Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

Cross-Border Payments are on the “Cusp of Transformation” According to Executive from Fintech Ripple

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Marcus Treacher, the SVP of Customer Success at American Fintech Ripple, notes that the world’s cross-border payments market is highly fragmented. But he claims that international transactions are now being redefined by “the power of ISO standardization” and the innovative technology approach of RippleNet, which is a “decentralized” network of global financial institutions that are conducting transactions through Ripple’s payment networks.

Treacher reveals that cross-border payments are “on the cusp of transformation.” He claims that blockchain or distributed ledger technology (DLT) and digital assets such as XRP can potentially offer a more “frictionless” global payments solution.

He notes:

“At Ripple, our mission is to remove friction from global payments and enable money to move the same way that information does today—digitally and instantly. We work with banks and payment providers to modernize legacy systems using blockchain and digital assets to make sending money around the world easier, faster and more reliable.”

He adds that Ripple’s goal is to offer real-time connections to RippleNet to banks and payment service providers. Treacher confirms that RippleNet follows the ISO2022 standard, allowing these organizations to send and receive funds on behalf of their clients and also between each other “immediately, with finality and transparency.” He claims that funds can be transferred quickly regardless of how much money is being sent or the currencies being used.

Treacher also mentions that being able to send money quickly across borders is not the only problem we need to address. He explains that funds must go to the intended or correct accounts in the right country and “at the right time to allow payments to actually flow.”

He adds:

“This need to pre-fund accounts is called the Liquidity Problem, and is one of the causes of hold-ups with cross-border payments. … Ripple has developed … On-Demand Liquidity (ODL) which uses … XRP to enable funds to be sent to destination accounts immediately – literally on-demand, rather than days beforehand.”

He claims that XRP is quite useful for conducting faster cross-border payments. It makes the process more affordable and overall more efficient, Treacher says. He explains that XRP is meant to serve as a bridge between two different fiat currencies, which should ensure that funds are transferred and received “in a given geography’s or user’s local currency instantaneously.”

He claims RippleNet is able to reduce the settlement period on international payments from 3 business days to only 3 seconds, which makes the process “truly frictionless.”

Treacher says that the crypto-asset market has been dominated or monopolized by high-net-worth individuals and “crypto enthusiasts.” But he claims that there are now an increasing number of indicators that show that institutional investors might be entering this market. He confirms that crypto markets recently set all-time highs in futures contracts’ open interest.

He points out that 60% of insitutions responding to Fidelity’s survey said they’d consider allocating a certain percentage of their porfolio to digital assets. He claims that this is a significant number when we consider the survey was completed before the COVID-19 outbreak. While not specifically mentioning Bitcoin (BTC), which Ripple considers a major threat and competitor to its business, Treacher notes that digital assets have been performing as well, if not better, than precious metals like gold.

He argues that banks and other financial service providers that are able to bring cross-border payment methods “into the modern world and provide a truly frictionless experience that reduces the many pain points consumers are facing today will emerge as leaders in tomorrow’s global payment industry.”

It’s true that Fintech firms like TransferWise are providing reliable and cost-effective ways for individuals and businesses to transfer funds, globally. Meanwhile, Bitcoin (BTC) has emerged as an increasingly popular way to transfer digital value in a peer to peer and permissionless manner.

However, Ripple has been the subject of several major lawsuits, with many XRP holders alleging that the company has been driving down the token’s price by selling large quantities of it, so that it can fund its business operations. During the past few years, the XRP market cap had briefly overtaken Ethereum (ETH) to become the second-largest digital asset by market share, trailing on Bitcoin (BTC).

But Ethereum’s market cap has now surged past the $40 billion mark, while XRP has dropped to fourth place (behind Tether’s USDT) with a market cap of only around $11 billion. While it’s true that Ripple has entered some notable partnerships, such as with MoneyGram, it remains unclear why a token like XRP is necessary when trying to send cross-border payments.

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Learn How the Top VCs Choose Startups

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This week top-tier venture capital firm Bessemer Venture Partners released the original deal memos from some of their best startup investments.

These memos provide a fascinating look at how VCs operate, think and make investment decisions. Today we’re going to look at a few highlights from these memos. But I strongly recommend you read them all. 

First, let’s take a look at Bessemer’s memo for their initial investment in Twilio in November 2009. Today Twilio is a $33 billion publicly-traded tech stock. When BVP first invested, however, it was a tiny seed-stage startup raising money at around an $8.5 million pre-money valuation cap.

At the time, Twilio was only producing around $17,000 in monthly recurring revenue (MRR). The startup didn’t even have a dedicated sales team yet. But BVP’s deal memo gives us valuable insight into why the firm thought Twilio had potential. Here’s an excerpt from the “Product” section.

The Twilio product makes the process of building a voice application extremely simple for web developers without any specialized training or need to deal with telecom companies or specialized integration service providers. Similar to consumer web apps, customers can sign up for an account with Twilio, pick a phone number (or port over an existing one), learn the five simple building blocks that make up the basis of Twilio, and start building voice applications right away.

Today every VC firm in the world is looking to invest in cloud software companies like Twilio. But at the time BVP made this investment, it wasn’t so obvious. I recommend reading the entire memo, but here are my key takeaways on what makes a successful startup investment:

  • Serial entrepreneur founder
  • Highly scalable business model
  • Steady revenue growth
  • Strong technology
  • Opportunity to expand offerings

As we know now, BVP’s early bet on Twilio turned out to be a fantastic one. Twilio is one of the reasons that similar enterprise software deals today are raising money at far higher valuations than this company did back in 2009.

2010: BVP Bets on Shopify

In October 2010, Bessemer Venture Partners made a $7 million bet on a young company called Shopify. Today Shopify is publicly-traded and worth a mind-boggling $113 billion. It recently surpassed the Royal Bank of Canada to become Canada’s most valuable company. In other words, this is a deal memo worth paying close attention to.

When BVP invested back in 2010, Shopify was raising money at a $20 million pre-money valuation. The company had an impressive $5.5 million annualized revenue run-rate. And it showed strong organic growth. 

Today, a $20 million valuation for a similar deal would be considered unbelievably cheap. Out of the thousands of deals I’ve seen, only one comes close (and it’s probably my best investment). 

One of the big reasons BVP got such a bargain price is because Shopify is headquartered in Ottawa, Canada. Most venture capitalists are based in Silicon Valley. And they only invest locally. So because BVP was willing to step outside the Bay Area, they got an amazing deal. 

The Shopify deal memo reinforces my belief that for most online startup investors, the best deals are going to be found outside the San Francisco Bay Area (SFBA). 

There’s an incredible amount of competition for deals in the SFBA. But outside of it there’s usually not much at all. This is a big reason why I primarily invest outside of the SFBA — I’m more likely to find success. My best angel investments are from Chicago, L.A., Spain, and India. Sure I have some nice investments from the SFBA. But my largest winners are from outside California — I don’t think that’s a coincidence. 

Bessemer’s bet on Shopify will go down as one of the best tech investments of all time. There are also a ton of other valuable nuggets to be found in the full deal memo.

If you’re a new startup investor (or an old pro), I can’t emphasize enough how valuable these deal memos are. Now go read them! You’ll learn a lot.

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The New Way to Generate Wealth

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Note: A few weeks ago, we welcomed John Fanning to the Early Investing family. Today, we’re pleased to bring you his second column. If you’re not familiar with John, he’s worth getting to know. He was the founding chairman and CEO of napster. He has an impressive track record as both a founder and startup investor. And he’s one of the sharpest minds in the space. — Vin Narayanan, Vice President, Early Investing

Wealth inequality in America is no secret. The rich get richer, the poor get poorer, and the middle class continues to shrink. 

Why is this happening? Historically, stock ownership was the greatest wealth equalizer.  But it’s become less effective at generating wealth because of government regulation.

I’m not talking about the regulations imposed on large corporations in order to promote competition or preserve the environment. That’s not the issue here.

The big problems are the regulations adopted in the early 2000s . They’ve made it very inconvenient for companies to go public. And they’ve made it virtually impossible for small, early stage companies to file for an IPO.

For investors, this is a serious problem. Early stage startup investments are where the highest potential returns can be found — in companies whose greatest years of growth are still ahead of them. 

Take Amazon for example. When it went public in 1997, it was worth $438 million. But there’s no way that Amazon (or most other companies) would go public with a valuation that low today.  If it were going public now, Amazon would have likely waited until it was worth at least $1 billion (and perhaps a lot more)! And stock market investors would have missed out on a significant chunk of Amazon’s growth.

That’s because Congress and the SEC over-reached in their attempts to curtail risk in the wake of housing market woes, the 2008 financial crisis, the dot-com bubble bursting and the high-profile bankruptcies of a few supposedly blue-chip companies.

One of the prime culprits is the Sarbanes Oxley Act. It requires companies filing for an IPO to hire expensive third party auditors, investor relations committees and accounting oversight committees to prepare and approve financial reports.These reports are too expensive for early stage companies to produce. 

The result is that early stage companies are staying privately held for longer. In 2001, the average age of a technology company going public was 3 years. In 2018, it was 13 years. By the time companies go public and can be traded in the stock markets, their periods of high growth are far behind them.

High returns come from high growth. So the older the company you invest in, the lower your potential for high returns. Unfortunately, most of the companies on the NASDAQ or NYSE are these mature, later-stage companies.

The irony of all this is that these government regulations were designed to shield middle class Americans from losing their money. But in doing so, the government also shielded middle class Americans from gaining money. These regulations created a system that makes it easy for the rich to get richer through access to private markets, while denying those of lesser means the access to lucrative investment vehicles. 

Now, the only way for Americans to win big lies in investing in early-stage companies in the private markets. Until recently, that opportunity was reserved for the wealthiest and most well-connected of our society.

But thanks to the 2012 JOBS Act, regular investors can now invest in early stage companies while they’re still private. It’s the great equalizer that the government took away in the first decade of this century. 

Investors again have the chance to invest in the next Amazon, Google or Uber while they’re still private — and growing. And that can lead to real wealth generation.

But it’s taken years for us to get here. And in the meantime, those government regulations only increased the wealth inequality. The next time government officials impose a regulation, maybe they should consider the unintended consequences: who are they really hurting, and who are they really helping?

For more of his thoughts on building wealth through private market investing, follow John on Twitter, and LinkedIn, or visit his website: www.john.fanning.com. 

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