Bits of Cents

There’re a lot of marketplace businesses being started out there - I probably see 2 a week these days.  Given the interest in the space I thought I’d share some high level thoughts on building marketplaces.

• Start small, grow big - There’s often a temptation to go big or go home.  In marketplace businesses, this temptation can be deadly.  You’ll find that most successful marketplaces start small, either in an individual city or region, and grow from there.  By rolling out this way the business can test supplier/consumer acquisition strategies, perfect models and get a loyal group of early adopters who feel close to the product.  By going national you lose the benefit of all that learning and possibly queer the market on a mass scale.
• Accelerate quickly once the model works - Once you’ve cracked the code to supplier/consumer acquisition on a small scale, aggressively roll the model out to more locations.  Odds are that marketplace dynamics observed in the small-scale roll-out will be very similar in other cities and regions.  Leverage your learnings from point one above to replicate the success across the country.
• Cater to your customers - The community comes first and foremost in any successful marketplace.  These businesses give their loyal customers (both on the supply and demand side) tons of love from free perks to significant discounts.  This positive brand image helps juice the viral loop because the “surprised and delighted” customers are likely to share their experiences with others and recruit them to the platform.
• Get suppliers in the marketplace who use it as their primary source of income - Successful, large marketplaces are built on the backs of participants who use the platform to make a living.  They’re the ones who drive transactions through the system, bring in new users and sustainably use the service - ultimately driving revenue for the business.  This is true for the successful, transactional marketplaces that I can think of, from Airbnb to Etsy to Ebay.  It’s the good old 80/20 rule in action.
• Create stories - The only thing the press loves more than nicely packaged funding announcements are nicely packaged user stories.  Highlighting success stories from power users on a marketplace can be a great way to generate mainstream press.  Kickstarter has done a great job at this.

Disclosure: I’m a data nerd.  I love data.  I eat it up.  Given that today marks my 3rd year at Flybridge, I thought it would be fun to shine some light on the data I produce as a VC.  I have NO idea if these stats are typical, light, heavy, etc.  I have absolutely no point of reference here - this is just the raw data.  I also have no idea if this is at all relevant.  I just  find it an interesting lens in which to view my past 3 years (or 1095 days or 26,280 hours).  I also hope this is helpful to all the aspiring VCs out there who are wondering what a day in the life of a venture capitalist is.

Emails

Email is my primary mode of communication and therefore something I thought would be fun to look at.  Unfortunately I don’t keep all the emails I get on my computer.  Thankfully, I do keep each and every email I send and have since 10/30/09.  Let’s see what email traffic from my system looks like:

• Emails sent from 7/6/10 to 7/6/11: 10,874
• Average emails sent per day for the past year: 29.79

30 messages a day.  I’m not sure what my received to sent ratio is but it’s probably around 1 sent message for every 4 emails received.  Based on that, I get something around 120 emails a day.  That feels about right.  Too bad I don’t have the actual emails.

I was curious to see how my email habits changed since becoming a Principal here at Flybridge last summer.  Since I don’t have sent emails prior to 10/30/09, I decided to compare email activity between 1/1 and 7/6 for both 2010 and 2011.  The data:

• Emails sent from 1/1/10 to 7/6/10: 4,661
• Average emails sent per day from 1/1/10 to 7/6/10: 20.06
• Emails sent from 1/1/11 to 7/6/11: 6,006
• Average emails sent per day from 1/1/11 to 7/6/11: 32.29

Definitely more active on email over the past year, likely a result of chasing down my own deals and going back and forth with entrepreneurs.  Makes sense.

Meetings

Meetings are the lifeblood of VC - it’s the way you get to find out about new deals, diligence ones in the pipeline and help the ones we’ve invested in.  It’s much harder to count calendar entries than it is emails so I’ll take a 2 month section (5/18/11 to 7/18/11) as a sample set and extrapolate from there.

• Meetings from 5/18/11 to 7/18/11: 190
• Average meetings per work day: 4.41

Nearly 5 meetings per work day.  Crazy.  Most of my meetings are 1h in duration.  Extrapolating out that means I spend 1287 hours per year in meetings.  That’s 53.63 days.

I was also curious how many of these meetings fall into various categories.  Most of what I do can be sorted into internal meetings (i.e. our Monday partner’s meeting, etc), new company meetings (i.e. companies I’m meeting with regarding financing, sometimes more than once, etc), networking meetings (i.e. entrepreneurs who aren’t active on a new company, etc) and portfolio meetings (i.e. companies we’ve invested in).  Of the 190 meetings, what was the various split?

• Team meetings: 14 (nearly all on Mondays)
• New company meetings: 96
• Networking meetings: 60
• Portfolio meetings: 20

How about the per day split for those:

• Average team meetings per work day: 0.32
• Average new company meetings per work day: 2.23
• Average networking meetings per work day: 1.40
• Average portfolio meetings per work day: 0.47

So about two company meetings a day, about two networking meetings per day, portfolio discussions every other day and team meetings every 3 days.  For context, remember that I’m a full board member only on one company since Ready Financial merged with Account Now and I’m a board observer on three.

Now if only I was creative enough to create an infographic.  Maybe in another 3 years…

I’m excited to finally be able to talk about something that has been in the works for a bit now: Ready Financial is merging with AccountNow.

Flybridge invested in Ready Financial in November of 2009 after a dive into the prepaid space.  The observation was that the space was undergoing tremendous growth (nearly 40% annually) and that the market was differentiating based on acquisition channel.  Greendot had locked up the retail distribution channel, working with outlets like Walmart.  Netspend had acquired customers though the alternative financial channel, working with payday loan outlets and pawn shops.  Both acquisition channels had been fruitful and both Greendot and Netspend were accelerating fast (in fact, both IPOed about a year after our investment in Ready Financial).

As we looked at the market and considered the success both Greendot and Netspend had seen, we wondered if that model could be replicated in another acquisition channel.  Our hypothesis: that the online channel could be as productive or more so than the physical channel.  Our investment thesis: that the skill set needed to build an online acquisition machine did not exist in the companies that focused on physical distribution, meaning a company could be built that focused exclusively in online distribution.  This thinking resulted in our investment in Ready Financial.

Fast forward to present day.  Over the past year and a half, Will Tumulty (CEO) and the entire Ready Financial team did a great job executing towards that vision.  The company rapidly grew their account base and released innovative products like the platinum card, a credit score and tracking tool and a way to grow consumers into a credit card over time called Path2Credit.  Things were firing on all cylinders.

AccountNow is the one player in prepaid card space that took a similar approach to Ready Financial by focusing their acquisition efforts online.  Started in 2005, AccountNow is no stranger to exploiting the online channel.  They accumulated a large consumer base and partnered with other online acquisition partners like ezTaxReturn.  Their CEO, Jim Jones, has done an incredible job at using both online as well as alternative acquisition channels to get consumers on the AccountNow product.

The relationship between the two companies had been close over the years and, over time, it became clear that joining forces could really accelerate both companies to the next level.

The combination of AccountNow and Ready Financial is an exciting one for a number of reasons.  First off, it gets the combined company to even more scale quickly.  By combining two sizable customer bases, the combined company will be one of the top prepaid card issues out there.  Additionally, both companies gain the skills of the other.  AccountNow benefits from the product innovation spearheaded by Ready Financial; innovation that will continue under the guidance of Will Tumulty who will serve as CMO of the combined company.  Likewise, Ready Financial benefits from the alternative acquisition channels AccountNow has successfully deployed and used to grow their account base.

More customers with better products.  That’s one plus one equals three in my mind.  Congratulations to Will, Jim and everyone at the new AccountNow!

I’m excited to finally be able to talk about something that has been in the works for a bit now: Ready Financial is merging with AccountNow.

Flybridge invested in Ready Financial in November of 2009 after a dive into the prepaid space.  The observation was that the space was undergoing tremendous growth (nearly 40% annually) and that the market was differentiating based on acquisition channel.  Greendot had locked up the retail distribution channel, working with outlets like Walmart.  Netspend had acquired customers though the alternative financial channel, working with payday loan outlets and pawn shops.  Both acquisition channels had been fruitful and both Greendot and Netspend were accelerating fast (in fact, both IPOed about a year after our investment in Ready Financial).

As we looked at the market and considered the success both Greendot and Netspend had seen, we wondered if that model could be replicated in another acquisition channel.  Our hypothesis: that the online channel could be as productive or more so than the physical channel.  Our investment thesis: that the skill set needed to build an online acquisition machine did not exist in the companies that focused on physical distribution, meaning a company could be built that focused exclusively in online distribution.  This thinking resulted in our investment in Ready Financial.

Fast forward to present day.  Over the past year and a half, Will Tumulty (CEO) and the entire Ready Financial team did a great job executing towards that vision.  The company rapidly grew their account base and released innovative products like the platinum card, a credit score and tracking tool and a way to grow consumers into a credit card over time called Path2Credit.  Things were firing on all cylinders.

AccountNow is the one player in prepaid card space that took a similar approach to Ready Financial by focusing their acquisition efforts online.  Started in 2005, AccountNow is no stranger to exploiting the online channel.  They accumulated a large consumer base and partnered with other online acquisition partners like ezTaxReturn.  Their CEO, Jim Jones, has done an incredible job at using both online as well as alternative acquisition channels to get consumers on the AccountNow product.

The relationship between the two companies had been close over the years and, over time, it became clear that joining forces could really accelerate both companies to the next level.

The combination of AccountNow and Ready Financial is an exciting one for a number of reasons.  First off, it gets the combined company to even more scale quickly.  By combining two sizable customer bases, the combined company will be one of the top prepaid card issues out there.  Additionally, both companies gain the skills of the other.  AccountNow benefits from the product innovation spearheaded by Ready Financial; innovation that will continue under the guidance of Will Tumulty who will serve as CMO of the combined company.  Likewise, Ready Financial benefits from the alternative acquisition channels AccountNow has successfully deployed and used to grow their account base.

More customers with better products.  That’s one plus one equals three in my mind.  Congratulations to Will, Jim and everyone at the new AccountNow!

Like others in the payments space, I spent the last hour watching Google’s plans for disrupting one of the largest industries in the world.  At times visionary (Osama Bedier was great), at times awkward (Ed Larby of First Data couldn’t pronounce the name of Sprint’s CTO), here are some high-level thoughts I had as Stephanie Tilenius, VP of Commerce at Google, spoke:

• Google is leveraging the Mastercard Paypass infrastructure to make sure they have merchants who can accept Google Wallet on day one.  Not a bad idea to get the ball rolling but the truth is that Paypass is not widely distributed nor loved.  Stephanie repeatedly boasted that there are over 120,000 Paypass merchants in the US.  That’s great but there are 4.7M magnetic card merchants in the US, leaving Google Wallet penetration (and possible usage) to 2.5% of stores.
• Walgreens is the flagship retailer Google is launching with; Walgreens is the 4th largest retailer in the US.  Next most sizable is Macy’s, at number 15 followed by Subway at 32. Leveraging Paypass is what gets Google into these merchants on day one.
• Google is also working with Sprint as the carrier partner.  The carrier plays a role in the ecosystem here not only because the app runs on their phone but because card provisioning will be pushed from the processor (First Data) to the phone wirelessly. I would guess that Sprint was not Google’s first choice (check out their less than stellar financial performance and note the growth of prepaid subscribers who are unlikely Google Wallet users) but probably the only option.  The best dance partners (AT&T, Verizon and T-Mobile) all teamed up about a year ago to create ISIS, a mobile wallet solution of their own.  That left Sprint all by its lonesome and really the only option for Google. This ultimately will hurt merchant adoption since there are not going to be tens of millions of consumers with Google Wallet accounts lining up on day one, especially when you consider the product is not only limited to Sprint’s anemic postpaid customer base but to 1 specific phone on the Sprint network (Nexus S).
• The prepaid card feature of Google Wallet is interesting. While the partnership with Citi and Google Wallet allows for new Citi credit cards to be “pushed” to phones, if you have an alternative card or can’t open a Citi card, Google needs a way to get dollars into the phone.  Google could have chosen to just collect existing card information and pass that on in a card-not-present transaction but that would leave them out of the loop and out of control for interchange fees.  By offering a “prepaid” card that can be loaded off of any credit card, Google inserts themselves into the process. It also gives them the ability to load cash directly onto the phone at the merchant; imagine an NFC version of the GreenDot reload network.
• It strikes me that, given the point above, Apple is in a considerably better position to pull off the prepaid card aspect of Google Wallet off.  While Google has to go and collect credit card information from consumers who want to load money into the Google prepaid product, Apple already has 200M iTunes accounts with credit card information inputted. If Google is thinking that the majority of users will not open a new Citi product or load at the merchant and, instead, will leverage their existing card products they should be worried about Apple.
• The NFC implementation thus far is what I’d call “dumb” NFC. All the phone is doing is passing basic information that point of sale systems already accept (credit, loyalty, or coupons) to the point of sale via NFC - replacing a magnetic bit for a wireless one.  The next step is bi-directional NFC where the register sends information back.  Google suggested this feature would come in October, initially in the form of digital receipts.  I suspect the lag here is that it requires some pretty fundamental POS upgrades to enable.  It will be interesting to see how quickly this feature rolls out to merchants.
• One would think that given the attention paid to interchange, it would have come up at least once in the hour presentation but nope; the speakers were entirely silent on the topic. It may have gotten addressed in the Q&A session that Google chose not livestream but there are likely to be lots of questions around the subject.  It’s worth noting that there are rumors that Google will not be charging interchange fees on Google Wallet.  That maybe the case but it is not clear if that would apply across all Google Wallet or be limited just to the Google prepaid card (since Citi is not used here).

I’ll leave the Google Offers discussion to another post but, needless to say, there is plenty to talk about when it comes to Google Wallet.  Can Google succeed here where others have failed?  They probably have a good shot but there’s still a long, long, long road ahead with many questions along the way.

PS: Kudos to the Citi guy who spoke who read his entire speech from a piece of paper he carried on stage with him.  Classy.

Yesterday under the direction of the Durbin Amendment, the Federal Reserve unveiled its proposed debit card interchange fee cap and pegged it at $0.12, a 70% decrease over the current average of $0.44.  For the uninitiated who think interchange is some sort of superpower, it’s the amount the card networks (Visa, MasterCard) charge merchants (Target, Wal-Mart, your local restaurant) for the service of settling transactions electronically.  You don’t see the fee as a consumer but a $100 shopping spree at Amazon paid with your Bank of America Visa debit card actually costs the retailer something closer to $102.  In this example, the proposed change would bring Amazon’s price for using the Visa network on a $100 purchase down from $1.75 to $0.12.

Reading into the (always cloudy) Witheiler crystal ball, there are a number of implications of this change.

What will happen:

• RIP debit loyalty programs – If you enjoyed the cash back, airline miles or point rewards on your debit card, you can kiss those perks goodbye.  The money to pay for those programs was funded out of interchange.  Reduce interchange by 70% and you can forget about that free trip to Hawaii.
• Fees will move elsewhere – Interchange fees are estimated to generate $8B in revenue to the top 6 issuing banks (who get a cut of the fees that Visa and MasterCard charge) and are a large revenue driver for these banks.  Expect the entire bank ecosystem to react in a manner that replaces lost interchange revenue.  Possible places the dollars will shift include further fees for checking accounts (adding to those already piled on to make up for lost overdraft revenues) and higher fees on the ACH network (the network used to wire money into bank accounts, for instance when your employer direct deposits your paycheck).
• Startup banks will be impacted – There have been a number of startups targeting the banking industry as of late – BankSimple and PerkStreet come to top of mind.  Like the big banks, these startups rely in part on interchange revenue to drive profits.  A $0.12 fee cap materially impacts this revenue stream and makes it harder to build a new business here.
• Merchant funded rewards increase – The other side to debit card loyalty programs are merchant funded rewards, where the merchant provides funds to consumers to build loyalty.  You’ve probably experienced this first hand when you shop at one of the bank malls, like Bank of America’s WorldPoints Mall or the Chase’s Ultimate Rewards Mall.  Expect more dollars to flow into this category given the fact that merchants are now making more money off of you.

What will not happen:

• Lower prices – Merchants lobbied congress to pass the Durbin amendment under the premise that interchange raises prices for consumers.  If you think that the price savings from lower interchange will be passed to consumers, you’re crazy.  There is a zero percent chance that retailers will use they money they are saving to decrease prices of goods.  It’s not that merchants are “greedy” and are looking to make more money (although they may be), it’s the fact that debit is only one form of payment.  While interchange on debit transactions may be capped to $0.12, interchange on credit thus far remain unchanged.  To realistically be able to lower the prices of goods, merchants would have to have different prices depending on how you pay – imagine a pack of gum with a $1 price tag if paid in cash, a $1.12 price tag if paid with a debit card and a $1.25 price tag if paid with a credit card.  It’s insane to think that merchants will have three price tags on goods and that consumers will understand the differences – after all, to most people, Visa is Visa regardless if it’s a debit or credit card.  Until there is consistency and parity across payment forms (likely never), expect merchants to pocket the savings off reduced interchange.

The interchange regulations are currently in draft form and are out for comment until April 21st.  The draft legislation can be found here and comments can be made here.

Scaling any consumer facing web property is a difficult task no matter what sector your startup is in. Getting 100 or even 1,000 people to sign up and use a product is one thing but getting 100,000 or 1,000,000 is another.  There are plenty of posts that talk about growing web properties and this is not one of them. This post is about growing a consumer facing property in the financial sector.

Along with all the challenges that come with customer acquisition in any online business, the challenges are magnified when consumer dollars are involved. It’s one thing to convince 100,000 people to sign up for a dating service and quite another to get the same number of people to trust you to directly touch their hard-earned money. This makes the already difficult task of even more onerous.

There is a tendency to think that innovative financial products lend themselves to “viral” acquisition. People often bring up ING when making this argument, pointing out that the company grew from 0 users when it launched in 2000 to 7.5M users today thanks to a radically new product offering. What they don’t mention is that ING, whose corporate parent is a €50B business, gave ING US a budget north of $50M for marketing in it’s first year alone and has spent hundreds of millions since. The goal - convince consumers that the ING brand is one you can trust your money with.  It worked but it wasn’t cheap.

Unfortunately, most startup financial services companies cannot support a marketing budget the cost of a small island which gets me to the purpose of this post.

The venture backed companies that will win in the financial services world are ones that can prove attractive customer acquisition math due to a unique view or take of the market – like Mint in its time where it focused on SEO and long-tail acquisition when no one else in the financial services world was. This is more or less true in any online business but is more so the case in the finance vertical due to the inherent trust and education component that comes with dealing with people’s money.

We’re really excited about the investment we announced today in Convoke Systems.  Why?  Because it’s an unsexy industry stuck with technology that has not changed since it was born in the 1990s.

The domestic consumer credit industry is massive - approximately $1 trillion of revolving consumer credit is outstanding at any given time.  Yes, with a T.  What’s even more shocking than the $1T number is the amount of credit card debt that is charged off (meaning is written to $0 in value by the credit industry) each year; that number is close to $100 billion.  Credit card issuers, the Chases of the world, attempt to recover from these delinquent accounts by either “placing” the account (giving it to a 3rd party to collect on the debt on the issuers behalf) or by selling it (choosing cash today at a discount over the possibility of cash collections in the future at a higher price).  Ultimately, the majority of accounts that cannot be collected upon get sold.

In the 20 years since debt selling hit the consumer credit space, over $1 trillion of debt has been sold via inefficient and manual processes.  Portfolios of accounts are generally packaged up by issuers and sold to a set of approximately 10 national debt buyers (many of whom have grown into large, publicly traded entities), with little underlying analytics or business intelligence.  These debt buyer then collect upon some of the accounts themselves and resell others.  The cycle continues, with accounts trading hands up to 5 times or more.  Along with these accounts come mountains of sensitive consumer information.  And care to guess how this information changes hands from credit issuer to debt buyer and debt buyer?  This guy.

That’s right.  Boxes of paper-based sensitive consumer information pass hands through US Mail, UPS and Federal Express and the associated account-level information is often times lost or mistreated; part of the reason the debt industry holds the number one spot for consumer complaints at the FTC.  Viewed as a back office task, debt placement and sales has been neglected although the importance to the issuer’s financial performance has increased. 

Convoke brings the credit card debt industry into the 21st century, offering technology sorely needed to the debt buying / selling community and transparency to the consumer.  Replacing the manual, labor intensive task of physically printing and mailing account-level information (called media) with an electronic system, Convoke saves both debt sellers and buyers money and increases collections rates.  It’s dark ages no, more with the typical 3-6 month media lead time replaced with media on demand thanks to SaaS.

We’re really excited by the opportunity facing Convoke.  Besides bringing efficiency to a historically inefficient market, Convoke also has regulatory wind in its sails.  Legislation mandating that debt collectors possess detailed account information before collecting on debt first went into law in North Carolina in the fall of 2009 and has since spread to a number of other states.  The regulatory pressure is also being felt at the Federal level as well, with the US Government Accountability Office recently releasing a report highlighting the same issue and the Consumer Financial Protection Bureau taking note.  And for good reason - courts are backed up with collection trials and consumers are frequently confronted with confusing, misleading and incorrect information.

So can a boring, back office task with antiquated technology be revamped by a VC backed company who looks at the problem from a document management and data aggregation lens?  We hope so.

I’ve been meaning to blog about something I read in Gary Rivlin’s excellent new book, Broke, USA.

Products that aren’t intended to be used for extended periods of time have frighteningly high costs when used for lengthy periods.  The most commonly criticized examples of this are payday loans, where a $100 loan that costs $15 if paid back in two weeks amounts to an APR of 390%.  That means that if you kept that $100 out for a year at the end of it you would owe $390.

Payday loans are not the only example of this phenomena, however.  How about these examples:

a) a rental car in Boston would cost $25,904 if you rented it for 365 days.  Financing the same car for a year would cost $4,116.

b) a hotel room in New York would $118,022.75 if you stayed there all year.  Renting an equivalent sized apartment would cost you $22,440 ($26,964 if you include weekly housekeeping).

c) a jet ski rental in the Caribbean would set you back $876,000 if you wanted to rent it for the full year.  A new jet ski retails for $7,299.

When the cost of short-term products are annualized, many seem criminal.  Consensus is that the newly minted Consumer Financial Protection Bureau will have short term loans in its crosshairs.  I’m hoping they go after jet ski rentals next.