Bits of Cents

As I continue to spend looking at investing opportunities in the education space, I can’t help notice the number of online class companies out there.  By my (highly unsophisticated) count, I can learn some variety of basic computer programming from at least 12 online sources*.

This observation has led me to what, on the surface at least, is a controversial statement: in the next 5 years, educational content will be a commodity.  The thinking is that if we’re this early in the development of Education 2.0 and I can already learn programming from more than 12 sources, it’s only a matter of time before I can learn that same skill from 2x those providers.  The content creation bar has been lowered sufficiently to enable almost any expert to post course content of reasonable quality.

While a controversial argument, I would propose that this happens all around us in education already.  What is one common feature between Biology classes at Harvard and Fullerton College (a 2 year junior college in California)?  Both use the exact same “Invertebrates - Second Edition” textbook.  The perceived value that Harvard is able to capture over Fullerton is not in the content they use, it’s in how they deliver that content.  It’s in the perception that Harvard teachers are more skilled, that their facilities are better equipped, that their students are more engaged and that the learning done in their classrooms is superior.  It’s not that they use special Harvard text books.  In an online world with 100’s of “Invertebrates - Second Edition,” the value captured by the content producer quickly erodes.

This hypothesis has been influencing my thinking as of late.  If content is a commodity, the value won’t be captured by the course creators of the world but, rather, by companies who build interesting tools, features and services on top of any content to deliver a superior learning platform that results in higher outcomes.

*In no particular order: Treehouse, Codecademy, Udemy, Udacity, Coursera, Khan Academy, Mozilla Webcraft, Google Code, OpenCourseWare, Bloc, Programr, Code School

For the past two years, I’ve been commuting to New York 2-3 days a week nearly every week.  I’ve accumulated more airline miles in 500 mile segments than should be possible.  I know precisely how to time my airport arrivals such that I can go through security and walk immediately on the plane.  I’m on a first name basis with the staff at my favorite hotel (hi, Evan).  But this month all of that changes: I’m officially moving to NY.

NY has been top of mind for us at Flybridge since before I started in 2008 and over the past few years, as the New York entrepreneurial community evolved, the city has captured an increasing amount of our mindshare.  Our New York-based deal flow has increased 50% per year for the past three years, there were two investment professionals in the city at least one day a week on average, and we brought on a great advisor in Nate Westheimer.

The burgeoning New York entrepreneurial scene combined with our increasing focus on it resulted in a growing portfolio there.  We are now investors in three NYC-based companies (10gen, 33Across and Tracx), exited a portfolio company based there last year (Jingle Networks) and a significant portion of our portfolio companies have a presence in the city.

In January we reevaluated our New York strategy and determined that given all that we are seeing in the city, it only made sense to have an increased presence there.  It’s one thing to be a bridge-and-tunnel investor who visits a few times / week and another to be a NY-native one.  Therefore, starting in the spring we set up a New York office and began staffing it.  Along with my colleague, David Aronoff, who became a New Yorker again a few months back, we decided that I would move down full-time once my wife finished law school and that we would add a New York-based associate (who I’m excited to say is Caitlin Strandberg, a absolute rockstar who we couldn’t be more happy to have on board).

The move to NY is not only a statement on Flybridge’s behalf that we anticipate New York companies to be a bigger portion of our portfolio going forward, it’s also a statement on my personal conviction around the NYC entrepreneurial scene being here to stay - I’m betting my career on it to some degree.  I was not involved in VC during the previous NY tech boom that ultimately resulted in a bust but, from what I can tell, this time around is different for a few reasons.

• There’s broad entrepreneurial support - From Mayor Bloomberg to Cornell to General Assembly, there is wide-ranging support and positive awareness around the NYC entrepreneurial community.  This support will facilitate its growth not just in the near term but for years to come.
• Large, California-based tech companies are establishing a major NYC presence - The fact that Google, Facebook, Ebay and Twitter have thousands of employees in major offices across the city shows that the New York sales outpost of years past is actually becoming a second headquarters of sorts with engineers, sales, marketing, management and support staff.  Not only does this mean that there will be more technology professionals who have a chance to build a career in New York, it also means that a whole new crop of entrepreneurs have the chance to get trained by some of the leading technology companies right here in New York before starting new companies.
• We’re seeing NYC-based companies emerge as tech leaders - NYC is home of 10gen, Fab, Etsy, Kickstarter, Gilt, Makerbot, 2Tor, On Deck Capital, Zocdoc etc, etc.  The list really does go on and crosses a wide variety of verticals.  Not all of these companies may turn out to be magnificent successes but all are on path and have the chance to be the premier tech companies of the next 10 years.
• The entrepreneurial community is incredibly networked and supportive - It has been incredible for me to see just how welcoming the New York entrepreneurial community is.  It’s the opposite of a cut-throat, competitive, secretive culture; it’s collaborative with even the highest profile entrepreneurs willing to help out and further grow the scene.

So I’m a believer.  I’ve drunk the Koolaid, placed my bet and am excited for this next chapter in my life, even if it means I won’t be hitting airline status anymore.

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.