A Sack of Seattle

How to be a fintech company

There are 5 fintech companies that I've been paying attention to as I try to figure out the model for Lighter Capital -- actually -- there's many more than that...but for the purpose of this blog post, let's focus on:

1. Second Market
2. Receivables Exchange
3. Wanga (UK)
4. Kabbage
5. OnDeck Capital

There are lots of differences and variants to these businesses but I like all of them and it seems like they follow a somewhat simple formula.

• Market segmentation -- Each company in its own way focusses on a market that is underserved by the capital markets.  One way or another, the underlying businesses need capital. 

• High rents (i.e charge a lot) The above businesses make capital available to the customer via the internet and charge a rather high rent. Wanga is off the charts!

• They've figured out repeatable customer acquisition --  to varying degrees the above customers has each figured out how to acquire customers cost effectively.

At lighter capital, we're trying to make sure we accomplish these goals as quickly as possible. 

Risk adjusted returns: Struggling to balance the gas and brake pedals

My career as an entrepreneur and as a seed stage equity investor has me look at a company and a team and think about what could go right.  It has me dream the possible. While working on refining the boundaries of a RevenueLoan, I find myself really thinking hard about reality -- and what could go wrong.

I find myself focused on risk-adjusted returns and yield. Prior to Lighter Capital, I never really thought about those concepts. Internally, we're debating the benefits of providing smaller revenueloans to companies earlier in their revenue life cycle. So, I find myself wondering -- what risk am I taking by moving earlier? Traditionally, people would say that moving earlier increases the risk -- and that's the obvious answer. But there's some benefit from a risk perspective to moving earlier. The main thing I find myself thinking about is that the fixed costs that get a company in trouble further into the revenue life cycle are not yet in place and so the entrepreneur is able (theoretically) to better able structure the organization to include those fixed costs.

The other thing to I find myself wondering about is that for each marginal dollar earlier in the revenue life cycle, I think I'm likely increasing my potential return by much more than one dollar. One dilemma for me is how to think about pricing this risk -- and there, frankly, right now, I have no clue! ;-)

Market education and awareness is top of mind

One of the topics that is top of mind for me at Lighter Capital is where and how are we going to get customers familiar with revenue based finance broadly and our RevenueLoan product specifically.

Once entrepreneurs and small business owners understand what we're doing, we should be a lot more effective in coming to terms with them and closing investments. That said, it's clear to me that we're in the early stages of market development for a new type of financial product. We have this new product that has some compelling advantages over other types of funding -- but if no one knows about the product and those benefits, it's hard to get customers.  We have the added challenge of not only having to educate small business owners and entrepreneurs but we also have to educate the lawyers that represent these business people.

In order to educate people about our product and our firm, I think I need to be communicating more about the process of growing this company. This should be straight forward as long as I have the time -- there's lots of interesting nuances and challenges we face.