Broken Isn’t Always Bad

I’m broken. Broken with a capital B. The type of broken that can’t be fixed. Humpty Dumpty had it easy compared to my type of broken. I’m FUBAR broken (look it up) and it’s taken me decades to come to terms that there’s nothing I can do about it.

But instead of starting with the conclusion, I’ll do my best to explain what led me to accept my brokenness by sharing how I discovered I was broken in the first place.

Evidence: School

When I was a kid, it was pretty clear to my parents and teachers that I was pretty bright.  On the smart/not-smart scale, I definitely fell on the smart side of the distribution. In fact, in a variety of subjects, the teachers didn’t know what to do with me because I took it upon myself to learn the subjects on my own (I think I consumed the entire 3rd grade math textbook in about a week which frustrated my teacher). But, I wasn’t uniformly good at school. In fact, there were times it was clear to me that our homework assignments were near impossible and I didn’t understand how my friends were able to cruise by with no problems whatsoever.

For instance, in 7th grade History class, over a series of weeks, continent by continent we had to memorize the names of all the countries and their capitals and be able to write them on a blank map when tested. I can’t even describe the painful hours of study I put in only to wake up the day of the test only to have forgotten everything I thought I had learned the night before. Week after week when a blank map was put in front of me and the teacher said “begin”, my heart started to race and on a good day I would write down about half the required information. If it hadn’t been for a deal I cut with the teacher to do extra-credit work I would have failed the class. Instead, I pulled out a “B”.

Memorizing lists of vocabulary words in 9th grade English – the same.

3 years of French class – even worse. In fact, I wanted to die every time I walked into French class for fear of being called upon to go to the board and show my ineptitude in front of all my friends.

But Math was different. I completed 3 years of calculus and linear algebra before graduating high school and ended up helping the advanced math teacher teach the other students.

And 11th and 12th grade English was also different. We read books and wrote papers and I found myself writing papers at such an advanced level that one of my teachers accused me of plagiarism which turned into a big stink with my dad (he was an English teacher that put 33 years into the school system and turned me into a reader). He backed me of course and chastised the teacher for not doing her job. Yay dad!

Why the differences? At the time I didn’t understand but now it all makes sense.

Evidence: Directions

Anyone who knows me quickly learns that everywhere I go I’m completely lost. And by lost, I mean LOST. Like most teenagers, I went shopping at the local mall, but what amazed my friends was that I’d get very confused when I walked out of a store. I didn’t know which direction we had come from or where the next store that we wanted to go to was in the mall. And it’s not like we only went there occasionally. I worked there for a while selling pianos, keyboards and organs.

I also only knew one way to get from my house to the high school. I only knew one way to get from my house to my best friend’s house. And I couldn’t figure out how to get from the school to my best friend’s house without going back to my house and using it as a starting point. My best friend called me Monopoly Boy because I had to “pass Go” in order to get anywhere. I couldn’t connect the dots.

Evidence: College

Even with all the typical distractions of college somehow I never lost my thirst for reading. In fact, there was a period where I’m pretty certain I read a book every other day for the entire school year (which was possible because I only slept 4 hours a night). My choice in books was always topic driven, and there was one period in particular that I just couldn’t get enough of the beat writers. The beat writers led me from the 50s into the 60s and naturally I found myself reading books about or by Timothy Leary, The Merry Pranksters, Neal Cassidy, Alan Watts and Ken Kesey among others. They described their drug fueled lives and escapades in many ways, but I recall reading a description that stuck with me because it made no sense. Ken Kesey said that he was happiest when he was “living in a waking dream”. And given the amazing things he saw and places he went and experiences he had I couldn’t help but fixate on his description of pure joy. I thought about those five words a lot because it occurred to me that I couldn’t recall the last time I remembered a dream. I knew what dreams were, but I couldn’t recall one. None. This realization actually shattered me and made me want to do something about it.

Broken is Broken

The above stories might be amusing to you (especially those of you who know me well) but they made my childhood difficult. I can truly say that I obsessed over my situation until I finally figured out what was wrong with me. The epiphany came late in my college career with the help of one of my Professors (an AI teacher) who pointed me in the right direction and helped me come to grips with what I discovered. What I figured out was that I definitively have a condition called aphantasia (it was only named recently which made my research tricky). Simply put, if you have aphantasia you don’t possess a functioning mind’s eye and cannot voluntarily visualize imagery. It’s been around and described in psychological texts and journals for quite some time (it was first described by Francis Galton in 1880) but it’s been mostly ignored for the past 100+ years until Professor Adam Zeman renewed interest in the topic with a series of scientific studies that are still ongoing today. In 2005, Professor Adam Zeman developed a test that he named the Vividness of Visual Imagery Questionnaire (VVIQ) which has since become the most commonly used evaluation tool regarding a person’s quality of mental imagery. The questionnaire invites the test taker to visualize a series of images and rank how vivid the images are, from “Perfectly clear and lively as real seeing” (5 points) to “No image at all, you only know that you are thinking of the object” (1 point). A person is categorized as having aphantasia if they total 30 or fewer points after being asked 16 questions. I’ve taken the test twice and scored precisely 16 each time. Basically, I’m visual-memory blind as a bat.

And to make matters worse, while some people with aphantasia can “see” involuntary imagery in their mind’s eye (i.e. – dreams), I can’t. I don’t recall ever having a dream in my life, so I’m dream blind as well. Joy to the world!

It explains my schoolhood failures because they all required visualization skills that I didn’t possess. When I close my eyes I see blackness. The big nothing. But for most people memorization is a visual act. And recall is highly visual as well so even when I jammed something into my memory, getting it out wasn’t a trivial act. I don’t have a map in my head. I can’t close my eyes and just “see” or “replay” something from my past. And I can’t count sheep to go to sleep unless they’re black sheep covered in ink swimming in oil in the middle of the night with no stars in the sky.

So why am I telling this story about myself and how does it relate to building businesses? I’m telling my personal story because I don’t think most Investors realize that sometimes there are aspects of people that are broken and can’t be fixed. I can’t tell you how many times I was told “study harder” or “you’re not paying attention”. And I did study harder and I did pay attention more and it didn’t make a difference.

Many of the Founders we invest in are highly functioning broken people (I’m one) and the last thing we should do as investors is insist on some form of “try harder”. Instead, we should focus on figuring out their strengths and surrounding them with people who can expertly fill in their gaps. If a Founder is brilliant on certain dimensions but falls short on others, the first thing that you as a coach and mentor need to determine is whether or not the Founder has the ability to fix his or her shortcomings. I’m of the personal belief that it’s OK for the answer to be “no”. It might be possible to help them improve a little or a lot, but there are times when there is a true inability to change. And in these cases, the worst thing to do is to insist on change that won’t manifest no matter the effort. There’s no reason to declare the Founder incompetent without finding other people who can be complementary and create a collective win.

It’s also critical to realize that when you give feedback to a Founder all you’re trying to do is turn them into you. You project yourself into their shoes and through feedback outline what you would have done if you had been faced with the situations that they had encountered in the past. But you aren’t them and they aren’t you. And if they’re fundamentally broken on a dimension then your feedback might be inactionable. Don’t try to turn them into you. Instead, help them become the best version of themselves that they can be. But doing this requires putting in the time and effort needed to build a strong relationship grounded in trust. It requires being empathic to others’ shortcomings. And above all it requires believing that it will all be worth it in the end.

I’m a highly functioning broken person because I have GPS in my car and on my phone. For what it’s worth, I’d make a lousy tour guide and an even worse crime scene witness. But fortunately I have people around me who understand my short comings and aren’t asking me to change. I’m broken but haven’t lost sight of the fact that things have worked out just fine for me (even though dreaming sounds fun……)


Three Is A Magic Number

For those of you who had the privilege of growing up in the ‘70s, you’re probably familiar with the amazing Schoolhouse Rock videos that were sandwiched in-between various cartoon and TV shows on Saturday mornings.  These videos taught kids of the ‘70s about grammar (Conjunction Junction), science (Interplanet Janet), history (I’m Just a Bill) and math (My Hero, Zero).  But I have to admit, my favorite of the 40+ short videos/songs happens to be the first one ever recorded (Three Is A Magic Number), and as crazy as it sounds, the song still runs through my head more frequently than you’d expect.

(Have a look/listen if you’re curious:

Three also happens to be a magic number in designing a perfect business model.  I’ve found myself time and time again asking about the same holy trinity of building blocks that define a business.  When all three building blocks come together and work in-sync, amazing things can happen.  When one building block is missing or yet to be cracked, I can’t help but feel uneasy and uncertain about the future of the business.

What am I looking for?  In it’s most simple form, the business trinity that I obsess about is:

Product: Does the product seamlessly solve a profoundly painful problem through a process that’s intuitive and requires little/no guidance?

Pricing: Is there enough revenue to generate attractive returns while simultaneously seen as a bargain by the target audience?

Channel: Is there a channel of distribution that densely contains the target audience and through which awareness can be built at an extremely low cost?

These might seem like obvious criteria to an outsider, but I can truly say that only a fraction of a fraction of businesses that come across my desk can satisfy the business trinity.

To call out a few specifics that help explain the “why” behind my obsession:

  • If a channel is chock full of prospective customers then the dollars that are put into the channel to build awareness educate the right audience.

The result: A high awareness/marketing dollar ratio

  • If a prospective customer is experiencing a painful problem they’re motivated to solve it. There’s no such thing as inertia when it comes to pain so more times than not a prospective customer is thrilled when a solution is presented.

The result: A high consideration/awareness ratio

  • If a prospective customer thinks of the solution as a bargain then pricing no longer becomes a barrier to the purchase decision.

The result: A high adoption/consideration ratio

What I can say is that when the business trinity comes together it’s almost a thing of magic.  Growth is bountiful, happy customers come naturally and profits roll in.  Check, check and check!

A perfect example of this is a company that QED is helping build in the UK called Wagestream (  They’ve created a solution that allows employees to gain access to earned wages in advance of their next payday.  The concept is simple and with 100% certainty satisfies the business trinity.

Product: Does the product seamlessly solve a profoundly painful problem through a process that’s intuitive and requires little/no guidance?

  • 55% of UK families can’t cover a £250 unplanned expense
  • In the UK, 85% of employees are paid once a month
  • Using Wagestream, an employee can launch an app on their phone and with a single click of a button they can see and access earned wages in advance of their next paycheck

Pricing: Is there enough revenue to generate attractive returns while simultaneously seen as a bargain by the target audience?

  • Wagestream is not a loan. No interest, no penalties, just a flat fee of £1.75 regardless of the amount being requested.
  • In comparison, a typical payday advance in the UK costs £15-£25 for every £100 borrowed per month

Channel: Is there a channel of distribution that densely contains the target audience and through which awareness can be built at an extremely low cost?

  • Employers are the natural distribution channel for the Wagestream solution. They’re willing to build awareness for the product at their own expense because it solves issues both for them and their employees.
  • Based on a 2016 PWC survey, employees who are stressed about finances are five times more likely to take time off work to deal with personal issues
  • According to the same survey, 46% of employees spend 3 or more hours a week at work dealing with financial issues
  • US firms that implemented a similar model saw a 41% reduction in staff turnover from hourly employees and US firms typically pay their employees twice monthly vs. once a month in the UK

And when all aspects of a business align, everyone seems to notice.  Wagestream has already been able to align with amazing distribution partners like Fourth (the leading global software provider for the leisure and hospitality industry) because the Wagestream solution just makes sense.  It scratches the macro-itches of transparency and immediacy that consumers demand from just about everything they do in life.  Providing a real-time view into earned wages and the financial freedom to choose when and how to get paid modernizes the relationship between employers and their employees.  Employees will have less stress, be more productive, improve their service levels and stay longer with companies that offer this freedom.  Everyone wins.

Wagestream - Product Example

Product, pricing, channel.  The business trinity at work.  In full disclosure, Wagestream is still a very young company but QED’s expectations for the business are high and early results confirm our thesis that the product sells itself.  So if you happen to know decision makers at UK based companies feel free to send them my way (or point them directly to the company).  And the next time you stare at a business opportunity, I hope you start humming “Three Is A Magic Number” to yourself…..

Additional Thoughts on The Copernican Revolution in Banking

I write because I like writing.  Putting words to paper (if that concept exists anymore) is very cathartic and a way of extracting nagging stories and concepts from my head and etching them in stone (if that concept exists anymore).  The process of writing helps crystallize half-formed thoughts and sharpen them until they can stand alone and defend themselves in a highly critical world. And occasionally the end result isn’t half bad and outsiders “get” what I was trying to throw down.

Given the active dialogue that’s surrounding the last piece I put out (The Copernican Revolution in Banking) I feel like it struck a chord with the Banking and Fintech communities.  The concept now has a life of its own and I can’t control where it goes from here.  I’ve personally been contacted by a handful of Banks, Fintechs and Investors with questions about the piece and have been more than happy to discuss my thesis and observations in more depth.  But, at this point the community knows as much as I do and should help evolve the framework from here.

With this said, I do have a few additional thoughts/nuances worth sharing.

Leverage Matters

I fully understand that comparing the ROE of Banks pre-crisis and post-crisis isn’t entirely fair because of the massive reduction in leverage in the system.  More leverage leads to higher beta and therefore should command higher returns when times are good. Less leverage creates more stability and therefore the expected returns should be lower.  On a risk adjusted basis the pre and post-crisis returns aren’t as far apart as the graph suggests but the net result is the same —— most Banks aren’t able to overcome their true cost of capital and produce economic returns for their shareholders.  This is the foundational problem that needs to be solved and Banks need to find a way to overcome the additional weight put on the system through the increased capital required by the Regulators.  Think of it as a piece of the explanation but by no means should it be an excuse.  The rules have changed and the Banks have to find a way to win in the Brave New World.

Non-Bank Partnerships

There’s plenty of recent “breaking news” about how some of the notable tech brands are looking to partner with Banks to deliver Banking services to their customers.  A question I was asked by multiple very seasoned Banking Executives who understand the dynamics of partnerships is “who the heck would want to win the Amazon teen checking account deal?”  By this they mean that in a competitive bid situation, isn’t the winner really the loser because all the economics have been stripped out of the system by the pretty girl at the dance?  There’s a lot of truth to this statement and having managed many partnerships in my 25 year banking career I would caution any Bank trying to win this or other similar contracts to be very careful.  Winning a high profile deal that has no economic juice in it is a great way of destroying shareholder value unless it serves a longer-term purpose and is structured very carefully.  For instance, scale matters in many businesses and sometimes a single anchor customer can help a service provider achieve scale instantly.  If the Amazon relationship is a justification to create a service that can be offered to other customers (Banks and non-Banks) and helps drive costs down, economic returns can be generated from the customers that come next.  And, checking accounts are extremely sticky so if the contract allows for a renegotiation of terms in the future the power will shift to the Bank if there’s a large embedded base of customers who are being served well.  Most happy customers won’t want to move their money elsewhere so unless the contract has an extremely long tail attached to it the Bank could be fine in the long run.  But, buyer beware is a good adage to follow.

Relationship Management

A few Banking Executives have asked me if Brand has any place in the new world. They’re deadly worried that relationship management is no longer possible because they’ve built their identity and cultures around “being there for all their customers’ banking needs”.  I understand why it’s scary to embrace the concept that the only sustainable strategy is to offer products and services that are the best possible choices for your customers.  And while price isn’t the only dimension that defines “best”, it is a very important decision criteria.  Reality check: This is the world that we’re living in and resistance is futile.  More than one Bank that I’ve talked to is proud of the fact that they have billions of dollars of deposits parked in SAVINGS accounts with the same near zero yield as their checking accounts.  They want to find a way to generate more of them.  How is this helping their customers?  Is this the foundation for a solid “relationship”?  Shouldn’t a good relationship manager (or Bot) contact these customers and offer them better solutions for their parked money?  How would a customer feel about their Bank if they knew that the Bank had superior products but didn’t make them aware of these options?  So, I’ll tie this back to the fundamental definition of what a Brand is.  A Brand is a Promise that When Kept Creates Preference.  So, what “Brand Promise” is a Bank keeping if they’re offering sub-standard products for their customers?  It feels to me like this is the behavior associated with protecting a cash-cow and innumerable business school case studies tell the tale of how cash-cows end.  Slaughtered every time.

I’ll end this post by saying that Kepler came after Copernicus and Einstein came after Kepler.  By way of analogy I assure you that by no means do I think the framework I’ve outlined is going to be the grand unified theory that solves all problems.  But, it is worth internalizing that Copernicus was a kick-ass astronomer and paved the way for the next wave of innovation…..just a thought.



It’s Time For A Revolution

My name is Frank and I have a problem. I like to put fancy titles on papers and presentations that I write as a way of luring in unsuspecting readers. It seems to have worked with The Hourglass Effect and with The Brave 100, so I’ve decided now isn’t the time to break my habit.

My newest piece is called “The Copernican Revolution in Banking” (hit link to download) and unlike my previous works, this one is a presentation instead of being another dense white paper. I’m hoping the trade-off of “easier to digest” vs. “detailed explanation” is a good one, but if not I can always revisit the topic and fill in the missing pieces later. Let me know what you think!

As for the premise, it’s about Banking being broken (i.e. – Most Banks are producing ROEs that don’t exceed their cost of capital) and that some fundamental a priori beliefs need to be challenged to fix the system. It’s too easy for Banking Executives to blame the structurally mandated changes of the past decade on their woes (i.e. – capital requirements, incremental costs of adhering to regulations, etc). But, there’s a more fundamental change that’s taking place that Bankers need to internalize.

The availability of data paired with the proliferation of channels is resulting in purchase behavior guided by near perfect information.

I know that’s a mouthful to digest….but data is powering the shopping behavior in Banking the same way it has everywhere else. “Best in class” products capture outsized market share, and as it becomes easier and easier to compare products the migration of market share will only accelerate.

The reason the paper is titled “The Copernican Revolution in Banking” is that if Banks are willing to challenge their a priori beliefs there are multiple ways to win in this new world. This fancy concept is based on the aftermath of Copernicus’ statement that the Earth moves around the Sun. Nothing in the physical world changed as a result of this statement and yet everything changed about our understanding of the world. What Copernicus did was take the existing a priori concept of the world (geocentrism) and pose an alternative a priori concept of the world (heliocentrism). Both fit the facts, but the new world view allowed for innovation (Kepler, Einstein, etc) while the old world view had stagnated after 1,500 years and had hit a dead end.

And for what it’s worth, I’m a big fan of cheating when it comes to making big, bold predictions. I love predicting things that are already happening and this presentation is no exception. Connecting the dots is my super-power!

Have fun reading and in all sincerity let me know what you think!


Yesterday Bad. Today Good!

Please don’t laugh at me. I’m about to share an embarrassing secret and would like to do so without the fear of judgment or ridicule. Want to know my secret?

I have a long and sad history of trying to solve problems with the wrong technology.

And guess what happened each and every time? I failed just about as badly as is humanly possible. Crash and burn doesn’t even begin to describe these disasters.

For instance, let’s go back to 1995 when I was working on the Account Management team at Capital One. My mission in life at that time was to dream up products, services and programs that would improve the profitability of our existing credit card portfolio. I worked on everything from Credit Limit Increase programs to Collections strategies and overall did a decent job.

One day I had a killer idea: What if we built functionality that allowed customers to pay their recurring bills using their credit cards? Utility bills, rent, lawn services, etc. We’d pay them all. We’d make their Capital One credit card more useful which would theoretically drive up utilization, improve satisfaction and drive down attrition. I smelled profit!

This was a time before the internet was a real thing to most people. It was a time before online account servicing existed in any form or fashion. It was a time before moving money was easy. And this is precisely why I thought it was a good idea. Nobody was doing it so we should!

So what did I do? I cobbled together a hacked together version of the service with the help of one of my co-workers (thanks Kathy!). Here’s how it worked:

Customers would register their bills by calling a number and interacting with an interactive voice response unit (an IVR). They had an option to enter a new biller as well as an option to edit or delete an old biller. They could set a bill up as a recurring payment for a fixed amount on a fixed schedule or store the biller’s name and address and their account number in the system and then each month call in and enter the desired payment amount.

Once the customer was set up, every time a bill approached its due date we’d manually print an envelope and stuff it with a buck slip with the relevant payment information and a physical check for the payment amount. To ensure the bills were paid on time, we’d mail our checks 3-5 days in advance of the bill’s due date depending on when the weekend fell. Simple!

And since we didn’t know how much people would be willing to pay for the service or what the effect would be on important drivers like utilization and attrition, we decided to test a variety of price points from $1 a bill to free.

Guess what happened? It was a colossal disaster on every dimension.

First, customers were very price sensitive with the only real response coming from the “free” test cells. This didn’t kill the program outright but it was discouraging.

Second, the initial setup of a recurring bill using a phone as an input device didn’t work. Numbers weren’t difficult to enter using the phone but biller names and addresses were. So we basically ended up using the IVR as a recording device and then had someone manually transcribe the information into our system. Guess what our error rate was? Guess how many times we had to call customers back to clarify the billing information? Guess how many customer complaints we had?

Third, there was no easy way to inform a customer that a bill had been processed. Guess how many customers cared about this? Guess how many called to check on the status of their bills?

The result: We created an operationally intensive service that customers weren’t willing to pay for. To make matters worse, our complaint volume spiked (which is never a good thing). And to add insult to injury, we significantly increased the attrition rate among customers that tried the service.

Kathy and I tried to fix the program for a few months but eventually dug a big hole and buried it.

Fast forward to today and the majority of US consumers use one or more electronic bill payment services and many consumers are more than willing to pay a fee to have a bill paid using their credit card (i.e. – taxes). What changed? Technology.

We now have the right input devices (keyboards and smart phones) and the right interfaces (web portals and apps) and the right back-end infrastructure (electronic movement of money). This combination works brilliantly while the 1995 version of the service failed. Technology made the difference.

And this theme is precisely why I’m so excited about our recent investment in Current. For those of you not familiar with the company, Current offers a debit card for teenagers that’s nested under a parent’s core checking account. The product is chock full of functionality that includes various buckets to store money (spend, save and give), monitoring and controls around spending, and features that allow parents to administer allowance and track chores. It really is a fantastic product and if you have teenage kids you should check it out (

Would it surprise you to know that a platform was created by Visa to address this need almost two decades ago (Visa Buxx) and it’s barely used today? Would it surprise you to know that Current’s version of the same product is literally flying off the shelves?

How’s this for product/market fit: Current sat down with a room of parents and a full 75% ended up purchasing the product afterwards.  And as for the teenage children of these same parents, 100% of them wanted the card!

The difference?  Technology.

The problem has been around for decades but the right technological solution only emerged recently. Smart phones plus e-commerce is a recipe for success while desktop plus physical retailers makes for a clunky solution. Guess the average age that a teenager gets their first smart phone? Around 12. Guess where they like to spend money? Online.

Compare this to two decades ago and it’s a completely different story. Where was the majority of money spent? Physical retail stores. This meant that money was only useful in the context of mobility. Until semi-independence came with a driver’s license (at the age of 16 or 17), kids relied on their parents to unlock the value of money. Allowance only mattered in the context of “when can you take me to the mall” so being a few days late didn’t matter much. And while it was inconvenient, if parents didn’t have cash in their wallets they could swing by an ATM on the way to carting their kids to the mall. The system was clunky but it worked.

The right technological solution applied to the right problem at the right time is a thing of beauty and can ultimately be the catalyst for creating a very large company. Will Current onboard a few hundred thousand customers? No doubt. Will they onboard a million customers? It’s definitely possible. At the very least it will be a fun one to be part of. Let the accounts continue to fly off the shelf!

Money2020, Building Businesses and Why I Love American Ninja Warrior

I don’t think this is a very profound insight, but having been around the business building block for two and a half decades I can truly say that building a wildly successful business is difficult.  Building a so-so business is equally difficult.  And what’s sad is that building an unsuccessful one might be even more difficult than building a successful one.  An entrepreneur can have a great idea that solves a persistent, obvious and painful problem, but the number of things that have to line up perfectly for a truly great business to be built is actually quite daunting (see this oldie but goodie for more on the topic: The Tyranny Of 0.8 To The 5th).

I bring this up because we’re right around the corner from Banking’s largest conference of the year – Money2020.  In attendance will be over 11,000 people from 4,500 companies, many of which are start-ups trying to find their place in the big bad financial services ecosystem.  While most of the start-ups will ultimately fail, I can’t help but relish in the obvious and infectious energy that’s generated by the entrepreneurs at these companies.  They have no political filters clouding their ideas.  They have no higher-ups waiting around to smash their ideas.  They don’t care about sacred cows and they don’t care if hundred-year-old brands are shattered.

What they care about is solving problems and doing things better than those that came before them.

But while each Founder believes that he or she is destined to succeed, the statistics would suggest otherwise.  They’re most likely going to fail or stall somewhere on the way to greatness.  Sad, but true.

So as an Investor, where do I fit in?  The simple (but incorrect) answer would be that my firm (QED Investors) provides capital to various startups trying to disrupt the incumbents in pursuit of better business models.  The reality is that there are plenty of sources of capital out there and ours is relatively shallow in comparison to the giant funds that are putting hundreds of millions if not billions of dollars to work in the Banking ecosystem.

The reality is that we exist to help Founders climb Mount Midoriyama.

I assume I’ve probably confused most of you, but just humor me and all will be revealed.  Mount Midoriyama is a fantastically large steel structure at the end of the world’s most difficult (and constantly changing) obstacle course.  The obstacle course originated in Japan under the name Sasuke, and over a thirty-four season run, only four competitors have completed the course (one did it twice!).  Of course, the US had to create its own version of the show, and so was born America Ninja Warrior.  The popularity of the show has been growing since it first aired in 2009 (with over 70,000 applicants in the last season alone) and thus far in American Ninja Warrior history, Isaac Caldiero and Geoff Britten are the only two Americans who have completed the course.  In summary —- it’s a nearly (but not) impossible task to climb Mount Midoriyama.

Bar none, America Ninja Warrior is my favorite show on television.  The contestants train year-round for what could sadly be seconds on the course.  A great year for a contestant might be conquering the obstacle that they fell on the previous year.  Or it might be making it farther than they did in the past.  Or it might be to just go out and “represent”.  Success means different things to different Warriors.

From all this a Ninja Warrior community has emerged, and what’s fascinating is that they exist to help each other get better and to help each other succeed.  They don’t see themselves in competition with each other, but rather they’re all in competition with Mount Midoriyama.  Dedicated Warriors sacrifice just about everything in their lives to train for a course that will almost certainly get the better of them.  Each individual knows that he or she is expected to fail but the best of them believe success is possible.

So this is where I feel like our firm fits.  If we can give a little piece of advice that gives a Founder a better chance at success, we’re helping him tackle Mount Midoriyama.  If we can help a Founder structure her product a bit better or think through a tricky either/or decision, we’re helping her tackle Mount Midoriyama.  And if we have the privilege of watching one of our Founders make it to the top of Mount Midoriyama, we can relish in the little things we did to help along the way, but more importantly know that it gives us and the Founders of the future a reason to believe ultimate success is possible.

See you all at Money2020!

(And now time for a shameless plug which has nothing to do with my “day job”.  My children’s book “The Festive Frolics of Panda and Owl” is available at Amazon and major book stores everywhere –  Feel free to support my labor of love….)

Know What Race You’re Running

A year in the life of an Entrepreneur often feels like being on an eternal roller-coaster.  Five hundred twenty-five thousand six hundred minutes (no I’m not channeling a song from “Rent”).  And every one of them a chance for the up feeling that comes with good news or the depression and panic that inevitably accompanies bad news.

A year ago most of the next-gen fintech lending businesses found themselves in the midst of a down cycle and it felt horrible.  The cycle started in early 2016 with a pullback from loan purchasers due to increasing losses and reduced unlevered returns. Not long afterwards the industry had to deal with the Lending Club “Event” that sent waves of panic throughout the ecosystem.  A few months later we started to see some of the smaller platforms shut their doors and the larger platforms tighten their credit criteria and reduce burn through RIFs.  Earlier this year the major platforms started to grow again and we now find ourselves in an environment where every recent securitization seems to be oversubscribed and well received by the investor community.  What a crazy year!

So, I thought it would be worth a follow-up piece to the posts that I wrote when the industry was in its downturn.  In Thriving, Surviving or Dying I laid out four critical questions that lending originators had to answer in order to thrive.  In What Happens When The Cash Runs Out I laid out the importance of “Climbing the Relevance Curve”.  And in I Once Was Lost… I made some obvious statements about what lending was all about.

Be your own judge about whether the points made a year ago are still relevant today.  I personally think they are, but I happen to be a bit biased.  But having lived through the past year, I feel that there are a few additional points worth sharing now and in future posts that will hopefully add a bit of richness to the view of “success and failure” in the lending ecosystem.

With this in mind, I thought it would be worth adding a new concept to the mix that I call “Know What Race You’re Running.”  Put simply: There are business models that are designed to favor a single break-out winner and there are business models that are designed to do quite well alongside a broad ecosystem of players.  A flaw I’m seeing quite often is that some Entrepreneurs don’t know what model they’re pursuing and therefore they don’t design or run their business correctly.  To make this tangible, it’s worth digging into the differences between “Type 1” and “Type 2” models.

Type 1 business models are designed around “being the best” for a given customer segment.  By having the best product/service for a given customer segment, Type 1 businesses aim to attract, service, retain and X-sell customers on the strength of their offering and brand positioning.  Many want to create “THE destination” for customers in their segment.  They want to make sure that awareness within their target segment is strong and that they lock up marketing and distribution channels that cater specifically to their prospects.

Type 2 business models are designed to “show me the money” by having both attractive horizontal and vertical economics.  Horizontal economics are the annuity oriented cash flows (unit economics) and vertical economics are the in-period cash flows (P&L economics).  These business models are designed around efficiency and healthy margins and ultimately around bottom line cash production.

The reason why it’s important to know what type of business you’re building is that the best strategic and tactical moves around what it takes to “be the best” vs “show me the money” are different.

A few things to internalize about each model:

Type 1 – Being The Best

  • A simple definition of “best”: You need to believe that if a typical consumer in your target segment were faced with perfect information that they’d pick your product every time.
  • Almost by definition there can only be one “best” business for a given customer so it takes being obsessive around product, brand, service, the competitive landscape etc. to remain on top
  • To carve out this position, a business usually has to provide a great deal of value to their customers which can put pressure on margins and make significant scale a necessity
  • War can break out if multiple well-resourced and nimble businesses try to own the distinction of being the “best”. In these cases, value tends to migrate back to the customer, the market becomes fragmented, and nobody achieves scale or generates attractive economics.
  • Falling farther and farther behind is a likely outcome when an under-resourced player chases a well-resourced player and they both want to “be the best”.
  • The majority of enterprise value creation will fall into the hands of the break-out winner and almost every investment into other entities in the space will prove to be “mediocre at best”.

Type 2 – Show Me The Money

  • The truth is that there’s typically room in most industries for multiple well-run players to thrive
  • The best operators of Type 2 businesses obsess over the fact that every dollar invested in growth needs to achieve a hurdle rate return and every dollar invested in a non-growth initiative is a dollar that eats into the company’s operating margin
  • Designing the company’s infrastructure such that it can earn money at low levels of scale is critical to building a cash machine (most overlooked design principle!)
  • Being the biggest or the best isn’t as critical as being really good, extremely efficient and scaling in a disciplined manner
  • Operations of Type 2 businesses typically believe that serving your current customers well and offering a slightly more complete product each year is a winning formula

So why does this matter?  It matters because certain ecosystems aren’t conducive to supporting a “best” business.  But, most Investors want to invest in and Entrepreneurs have therefore built business plans around “Being The Best”.  Too many Entrepreneurs design their businesses to give every dollar of margin back to the customer through pricing and functionality and justify it by thinking they’re in a Type 1 race.  Rock meet hill.  Cash meet toilet.

And the opposite situation is also frustrating.  Chasing a break-out winner in a Type 1 race is a near impossible task.  Type 1 races are awesome if you can win them but when you don’t you have some really unhappy investors and a really broke company to show for it.  I can point to a few businesses that lost ground every year to the dominant player and had to close shop (or are about to).  Punching yourself in the face would be more pleasant.  Rock meet hill.  Cash meet toilet.

With this in mind, the best advice I can give is “Know what race you’re running” and act accordingly!