Wandering Through the FinTech Forest

Building FinTechs in Emerging Markets

An Intro

I left Beyonic in my full time capacity at the beginning of the year to join the DFS Lab. It’s a necessary break from the roller coaster of running a startup and my role as EIR at the DFS Lab is to help the next group of emerging market FinTech founders bushwhack their way through their respective forests. Our companies are solving big and complex problems and, in addition to working through some of the day-to-day issues encountered, we also try to think about what the future holds for them.

After spending five years helping build Beyonic and the past seven months working with a great group of portfolio companies, I’ve had the opportunity to take a step back and spend time thinking about the common struggles faced by Beyonic and our portfolio companies, as well as how some of the DFS Lab investment ideas fit into the broader narrative of where emerging market FinTech is heading.

Seeing the Forest Through the Trees

Searching for Unicorns, or Zebras, or whatever...

Time and Patience Will Always Be Necessary

Five years ago I placed a bet, equivalent to a market rate, post-MBA salary, that mobile money was going to be the infrastructure of choice for financial services in sub-Saharan Africa. Luke Kyohere, a brilliant Ugandan computer engineer and classmate at the University of Texas-Austin, had built out some interesting payment infrastructure after building and selling a suite of mobile VAS products in Uganda. We decided to launch Beyonic as a payment aggregator that allowed businesses to connect to mobile money networks.

Beyonic was a fairly simple idea — a few potential customers told us they would pay us if we could replace petty cash disbursements with an online payment platform that paid out to up-and-coming mobile money networks. And they said they would pay us a whopping 5% of the transactional volume we helped them divert away from cash-based payments. We plugged 5% into our business model and smiled. The number of potential enterprise customers we could serve was so enormous, that according to our business model, at 5% with a very limited market penetration rate, we’d be making millions in a matter of a few short years.

When we signed the first customer, we built out an initial product. The first customer started to use it, and we started talking to the next set of potential customers. When we signed the second customer, pricing was squeezed down to 3.5%, and then it took four months of going back and forth with the legal team from customer number three to get an SLA that they were comfortable signing.

Note to other startup founders: Getting (potential) customers to pay their legal teams to create robust SLA’s is a cheap way to get this done.

Looking back, it doesn’t surprise me that it took 18 months to get to 10 customers. Most US-based investors told us we needed to “growth hack” and prove we could sign customers faster. I’ve never been able to tell if that was a polite way of saying “we don’t believe in you” or if they thought “growth hacking” worked in emerging market FinTech. Things like “check out PayPal’s referral scheme and how they scaled so quickly” weren’t incredibly useful to us. Current customers being happy enough to refer us to others worked — so we made a few customers as happy as possible and we were patient.

Build Trust

The Beyonic product also did two things that no one else offered.

  • KYC verification for individuals being paid by businesses
Evelyn is the best but it’s good know that this might be the wrong recipient…
  • You could sign up online in a matter of minutes. We had heard stories that some of our customers asked for similar platforms from the MNOs and it took four to five months to get access.

Answering the phone when a potential customer calls, simple online signups and making sure payments get sent to the right person are all simple ideas and build trust in ways that let Beyonic differentiate itself from the competition. Beyonic hit the nail on the head with a few tweaks that made the company more trustworthy.

Over the last 5 years, Beyonic kept earning the trust of customers and came a long way from “two guys in Austin, Texas with an idea”. Beyonic has been live since the summer of 2013 and last month, the platform processed hundreds of thousands of transactions across five countries and is serving hundreds of large enterprises, tech companies, NGOs and multinational banks.

Building a product that earns the trust of customers is ludicrously hard. It’s also necessary for any FinTech company to instill in customers. Building trust in emerging market FinTech isn’t about growth hacking — it’s about patience, good products solving hard problems, time and more patience.

Note: We also weren’t great at raising money and the answer to not raising (being able to raise) money is to get back to work on whatever problem is being solved. The company continues to scale very quickly and has tripled revenue since the beginning of 2018. Beyonic hasn’t raised outside capital in two years; all of this growth is driven by how well the team is executing.

Being patient is something I have gotten significantly better at over the last five years, and patience will be necessary for our Founders to build great companies. Trust, of course, is a given. It may seem like I am repeating myself, but it’s very, very easy to forget this when you are in the operational grind of running a company.

Looking Past the Forest

This is Western Uganda. I highly recommend it.

For us at the DFS Lab I suspect patience and trust will also be necessary to find the next set of great FinTech companies. Beyond those two criteria, there are a set of investment theses and predictions about the ecosystem that DFS Lab has refined over the last few years. After eight months, I can’t help but think that putting all this together is what is going to shape the way the next set of FinTech companies are built and funded.

Here’s a quick overview on what I have picked up so far.

Mobile Only (B2B being a limited exception)

Mobile first is a funny joke in most emerging markets. The vast majority of emerging market customers that have never walked into a bank as of mid-2018, may never. There’s no practical difference between a mobile and a computer and with android-based biometric applications, new types of KYC-as-a-service applications, and a persistent lack of adequate infrastructure, mobile devices will be the only delivery channel for profitable new products. I think the bet I made five yeas ago will pay off but the return (odds?) on it are still TBD.

The Future Won’t Be Grant Funded

There’s a massive early-stage funding gap and unless you’re already well-connected in Silicon Valley or go to Y Combinator, getting SV-based investors at the seed/early stage is still difficult. The current path of least resistance comes in the form of grants from non-profit organizations doing “economic development” and “innovation”. Despite the mocking tone of the quotes, I’m not debating or questioning the role grant-giving organizations play in the ecosystem. The problem that I’ve seen in the past, and continue to see now, is that grants have a tendency to pull talented founders away from building scalable products (same goes for pitch contests, by the way). And when founders aren’t building scalable products, the impact they can have is limited. The good news is that there are an increasing number of people writing true seed-size checks ($50–500k) and equity and debt capital can fill the early-stage funding gap and contribute to building better companies than any grant program out there. “True seed” in emerging markets isn’t $5–20m like in Silicon Valley. Building out a product, eliminating execution risk and proving distribution on a limited scale are way, way cheaper. You can get it done with less than $500k. Luke did this at Beyonic.

Constantly chasing grants makes getting to product-market fit (and then the inevitable outcome of profitability) less of a priority. If you actually want to build a scalable product company — stop chasing grant money.

Finance As A Background Service

The best FinTech companies I’ve seen recently are financial products, but may not appear to be on the surface. GoJek started out as a ride-sharing platform and became a motorcycle based agent network after their acquisition of Kartuku. One of our portfolio companies is factoring receivables but is doing so by building out a ruthlessly efficient marketplace compared to the status quo. Pula, an ag-insurance provider offers insurance without having to sell insurance. All three of these plays are brilliant, and I’d be willing to bet they’re successful.

Over-the-Top Applications

“We believe [company name] is misappropriating the [mobile money] ussd (sic) channel through inserting an unauthorized app layer between the customer and the [mobile money] service.” — Large emerging market DFS provider

If they gave out Innovation Merit badges, it would look a lot like a cease-and-desist. This note wasn’t received by Beyonic, but cease-and-desists from the 800 pound gorillas are not surprising and Beyonic has gotten several over the last five years. I was never a Scout, but I’ll take that merit badge.

This trend will continue. WhatsApp and WeChat have “cannibalized” SMS revenue (read: expanded the market by orders of magnitude) and consequently, VoIP is banned in the UAE. Related to a decrease in revenue from SMS and airtime taxes, the Ugandan government recently launched an OTT Tax. (Anyone that tells you this is a tax on Facebook is a liar.)

Regulating innovation out of the market is only a stop gap. Eventually the forces that drive product adoption will win this game, and OTT will be the norm. The portfolio company that received the cease-and-desist letter is offering a value proposition so strong I think they’ll win, even against an 800 pound gorilla.

Raising Capital Will Be Easier

Over the last five years, the sheer velocity of FinTechs in East Africa has increased exponentially. At some point last year, Beyonic was getting one to two inbound leads a week for unsecured lending products. There’s $40–80 million funding rounds being handed out like hot cakes. The unit economics may not have the broad appeal of some less risky financial instruments, but if you’re getting a 20–30% margin on your capital, who cares if your annualized interest rate is 250%?

Unsecured Lending Will Die

The regulators care. This is probably the point I’m the least confident on, but if history has taught us anything, regulators will tend to crack down on “predatory lenders”. If any of the protectionist tendencies of other countries spread to Kenya and a few of the other markets being served by unsecured lenders, the companies that have raised these massive rounds will face an even riskier operating environment. Increasing evidence also suggests that unsecured loans are being used to finance sports betting.

“FinTech” — > Digital Bank

Branch and Tala aren’t going to become billion dollar companies as unsecured lenders. They both raised massive rounds earlier this year — and the appeal to investors isn’t to lend $2 at a time:

“The banking infrastructure in the U.S. is so robust and complete,” says Schwark Satyavolu, the general partner at Trinity Ventures who led the [Branch funding] round for his firm. Meanwhile, Branch, he says, “seems like an application of Silicon Valley tech to create financial services. (from TechCrunch)

Banking is awful across nearly all segments, and building out a consumer-oriented lending product and then adding additional services like savings, insurance, and payments products looks a lot of the digital banks that are popping up in the UK.

So where does this all lead?

(Ideally.)

Exits

I have no idea which fish I am. Or when the first bite gets taken.

This may be sacrilegious in the world where the most relentless, “formidable” founders win the startup game, but if I’m honest, I think that’s bullshit and Beyonic isn’t going to be the next Visa or MasterCard. The next Visa and MasterCard are already here — namely Alipay and WeChat. As a FinTech company, Beyonic was bushwhacking through the complexities of regulatory environments, service and delivery problems, and alternative customer acquisition strategies. Once these problems get worked out and smartphone penetration gets above a certain amount, there won’t be enough SoftBank cash to push the lever of customer acquisition in the same way WeChat and Alipay are able to drive uptake of new products.

I expect the big players will make more acquisitions and significant investments in emerging markets. Ant Financial has already started acquiring properties outside of the “traditional” expansion markets and it will make sense to acquire the companies that have bushwhacked their way through the wilderness in sub-Saharan Africa as well.

Beyonic might die. Some of the DFS Lab companies might die. Many other companies will die. The next wave of FinTech companies will need to successfully build trust, raise the right kind of money, and will likely layer finance into the background and successfully drive customer adoption through OTT applications. If that all goes well, hopefully death looks like a successful exit to someone like Ant Financial. And the founders move on to whatever forest they find themselves in next.

There’s an implication here that Pooh lives on the other side of the Rwenzori mountains. That’s possible.
I’m the EIR at the DFS Lab, a seed stage accelerator for FinTech companies in emerging markets. If you want to hear more from me, you can follow me on Medium, but I usually am more active on Twitter.
If you want to know how to get involved with the DFS Lab, leave a comment below.