Early Stage Fintech Investment Thesis (Sept 2016)

Earnest Sweat | 2016Prospective Venture Capitalist

[email protected]

InvestmentThesis&Opportunities

FINTECHThe Big Idea

The internet has shifted the way individuals view finances & mandatory features for the banking experience. This trend coupled with rise in user generated data creates a unique opportunity for Fintech solutions that can provide customized products & secure transactions to digital natives.

Virtual banking is driven by consumers’ expectations & a digital approach is mandatory for financial institutions wishing to compete. Over 60% of all 18-44 year olds use mobile banking & this trend 24/7 access is expected to grow. Banks have typically pushed what they believe customers want.

Advances in data analytics creates opportunities for institutions to improve operations by anticipating customer behavior & customizing product offerings. Tools that shift raw data to structured data—including new types of data–consumers & businesses could be advised real-time at point of sale.

Increase in access opens up data breach risks & this is evident with over 500M financial records hacked in 2015. After the financial crisis, consumers see most value of banking in transactional trust. Security & blockchain tools will become much more valuable to protect & speed up settlements.

Source:GOBankingRates;PWC;Frost;CityAM.

This Thesis is Predicated on 9 Assertions

• The accessibility and power of computing has increased, while cost has declined thanks to services like Amazon’s AWS.

• Spread of mobile has given rise to large amounts of user-generated data and security risks.

• This data can be highly revealing to financial health.• Inefficient financial services can be very expensive to banks, lenders, and

consumers.• Better data can be utilized to match consumers to more ideal products/services,

leading to better ROI for financial services companies.• Customized products for consumers are in the fiscal interests of banks, lenders,

and credit unions.• The infrastructures to deploy such technologies have been established.• Consumers desire a balance of automated and human interaction for their

services.• Incumbent financial services firms, are larger, slow-moving companies that are

data deficient and thus vulnerable to disruption.

Therefore, there is a tremendous investment

opportunity in early-stage startups addressing needs of

new financial consumer—providing customized &

secure products.

FINTECH

Consumer Preferences are Driving Disruption Opportunity

The emergence of mobile banking amongst Gen X & Millennials directly correlates with the mostly likely disruption targets (consumer banking & payments)—which suggests the Fintech sector is at a technological tipping point.

FINTECH

Thesis Definition

This thesis defines Fintech as intersections of user-generated data, analytics, specific marketplaces & security tools that provide consumers access to customized financial products or secure transactions.

Technologies that abide by this definition may be mobile banking or payments tools, data analytic platforms, marketplaces, and security solutions that address the fast paced needs of the digital native consumer. For instance, Abra has built a mobile P2P transaction platform on top of blockchain technology. Users can now transfer funds through their app to another user by only entering a phone number.

FINTECH

Consumers are more open to new relationships that are focused on origination/sales—the focus of fintech startups—which generates 60% of global banking profits.

Advanced analytics offer transformative potential to predict “next best actions,” understand customer needs, & deliver financial services via new mechanisms ranging from mobile phones to wearables.

In a world where more than 90% of data has been created in the last 2 years, fintech data should lead new products and services, delivered in new ways.

Data in Banking will Improve Operations & the Consumer Experiences

Source:McKinsey2015GlobalBankingReview.

FINTECH

Consumer Preferences Require Advanced Security Tools

Source:BusinessInsider;AllegisCapital.

Mobile technology has created numerous opportunities for growth & innovation within the Fintech sector. Many consumers enjoy signing up for Fintech solutions because they are easy to use & provide more choice.

But the proliferation Fintech products increase the chance of risk of data breaches. This calls for an improvement of authentication, security, & fraud analysis solutions. This is needed to address the 4x growth of cyber breaches of the last 5 years.

Banks see the need to address breaches given the anticipated 37% growth in enterprise mobile security budgets. Advancements made in machine learning, analytics, artificial intelligence & blockchain, has potential to secure the transactional trust banks need to maintain.

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Value Proposition

The value proposition of this thesis can be defined by access & actionable analytics, wherein data offers guidance on customized products, acquisition of customers, & security verification.

As an example, Bee Bank offers online banking services meant to

replace traditional checking accounts & help people with low incomes pay less for costly fee-

driven services.

While Tala offers a smartphone app for potential borrowers to download. Tala accesses data through the app to determine

their credit-worthiness.

Lastly, Trust Stamp creates a user-initiated, digital identity complete with a color-coded

Trust Score, which is a fraction of the cost of a 3rd party

background check.

FINTECH

1. Banks respond to regulatory change constantly, tying up capital. Customer

expectations are growing exponentially causing banks to become more efficient at

their business right as it changes.

Investment Conclusion

2. Traditional banks lack the internal expertise to create tools that leverage data

& speed up settlements; need tools that suggest optimal products & marketing for

certain market segments.

I believe that the success of fintech startups will be a function of their analytic capabilities, as opposed to online access to traditional banking products. Last decade’s unbundling of the traditional bank has created a crowded Fintech market.

Yet the big data analytics strategies to create optimal products for specific market segments & cyber verification tools remain integral, and a function of an impressive founder’s execution. These factors should be evaluated thoroughly during due-diligence for early-stage Fintech startups.

These two conditions (on the right) present a tremendous opportunity in financial technology.

Key Market Conditions

FINTECH

Abra,Bee,Tala,&TrustStamp

StartupsofInterest

Significant Achievements & Opportunities: Users can fund their Abra wallets (through the app) immediately with their bank accounts, & send money completely free by just entering a phone number. The startup plans to use the Series A raise to expand to 20 countries by 2017.

Mobile P2P payments will grow to $174B by 2019 & 30% of P2P volume will be paid via mobile, up from 1% in 2015.

Abra

Investment Conclusion: This information is sufficient to prompt informal due-diligence.

Overview: Abra is the world’s first digital cash, peer to peer money transfer network. Abra Tellers represent a global, shared network of consumers helping each other easily deposit & withdraw cash. https://www.goabra.com/

Total Financing: Have raised $14M in total over 3 rounds. The latest was a $12M Series A, September 2015, led by Arbor Ventures. Investors include Blockchain Capital, RRE Ventures & First Round Capital.

Traction: Offered in the Philippines and expanded into U.S. in late 2016. The company generates revenue by charging a .25% fee to a user whenever they transact with an Abra Teller. Have tellers signed up in 80 countries.

Founder: Bill Barhydt (CEO, Founder, [email protected]). Serial Entrepreneur, Startup Investor, Goldman Sachs. New York Institute of Finance.

Source:Crunchbase;TechCrunch; CompanyWebsite;BusinessInsiders.

FINTECH

Significant Achievements & Opportunities: Provides accounts that allow customers to access money anytime and anywhere, use their smartphone to deposit a check, setup a direct deposit with employer or benefits provider, deposit cash at many major retailers, pay bills, mail checks & ATM locations.

Almost 1,900 bank branches closed in the U.S. in the years after the financial crisis between 2008 & 2013. 93% of the closures occurred in postal codes that had household income around or below the U.S. median.

Bee


Overview: Mobile banking solution for urban consumers that provides low-cost convenient services directly from the mobile phone. Touch points include stand & truck-based branches. http://www.beecard.us/

Total Financing: Has raised over $4.6M over 3 rounds. The investing group includes Blumberg Capital.

Traction: Currently operating in the Greater NYC & San Francisco/Oakland markets. As of December 2015 Bee had over 3,200 customers (this was before the expansion to the Bay Area).

Founder: Max Gasner (Head of Product, Co-Founder, [email protected]). Serial Entrepreneur, Data Scientist, Stock Trader, University of Chicago BA.

Can make personal intro to Co-FounderSource:Crunchbase;CompanyWebsite;USCensus;Finsmes.

FINTECH

Significant Achievements & Opportunities: On loans that average $50 with an interest rate of 11%, Tala has logged a repayment rate of better than 90%. The startup is gathering data directly from its customers rather than working with third parties, like in the U.S.

There are 2.5 billion people around the world who are underserved and there’s a $31T unmet need for credit, according to the World Bank.

Tala

Overview: Tala is an innovative, fast-paced mobile technology start-up, that provides a credit scoring and reporting platform to financial services institutions in emerging countries. http://tala.co/

Total Financing: Have raised $11.2M over 3 rounds. The latest round ($10M Series A in September 2015) was led by Collaborate Fund. Other significant investors include GV & Data Collective.

Traction: Has loaned almost $20M to more than 150K people. On revenue of $1.5 million in the 2015, it had a profit of more than $500K. Tala uses user generated data from their mobile app to determine their Kenyan customer’s credit worthiness.

Founder: Shivani Siroya (CEO, Founder, [email protected]). Credit Suisse, United Nations, Citigroup, Columbia MPH, Wesleyan BA.

Source:Crunchbase;TechCrunch; Forbes;CompanyWebsite.


FINTECH

Significant Achievements & Opportunities: Uses over 200 public records and social data to provide reliable ID verification in under one minute for financial advisors or real estate agents meeting new prospects or clients. Trust Stamp is a Global Entrepreneur Partner of IBM from whom it has received $120K of in-kind funding as well as a Microsoft supported Biz spark Plus startup.

The cyber security market is estimated to grow to $170B by 2020, at a CAGR of 9.8%.

Trust Stamp

Overview: Guards against identity theft & friendly-fraud by providing a secure digital token & objective trustworthiness score using patented algorithms & AI resources. http://www.truststamp.us/

Total Financing: Have raised $1.3M in total over 3 rounds. The latest was a $1.1M Seed, September 2016, led by Second Century Ventures.

Traction: Currently offered for US Marketplace use as a web application. Anticipates international, iPhone & Android app scheduled for early 2017.

Founder: Gareth Genner (COO, Co-Founder, [email protected]). Serial Entrepreneur, Educator & University of London JD.

Source:Crunchbase;TechCrunch, CompanyMaterials,Markets&Markets;CompanyWebsite.


Can make personal intro to CEO

FINTECH

MyBestBox &OffrBox

Non-Fintech Startups

Significant Achievements & Opportunities: MyBestBox has built their own end to end fulfillment center (warehouse). Has establish a partnership with Arianna Huffington that features products that promote healthy sleeping. The team is currently their data-driven curation algorithm that will select products.

The current online health & wellness market is valued at $40B & is expected to grow at a rate of 13% annually until 2020.

MyBestBox

Overview: A lifestyle brand that helps people jump-start & maintain healthy lifestyles. The startup assembles boxes with essential, high-quality products through a platform that leverages machine learning. http://www.mybestbox.com/

Total Financing: Has secured $130K in pre-seed funding, including $125K (non-equity stake) from Accelerate Baltimore. Currently raising their $1M seed round.

Traction: As of September 2016, the startup earned $43K in revenue from 120 subscribers. Have also established 30 brand partnerships including Uber & Roundstay.

Founder: Fatima Dicko (CEO, Founder, [email protected]) Sr. Engineer on P&G Innovation Team, Columbia Chemical Engineering, Stanford MBA.

Source:Crunchbase;CompanyMaterials.CompanyWebsite.



FINTECH

Significant Achievements & Opportunities: Offrbox has obtained SLAs with numerous conferences, association influencers, funds & strategic partnerships including the Real Estate Investment Association & Silver Bay.

The total value of U.S. residential homes equals $28T. There are 105M homes in the U.S. & 5M are sold each year. There is a lack of transparency & access during the home transaction process.

OffrBox

Overview: Platform empowers buyers & sellers of residential investment properties to search, make offers, and close transactions in a few clicks. https://offrbox.com/

Total Financing: Have raised $500K in seed capital (July 2016) from two angel investors.

Traction: Since the beta launch in July 2016, the platform has over 1,400 properties in 43 states with a market value of $50 million featured. Over 2K users have browsed the site & over 4K are subscribed to the startup's email list.

Founder: Eric Andrew (CEO, Co-Founder, [email protected]). Real Estate Professional, Auction.com, Goldman Sachs, & Columbia BA.

Source:Crunchbase;CompanyWebsite.



FINTECH

AMMoney

FrontierInvestmentOpportunity

Significant Achievements & Opportunities: Recently participated in the Google for Entrepreneurs accelerator program.

High-potential, low-income college students have acute credit needs, but lack access to fairly priced options. Traditional institutions underestimate long-term value through transactional engagement because they only see this market segment value as a few hundred dollars.

AM Money

Overview: Provides users fairly priced financial services & long-term value when & where other financial institutions won’t. Will operate financial service centers that offer products designed specifically for younger, lower income customers with limited exposure to the formal financial system.

Disruptive Potential: More than 2M customers under the age of 35, who at one point in time, spend approximately $3500 per year on financial services.

Product Features: Startup offers preventative & remedial products to serve our customers’ needs. Offerings include saving account that enables consumer to take out 2x the amount saved in a form of a loan. Also will over a below market rate emergency loan product. Will eventually micro-segment consumers through data analytics.

Founder: David Osei (President, Co-Founder, [email protected]) McKinsey & Co, Michigan JD, Chicago Booth MBA.

Source:Crunchbase;CompanyWebsite.

Although it is too nascent a venture to be investable at the moment, AM Money’s future remains promising.

Can make personal intro to Co-Founder

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Conclusion

The future of Fintech is at an exciting point. I hope our paths intersect in the future to build companies that change the way consumers conduct

transactions & settlements for the next 30 years.

LinkedInFor more context on my academic

and professional experience, please check out my profile here.

MediumI have written about my Fintech

investment thesis & provided advice for founders. Check out #ReadingEarnest here.

TwitterI have microblogged & shared

articles on events impacting the Fintech sector. To stay informed

please follow me here.

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Technology

Early Stage Fintech Investment Thesis (Sept 2016)