Confessions of a FinTech Junkie

Being a Venture Capitalist has its ups and downs.  If I do my job well, the advice I give to one of our portfolio companies will have an impact on their results but it will typically evidence itself well down the road.  So when “events” occur, they help define progress and reinforce that the time being poured into a company is well worth it.  When one of QED’s companies crushes its numbers I can’t help but get excited.  I smile inside when a new product is launched that we worked on together and the early results are everything we hoped for and more.  And I can breathe easy when a funding round is closed knowing the management team can finally leave fundraise mode behind and get back to building the business.

But there’s also that magical moment when I hear a pitch from an Entrepreneur and everything (s)he says just makes sense.  The opportunity (s)he is chasing is large and obvious, the business model that’s been assembled is elegant yet simple, the business’s acquisition strategy has a built-in structural advantage, the team is chock full of talent, and the back and forth dialogue makes me feel like I’m destined to become best friends with the Founder.  Given that half of a typical Venture Investor’s job is looking for the next company to invest in, it’s nice when a Picasso is discovered at a Yard Sale! Unfortunately the opposite is more common.  Much more common.  MUCH MUCH more common if I’m being honest.  And as a result there are days that aren’t fun at all.  In fact, there are weeks, sometimes months that aren’t productive on the deal sourcing front which makes the discovery of a gem that much more exciting.  Which leads me to this blog.  The next few posts are going to be a tribute to a handful of the common mistakes I hear and bad conversations that I suffer through daily.  From me to you — enjoy.

Common Mistake #1 – Fishing in the Open Waters of the Internet

Here’s an example of a typical conversation that drives me crazy:

Me: “How are you planning on acquiring customers?”

Founder: “We’re going to use search and adwords”

Me: “Ummm…..anything else?”

Founder: “Not for a while.  We know our customers are shopping for products like ours online so we’re going to go where they are.  Partnerships aren’t in our control and Partners won’t move as quickly as we want to anyway.  Partnerships are hard work.”

Me: “Aren’t the big guys already spending a lot in these channels?”

Founder: “Sure, but we’re going to out-market them.  Our team has built businesses in the past that rely on search so we’re confident we’ll hit our acquisition cost targets.”

Me: “Um….Doesn’t adding another player to the search ecosystem just increase everyone’s costs?”

Founder: “It will for the competition because they’re not as good as we are”

Me: “Can I have the last 30 minutes of my life back please?”

Founder: “No.  We booked an hour with you and we’re going to use it.”

Me: “Sigh.”

I hope the kind reader understands that I’m not saying that these channels aren’t productive and can’t be optimized.  What I am overstating to make a point is that fishing in the open waters of the internet is an arbitrage play that does not create sustainable advantage.  Each new player that buys a particular keyword marginally increases the price of the word for everyone downstream from them.  The choice is to pay a little more to try to re-gain their lost ground or be relegated to a lower position in the food chain.  Google extracts additional rents when competition heats up and the average all-in economics of the space get worse for everyone using them to acquire customers.

So what can you do to create sustainable advantage?  There are many ways to square the circle but one of my favorites is to fish in a pond where you have the only rod.  This way, when a fish gets hungry it only sees one worm which means only one fisherman captures the prize.  The fisherman might have to wait for a nibble, but if the pond is large enough there will be enough fish getting hungry on a regular basis for the fisherman to make a good living.

An example of this in practice is a company in QED’s portfolio – ApplePie Capital (APC — http://www.applepiecapital.com).  At its core (pun intended), APC is a SMB lending company that specializes in funding remodels and new starts in the Franchise space.  APC has tailored their customer experience to wow both the owners of the parent Franchise Brands as well as the Franchisee applicants.  They’ve taken the time to understand the cash flow needs of Franchise owners and have tailored loan products that work for their specific needs.  And the CEO (Denise Thomas – a rockstar!) knows how to sell Franchise Brand owners on the value of partnering directly with them vs. allowing their potential new Franchise owners to pursue other sources of capital. The result is a business that has zero marketing costs.  Zero.  Yes there are sales costs but selling into a Franchise is typically a one-time cost and once APC becomes better known in the industry their Sales cycle will collapse.  Brands will seek them out rather than the other way around.  And over time a wonderful thing will start to happen —- applicants will show up with increasing frequency as the pond they’re fishing in grows with every additional Franchise that’s added to their mix.

The moral of the story is simple: While having a great product is an important step in building a great business, knowing how you’re going to build awareness for your product is equally important.  Without a well articulated marketing/channel strategy that has a fighting chance at creating sustainable advantage you might as well add a slide to your pitch deck that says “my marketing costs are going to start out high and increase over time.”