfolio company AppNexus that operates a real-time online advertising exchange and technology platform. The exchange aggregates advertisers, agencies, publishers and ad networks for marketplace liquidity, but also offers a hosting and technology platform for other AdTech companies and ad networks to augment their own businesses. And the vast troves of data AppNexus processes every millisecond flows back into the system as optimized and targeted ad serving.
On April 14th I am moderating a panel at the Digital Healthcare Innovation Summit in New York City titled “The Hospital as Production Center: Holy Grail or Impossible Dream?” [For anyone who wants a discounted registration rate, see the end of this post.] In an effort not to suck, I’ve put some thought into what makes a great panel. Like many conference junkies in the tech and finance worlds, I’ve sat through hundreds of panels, been on a bunch, and moderated a few handfuls over the years. Here’s a list of a dozen suggestions that I plan to implement:
By the time you read this post, Super Bowl XLV will be over and everyone will be talking about the … commercials. Why? Because most of them are entertaining, some are memorable, and the $2.5 million price tags (for air time alone) pique our curiosity. Why are brands willing to pay so much? Because it is one of the only ways to reach 100 million consumers simultaneously, and because a great 30 second video ad packs an emotional payload in support of your brand unlike virtually any other form of advertising.
Over the past few years I’ve noticed more and more web companies producing great videos to market their companies, often presenting them front and center on their homepage as the introduction to their company. A great video overview can really help explain what you do for customers, how you do it, and present your brand in a flattering light. The best videos go viral and bring you exponential attention and new visitors. And web videos have never been cheaper to produce (at 1/2000th the cost of a super bowl commercial even a start-up can afford them.) So, here are five thoughts on what makes a great marketing video for web companies, and a bunch of examples:
Answer WIIFM: A great marketing video should clearly and convincingly articulate a few simple benefits that customers care about. Mint.com does a terrific job of this, as does Dropbox, both front and center on their homepage. The Dropbox video is particularly noteworthy because it takes an esoteric concept and uses analogy to demonstrate user benefits everyone can relate to.
Show how it works: A great overview video shows just enough of the product and how it works to lend credibility to the benefit statement. Word Lens does a terrific job of this for a product that truly needs to be seen to be believed. A full blown demo would have been less effective than just these short glimpses of the product in action.
Be yourself: Video is such a rich and engaging medium it is perfect for showing the personality of your brand. It is a great way to set tone and speak to your customers and prospects in an authentic voice. Flavors.me does a terrific job of this through music and images alone, letting actions speak louder than words in convincing you that they can make your personal homepage look amazing because they do such a killer job of presenting themselves through this video. Style personified.
Be fun, get remembered: Great marketing videos are fun to watch and somewhat memorable. You don’t have to be knee slappin’ funny or so hip it hurts, just smile-inside funny will go a long way. SalesCrunch and SolveMedia both take pretty dry categories (CRM SaaS and AdTech respectively) and rivet their viewers through entertaining use of cartoons and wit.
Be Brief: Even a great marketing video starts to feel long after two minutes. Shoot for less. This video from Smartling gets the job done in 38 seconds. [Disclosure: Smartling is a Venrock investment.]
These are the five characteristics which I think make for a great marketing video for your web company. If you think there are points I missed, or have other great examples, please comment and add to the list. If you are the production agency responsible for making any of these videos please take a bow by claiming your work. I’m sure others will want to contact you. If you are looking for more of a live action marketing video, TurnHere can help produce custom video for ridiculously low rates [disclosure: TurnHere is a Venrock investment.]
Today I faced a choice. Should I go out and enjoy the beautiful weather and waves and go for a surf or should I blog about my favorite financial reporting tool? Seems like a pathetic question for a surfer to ask, or maybe this financial reporting tool is really that great. I’ll settle for an answer of “both”.
The tool in question is the Waterfall Chart. It’s a way to compare actual results across time periods (months or quarters usually) against your original Plan of Record, as well as forecasts you made along the way as more information became available. It packs a ton of information into a concise format, and provides management and Board members quick answers to the following important questions:
1. How are we doing against plan? Against what we thought last time we reforecast?
2. Where are we most likely to end up at the end of the fiscal year?
3. Are we getting better at predicting our business?
The tool works like this:
Across the top row is your original Plan of Record. This could be for a financial goal like Revenue or Cash, or an operating goal like headcount or units sold. Each column is representative of a time period. I like monthly for most metrics, with sub-totals for quarters and the full fiscal year. Each row below the plan of record is a reforecast to provide a current working view of where management thinks they will wind up based on all the information available at that time period. Click the example below which was as of August 15, 2010 to see a sample, or click the link below to download the Excel spreadsheet.
Periodic reforecasting does not mean changes to the official Plan of Record against which management measures itself. Reforecasts should not require days of offsite meetings to reach agreement. It should be something the CEO, CFO, and functional leaders like the VP Sales or Head of Operations can hammer out in a few hours. Usually these reforecasts are made monthly, about the time the actual results for the prior month are finalized. When you have an actual result, say for the month of August, $2,111 in the example above, this goes where the August column and August row intersect. On that same row to the right of the August actual you will put the new forecasts you are making for the rest of the year (September through December.) In this fashion, the bottom cells form a downward stair step shape (a shallow waterfall perhaps?) with the actual results cascading from upper left to lower right. You can get fancy and put the actuals that beat plan in green, and those that missed in red. You can also add some columns to the right of your last time period to show cumulative totals and year to dates (YTD). With or without these embellishments you’ve got some really powerful information in an easy to visualize chart.
Two questions an entrepreneur might ask about this tool:
By repeatedly comparing actual to plans and reforecasts, won’t my Board beat me up each month if I miss plan or even worse, miss forecasts I just made? If you are a relatively young company, most Board’s (I hope) understand that planning is a best-efforts exercise not an exact science. Most Boards will react rationally and cooperatively if you miss your plan, as long as you avoid big surprises. By giving the Board updated forecasts you decrease the odds of big surprises because the latest and best information is re-factored in to the equation as the year progresses. They probably won’t let you stop measuring yourself against the Plan of Record, but at least you’ve warned them as to how results are trending month to month and course corrections can be made throughout the year.
Won’t this take a lot of time? Hopefully not a ton, but it does take effort. However, it should be effort well worth it beyond just making the Board happy, because as a management team you obviously care about metrics like cash on hand, and this should be something you are constantly recalibrating anyway. The waterfall is the perfect tool to organize and share this information.
Most of my companies using this tool track five to ten key metrics this way. Typical metrics include:
There is much conventional wisdom in venture capital. One such belief is that hospitals are a really horrible market for tech startups to pursue. Back in 2002 when we invested in Vocera, an innovative communications system for hospitals (think Star Trek), many other firms had looked at the deal and passed. Although this was the company’s third round of financing, the company was still pre-revenue and pre-launch, and this was the first round raised subsequent to their strategic shift from a horizontal solution to one vertically focused on hospitals. Most VCs ran from it. Following are some of the reasons potential investors gave for hating the hospital market then, most of which persist as concerns, often valid, today:
1. Hospitals are highly budget constrained
2. Most hospitals don’t have profits motives and are not subject to the same competitive forces as for-profit businesses
3. Hospitals are complex political environments with many forces that influence decision making and purchase behavior that seem counter to rational business judgment. Those who decide, those who approve, those who pay, use, benefit from, can all be different roles in the organization.
4. Sales cycles are very long, often measured in years.
5. Hospitals are technology laggards when it comes to adopting information technology.
6. Hospitals are dominated by large technology vendors such as GE, Cerner and IBM.
There is some truth to each of these, but here’s the counter argument that led us to make a second investment in the hospital market, namely Awarepoint, an indoor GPS system for tracking people and assets in the hospital.
1. There are lots of hospitals. Over 5500 in the US alone, and there are little blue signs pointing you to each of them. Given the annual budgets of your typical hospital, this translates into a very big market. Vocera now serves over 650 hospitals and more than 450,000 daily users, and is still growing very rapidly, believing they have tapped less than 10% of their core market opportunity.
2. Hospitals are sticky. Once your product is adopted, and assuming it works well, they are reluctant to switch you out because solutions get so enmeshed in different processes and systems, and so many employees get used to them. You can’t screw up, or raise prices dramatically, but you may not have to sing for your supper every time a competitor issues a press release.
3. Hospitals are willing and able to spend on IT if it is a priority and they see an opportunity for a large return on investment. This is one of the things helping Awarepoint penetrate the market, and they are not alone. Companies like Allocade , which creates dynamic patient itineraries to improve throughput, are also having success based on the ROI they can deliver.
4. Because hospitals are underpenetrated by information systems, there is lots of low hanging fruit and relatively basic problems to be solved. Electronic Medical Records vendors are having a field day, both because of stimulus incentives but because many hospitals, especially the 72% of all community hospitals with under 200 beds, still don’t have this basic form of digitizing their information. The trend towards Accountable Care Organizations, and the related financial incentives, will require greater clinical integration of care across health care settings (inpatient, ambulatory), greater financial efficiency, and increased transparency and flow of information about the process, costs, and outcomes of health care, all of which will require better healthcare information technology.
5. Hospitals are similar to each other and willing to serve as references to each other. Yes, they do compete in some ways, and each has its unique attributes, but you find a higher degree of collegiality and similarity than most industries where competitors hate each other and each may have very different ways of doing their core activities.
There are a few reasons why the hospital market is ripening for startups and the VCs who love them:
1. Hospitals are feeling financial pressures to run efficiently. With healthcare reform there will be more patients coming in their door requiring services, while price caps will get tougher. And there will be financial penalties for things like readmission rates that often correlate to operating inefficiently, and which technology can help prevent.
2. With the EMR mandates and installations, the Chief Information Officer is now in an elevated position in the organization and even considered a revenue generator. Many EMR installation projects are leading to ancillary projects and opportunities to automate and digitize other aspects of hospital operations.
3. New IT paradigms like cloud based services, open data initiatives (thank you Todd Park @ HSS), APIs, and Open Source means that it is less expensive to build and deliver better products into the hospital.
4. Wireless technologies, and relatively cheap and robust devices like iPhones and iPads, make it easier to reach caregivers on the go, whether nurses at the bedside or Doctors on the golf course. Companies like AirStrip are getting real-time info to the caregiver wherever they are, and caregivers love it. Also, WiFi and Zigbee in the hospitals means your equipment and monitors, and even staff, can transmit their info from wherever they are without wires and expensive, disruptive installations.
5. This current generation of Doctors and are used to technology in their personal lives. They use email, carry iPhones and Blackberries, shop online, etc. And the residents entering hospitals today are Digital Natives. There will be an increasing expectation that hospitals adopt these technologies that most other verticals have embraced.