Death, Taxes, and Losing on FX
In December 2020 my co-founder Seth and I quit our jobs to focus on Bound — a startup based in London. Bound wants to make FX risk management so easy that, in the future, businesses can transact internationally without even thinking about other currencies.
I love telling people about how we came across Bound. It’s all nostalgic for me. All the memories I have built up to the moment we decided to go for Bound are exciting.
Cliché and a bit corny, but coming across a startup idea feels a bit like falling in love. First, you get familiar with the idea. Then, before you know it, you’re thinking about it during breakfast, lunch and dinner. You want to talk about it to anyone who will listen, and even if it doesn’t make sense to them, it’s true to you.
I’d like to share that story and give some insight as to the who, what and why of Bound. My hope is that someone reading this will feel how excited I am about Bound and what we’re going to accomplish. I hope this drives that person into clicking the careers page and applying to come help us make FX effortless for business.
Our Exposure to FX Exposure
I met Seth in the summer of 2017 when I joined Paxos as a software engineer. I originally joined the New York office, but soon packed my bags and moved to the U.K. to help start up the company’s London office.
In London, Seth and I were building software to help improve the OTC settlement process. Many of the trades we saw come through our platform were commodities and FX hedging trades.
This was my first introduction into hedging. As we started to get customers and grow the business, we’d see multi-million dollar trades go through our system hundreds of times a day. One trade might be from a South African miner trying to hedge out of their gold exposure, another trade might be from a big bank trying to reduce their euro risk. You couldn’t work on this product and not realize that hedging wasn’t just important to these businesses, it was a necessity.
On top of that, I was an American living in London during Brexit.
With uncertainty surrounding Brexit, the British Pound was on a downward trajectory. At its worst point, I had taken a near 20% hit to my salary because of USD/GBP volatility. It was painful.
And that pain wasn’t just felt by me, but also by many expat friends. We spoke about it all the time.
Everyone had a different strategy to deal with their GBP risk. I averaged out my cost by committing to converting the same amount of GBP to USD every month, regardless of the rate. My friend Alex was a bit more opportunistic, waiting for little increases in the rate to make big transfers. John decided he’d just hold all his GBP until the rates “returned to normal.” Spoiler alert, and I’m not exaggerating, almost two years later and he still hasn’t converted any GBP back to USD. Bad strategy, John.
And finally, there was the family business.
My father operates a small business in New York which imports kitchen cabinets from Italy. His cash-flow is pretty simple: dollars in the door as revenue, expenses paid out in euros to his Italian supplier.
One day in 2019 I was complaining to him about the dollar/pound exchange rate when he interjected: “Dan, I have this same problem with my business and there’s nothing you can do. Three things are certain in life: death, taxes, and losing on FX.”
That was the moment Bound was born. I knew he was wrong.
He continued and told me about how one year he lost over $80,000 on one contract because he didn’t give himself enough padding on the dollar/euro exchange rate.
I realized that if the margin on one of his business deals is 10%, that means a 2% swing in the dollar/euro rate would cost him 20% of his profit! Considering all of his deals are more than 9 months out, these losses were a massive issue for him and his business.
The ‘Ah-ha’
After that conversation with my dad, two thoughts immediately crossed my mind:
- His company has serious FX risk, and he wasn’t dealing with it correctly.
- How could he deal with it correctly? Even though he’s a talented businessman, he doesn’t have the knowledge to manage his own FX risk using complicated financial instruments. That’s a job for a treasury department, not for a small business owner.
If this was true for his business, it must be true for many others. And after a quick search, I found some numbers that shocked me: 94% of FTSE 500 companies have some sort of hedging program in place to mitigate their risk, whereas only 4% of SMEs in the UK do. The average loss for those SMEs is about £70,000 per year.
That disparity was the biggest mind-blower of all. This must be a huge pain in the ass for any business that has foreign currency risk, but some businesses are just too small or inexperienced to do anything about it.
A few months and a ton of research later, Seth and I felt confident we were sitting on something big.
We quit our jobs and raised $200,000 from friends and family to tackle our thesis:
Small business do not have the knowledge or expertise to:
(1) Identify and quantify their FX risk: that is, a small business cannot point to where in their business they face exposure to FX, nor are they able to quantify that risk even if they could identify it
(2) Action their FX risk: if a business were able to identify and quantify their risk, they would still face trouble actioning it. Maybe they don’t understand the nuance of complex financial instruments, or maybe dealing with FX brokers just sucks. Maybe banks are too expensive, or maybe these businesses are “too small” to be serviced.
And a few months after that, we felt strongly that there was a business to be built, and raised $6.5mm from investors behind the likes of Klarna, Wise, N26 and Xero to make FX effortless for business.
Come join us!
The FX experience sucks for SMEs, so we’re working on building the world’s best digital FX brokerage. To do that, we use these three principles to guide every decision we make:
- We 💙 customer trust. We promise our customers transparency and fairness in order to win their trust. This is true in our pricing and in all our interactions with them.
- We 💙 customer savings. We promise our customers low, consistent fees. Unlike almost all other brokers, Bound will never turn up our fees behind our customer’s backs.
- We 💙 customer ease. FX and hedging is hard and complicated. Most FX tools and services are tailored for big businesses that have treasury departments. Everything we do is to make FX simpler and more accessible for businesses of all shapes and sizes.
We’re hiring for roles across the board to help make FX effortless for businesses. If anything I said above intrigued you, check out our careers page or shoot us an email at careers@bound.co!
