Investing in Diamonds
One of my favorite kinds of startups to invest in is the “diamond surrounded by a lot of shit” kind. I use this term to refer to a company creating a step function innovation (the “diamond”), and then augmenting it with functionality that usually requires an immense time investment to properly execute (the “shit”).
Every time I use this term to describe a company, I catch flak because it goes against the perception of startups relying on innovation alone. Still, when you think about it, having a core innovation is rarely enough to create a long lasting moat. On the other hand, many startup opportunities come from taking away the grunt work that isn’t core to their customer’s offering, but takes a lot of heavy lifting to get exactly right. Twilio is a great example. And if you think it’s hard to get sending an SMS “exactly right,” then you should know that being able to offer financial services within your app is far worse of a time, resource and risk sink.
Unit is such a company.
In building a “bank as an API” service, Unit is an enabler of the disintermediation of financial services. Coming from the perspective of a trustee of Bankinter (the most innovative and fastest growing commercial bank in Spain), I know that even though these capabilities are top of mind for any bank leadership, it still takes a year to sign an agreement with a bank.
And signing the agreement with a bank is, unfortunately, only the beginning. The banking tech stack is horrendous for a reason. The IT services underpinning banks were never intended to be exposed as external APIs and don’t represent a short- to mid-term value creation opportunity. But even more importantly, their organizational genome drives them towards risk mitigation. Bank compliance departments are sometimes the most powerful part of the organization. Once integrating with the bank’s API is done, the developer then needs to struggle with financial APIs written decades ago, integrate with over a dozen services for mandated financial safety nets like Know Your Customer and Anti Money Laundering as well as (!) establish a compliance operation in-house.
Compare that with using Unit, where every developer can integrate functionality like FDIC-insured account balance, lending or ACH transfers into their service by simply adding a few lines of code.
There are two key challenges Unit had to overcome in providing a bank-as-an-API service: 1. Get the numbers right, and 2. Be able to prove they got it right.
Getting the numbers right requires a bulletproof “bank ledger.” Writing a ledger is HARD. Itai and Doron grew Leverate, a trading-focused fintech startup that grew to $100b+ in monthly trading volume over a decade without VC funding. Doron still leads ZeroMQ, an open-source messaging library used by NASA, Google, Microsoft, Spotify and more. That’s the experience required to get the numbers right, and this is the team to do it.
Proving the numbers are right and thus protecting consumers is why the financial work has stringent compliance requirements. Providing compliance as a service is even harder. We know regulated businesses. When we invested in Lemonade, people smirked and said, “why go through the regulatory hassle instead of being a broker?” Shai Wininger and Daniel Schreiber realized from the get-go that to create the best experience, they needed to take the regulatory framework head-on. Unit understood the same thing: they have to take on compliance, because otherwise, they can’t provide the seamless experience they set out to give. You need to be able to prove you got the numbers right, because otherwise your customers will need to shoulder the burden. Unit knows that, and one of their very first hires was Amanda Swoverland, who was the Chief Risk Officer for Sunrise Banks.
When I first saw the Unit API, I couldn’t stop thinking about Aleph portfolio companies that could take advantage of it. Companies like Honeybook, Lemonade and Workiz can all delight their users by providing a separate business account, loans or transfers.
On a more personal note, Itai and I have been friends for what seems like millenia. LinkedIn says we connected December 30 (interesting!) 2013, so we probably met sometime before, while they were still building Leverate. The complexity of the financial infrastructure Doron and Itai built at Leverate was mind boggling to me. But when he and I met in the early days of Unit, I missed the boat. Rona Segev of TLV moved faster and more decisively. She was right, and I was wrong. I reached out to diligence the approach with friends of Aleph in the fintech industry, moving slower and eventually losing the deal. When you have a team like that, in an area that’s very clearly huge, one shouldn’t over-analyze (especially when there wasn’t much to analyze at that point in time). We are grateful that round A came (as competitive as it was) and that the team thought we’d be a good addition to the cap table.
Every conversation with Itai and Doron becomes a brain tease driven by their endless curiosity, detail orientation and get-shit-done mentality. Building a startup is a long and many times lonely journey. I am excited to be supporting people I love on that path.
