As fintech and proptech investors, Canvas Ventures has been paying close attention to the impact that COVID-19 has had on the mortgage industry. 2020 saw forbearance and loss mitigation requests in record numbers, with the delinquency rate of FHA loans reaching an all-time high of 15.6% in 2020. The last time this happened was in 2010, and it preceded an epidemic of foreclosures. For borrowers in delinquency, getting the help and forbearance they need to avoid foreclosure is a time-sensitive and often overwhelming process complicated by frequently changing regulation and a dependence on paper-based processes.

Evan Hatch and I are proud to share that Canvas Ventures is leading Brace‘s $15.7M Series B. Eric Rachmel of Brace is transforming the mortgage industry with a digital servicing and workflow automation platform. Starting with loss mitigation and default, Brace is developing a full suite of digital solutions to progressively unbundle and improve mortgage servicing core infrastructure.

With prior investments such as Lending Club and Possible Finance, we’ve had a long-held thesis around the modernization of lending, and Brace is leading the way in extending this modernization to what has been a seriously overlooked layer of the tech stack.

Modernizing mortgage software is one of the largest opportunities within fintech
It goes without saying 2020 that was a major year for fintech. Underlying the continued digital transformation of banking has been a corresponding evolution of the back office and infrastructure software powering financial services. As far as exits, 2020 was a major year for lending and mortgage origination software — between Ellie Mae, nCino, and Optimal Blue, there was ~$20B in liquidity realized. This isn’t surprising when one considers that residential real estate is the world’s largest asset class, a theme we’ve also invested behind with proptech deals like Roofstock and Flyhomes.

And yet, origination is just one part of the mortgage value chain. Equally important are the servicers who manage the administration and repayment of a loan over a multi-year lifecycle. The workflows of these servicers are often highly manual and dependent on pen and paper. Other than legacy core systems like Black Knight and Sagent, software to automate and modernize mortgage servicing has been almost non-existent.

Delinquencies from COVID-19 have the potential to push current infrastructure to the breaking point once forbearance ends, and banks and servicers are already in search of solutions.

A novel approach and best-in-class product
To solve these problems, Brace has built a modular, cloud-first platform to accelerate the human workflows within servicers and provide a digital, self-service experience for borrowers. In some ways, Brace’s product recalls those of RPA providers like UIPath, but is tailor-made for the specific needs of mortgage servicers.

Using a robust no-code engine, Brace is able to digitize and automate complex and divergent business logic with a dizzying amount of edge cases. It also can rapidly adapt to the challenges presented by a rapidly changing regulatory environment. With a microservices architecture and API-forward design, Brace’s platform also brings interoperability to a historically ‘siloed’ space dependent on on-premise systems.

Since our first conversation in late 2019, Brace has made incredible strides, signing contracts with some of the country’s largest servicers and continuing to expand the scope of their product. They have demonstrated an ability to drive digital transformation within mature companies and serve the often dissimilar needs of banks, non-bank servicers and specialty servicers alike. They also have secured a No-Action Letter from the Consumer Financial Protection Bureau, an important marker of regulatory approval.

A truly exceptional team
Eric and team exemplify the qualities we value in founders — humility, hunger, and domain expertise — especially within vertical SaaS and Fintech. The team’s comprehensive understanding of the servicing domain has allowed them to drive digital transformation within a mature industry and build trust with some of the industry’s most well regarded servicers. It is rare to find a team capable of moving as quickly as they have while at the same time navigating a particularly complex regulatory environment.

Sitting uniquely at the intersection of fintech, proptech, and enterprise software, Brace was a perfect fit for Canvas’ overlapping thesis areas. We are proud to partner with Eric and the Brace team, as well as existing investors including Point72 Ventures, Crosslink Capital, and Clocktower Technology Ventures. Brace is just getting started, and we can’t wait to help them along their important journey.

And, if you’re interested in getting involved, Brace is hiring!

Our Investment in Brace: Transforming the Mortgage Industry was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

Customer Data is the Biggest Opportunity and the Biggest Risk

Companies who know their customers better are winning. So it’s no surprise that every company is asking for and storing our personal identifiable information (PII) — and then augmenting it with our activities, visits, preferences, transactions, and third-party data. As a result, almost every company from banks, credit agencies, hospitals, and insurance, to even our local coffee shops and grocery stores are holders of our PII.

Meanwhile, very few are equipped to properly secure this sensitive information. The increased sophistication of hackers with the ever more complex application stacks have made it easier than ever for unwanted guests to sit on our network and steal precious information like our social security numbers.

A Breakthrough Solution to a Complex, Intractable Problem

Anshu, former VP of Platform at Salesforce, and Prakash, former EVP and CTO at AthenaHealth, took a radical approach and had a breakthrough. While enterprises typically solve for data privacy and security one system or use-case at a time, Skyflow turns this notion on its head by using an API-centric approach which can be deployed across applications, warehouses, datasets and platforms. With Skyflow, sensitive data lives in a central vault in such a way that enterprises can simultaneously mask the data with zero-trust architecture using strong encryption, tokenization, and smart policy engine, while also serving business needs with a sophisticated API and SDK. Imagine running SQL on encrypted data fast so that multi-party data sharing, clear data residency, and federated machine learning are possible.

“Skyflow has a unique ability to redact, anonymize, and tokenize any data using a policy based approach that leads to quicker deployments, and simpler updates and changes,” observes Fawad Butt, Executive-in-Residence at Canvas Ventures, who served as Chief Data Officer at the UnitedHealth Group and Optum.

Customers are Looking: The Market is Ready

We met Anshu and Prakash earlier this year and we were in awe of how fast their customer conversations turned from a sales pitch to a signed contract — and a strong revenue stream. One of their early customers was a leading health insurance startup built by the CTO of a top tier bank. He was effusive in his praise of the product Anshu and Prakash had developed. Skyflow has all the key features of technology he had built (at no small cost) at his bank — plus more. The Skyflow Data Vault is a “must have” he told us, for both fintech and health organizations that need to satisfy strict government regulations but still seamlessly serve business needs. We believe that companies of all sizes should have access to technology that allows them to properly secure, and efficiently access, customers’ PII data — and based on the robust early pipeline Skyflow has established, the market is sizable and ready.

Funding Next Cloudflare

The adoption velocity of Skyflow reminded me of the early days of Cloudflare — users were profusely positive about the magical experience of the product. This insight, together with our belief in the team and admiration for their product gave us conviction that we wanted to make an investment as soon as possible, so we asked Anshu and Prakash to let us pre-empt their Series A. And they said Yes!

We are grateful for the opportunity to partner with the entire Skyflow team and appreciate the support from our friends at Foundation Capital, especially Ashu Garg. He is one of the best enterprise investors and led Skyflow’s seed round. We can’t wait to roll up our sleeves to help Anshu and Prakash as they build Skyflow into an enduring company.

And we are hiring!

Our Investment in Skyflow: Safeguarding Customer Data with a Privacy API was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

90% of modern software is open source, and 77% of companies use open source software in commercial products. Open source software (OSS) adoption continues to grow, expanding across every industry. With that increase, how enterprises manage and control their OSS use within their codebases will continue to increase in importance.

In spite of a growing open source landscape and increased opportunities for enterprise companies to leverage open source as a bigger component of their codebases, the existing developer experience for tracking and using open source software is poor with fragmented control and limited visibility into what developers are using.

That’s why we’re especially excited to announce that we’re co-leading the Series B in FOSSA with existing investors Costanoa Ventures and Bain Capital Ventures. FOSSA is building the enterprise control panel for OSS. The company uniquely offers universal, real-time, detailed visibility into open source inventory with a state-of-the-art policy engine to make sure compliance departments are up to speed on all their open source usage. FOSSA’s value add is enhanced by a beautiful platform designed to deliver an amazing developer experience to leverage and implement sophisticated next-generation open source systems.

When we first met Kevin, we were struck by his explosive energy, ambition and thoughtfulness. Kevin has been fixated on ways to improve a developer’s experience with open source code since he was a teenager. We continue to be impressed by Kevin’s commitment to deliberately build and scale his business, from interviewing over 50 sales candidates before deciding on a VP of Sales, to deciding how he builds out partners and investors on his cap table. We have also learned a lot and have enjoyed working with Kevin’s executive team, including his VP of Engineering Eugene Fratkin, former Head of Engineering & Product at Scale AI, VP of Sales Paul Murphy, previously of Sysdig, VP of Marketing, Ryan Goldman, previously of Pendo and VP of Finance, Benedict Waters, previously of Upsight.

FOSSA’s top caliber team has developed a very compelling value proposition and return on investment for its customers, which include major Fortune 500 companies most of whom were acquired organically to automate the risk out of their open source. For Uber, FOSSA helps validate compliance of thousands of open source software libraries, especially in preparation for its IPO. FOSSA can solve problems in 24–48 hours that previously took companies nearly a year to do on its simple, easily integrated product that developers actually enjoy using, in stark comparison to existing open source compliance tools on the market.

FOSSA was designed with developers in mind, and their OSS dependency scanner, fossa-cli, is one of the most popular open source dependency analysis tools on Github, having reached over 2M downloads. FOSSA supports over 20 languages and environments and has analyzed over 61 million commits to date.

We couldn’t be more excited to support FOSSA on its exciting mission to transform enterprise use of open source software. Welcome to the Canvas family, Kevin and the FOSSA team!

Our Investment in FOSSA was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

A Q&A with Mike Ghaffary & Grace Isford of Canvas Ventures

Mike Ghaffary is a General Partner at Canvas Ventures, and has invested in Superhuman, Strava, Flyhomes, CloudKitchens, Optimizely, Padlet, and several others. Previously, he was CEO of Eat24 post Yelp acquisition, and Vice President of Corporate and Business Development for Yelp. Grace Isford is an Investor at Canvas Ventures, where she is actively involved in several portfolio companies including Airvet, Flowspace, and Flyhomes. This is a transcript of a conversation between Mike and Grace, and has been edited for clarity.

Eat24 was one of the fastest growing food delivery marketplaces from 2012 to 2017, experiencing growth to $700M gross transaction revenue from a much lower baseline in that 5 year period. Yelp acquired Eat24 in 2015, then sold the company to GrubHub as part of a broader Yelp/GrubHub strategic partnership 2017. This month, Just Eat’s acquisition of GrubHub was announced as part of continued consolidation in this industry.

In this Q&A, we talk about what was unique about Eat24, what made Eat24 so successful, and why the Yelp acquisition was synergistic.

Grace Isford: How did you meet the Eat24 Team?

Mike Ghaffary: In 2010 I was working at Yelp, which was still a startup but growing really fast. I was in charge of Business Development and Corporate Development, which meant partnerships as well as acquiring companies. Yelp hadn’t done any acquisitions before I arrived, and over the time I was there I helped lead about 200 business development partnerships.

One of the early partnerships was with this little company called Eat24. At Yelp, we wanted to launch a transaction platform to allow startups that were doing local transactions with local businesses to transact right there on the Yelp platform. So if you did want food delivery, rather than having to look up a restaurant that offered delivery on the Yelp app, we had a little flag that said “offers delivery” where you could read about the ratings. Then, you would go on another app, like Eat24 or GrubHub and finish your order. We thought, why not let people do the delivery ordering right there in the Yelp app? The same logic applied to other categories as well. You could book hotels via Hipmunk, golf tee times and excursions, like hot air balloon rides. We had many other categories. But we knew food delivery would be a big one — restaurants were about 50% or more of Yelp’s traffic at the time, even if they weren’t a majority of revenue because some other categories monetized better.

So I went looking for food delivery startups, and we found this little company called Eat24, co-founded by Nadav Sharon, Haim Erez, Morani Hacmon, and a few other guys who were all immigrants to the United States. And they were extremely scrappy. When I met them in 2012, they had about a dozen employees and were still early in revenue. But there was something about them. The product was really good. It was really impressive — it was the best user experience we had seen, with a great product flow, and they were signing up restaurants pretty quickly.

So we decided to give them a shot as a launch partner on the transaction platform, and then as they say, the rest is history. So that’s how we first met, and it led to a lot of exciting things as the relationship continued to escalate.

GI: Taking us back to that time, why did Yelp choose to partner with Eat24 versus some of the other platforms? Was it just a really great founding team?

MG: We partnered with a few companies, so it wasn’t only Eat24. We also partnered with Delivery.com. We actually had a signed partnership with GrubHub, who was the biggest in the space at the time, but they never ended up wanting to do the implementation we wanted. We wanted to have GrubHub allow you to order right there in the Yelp app — we signed a partnership and I learned a lesson that we weren’t as crystal clear on timelines for implementation. And they never ended up building it. GrubHub said it was easier for them to just link users over to the GrubHub app to complete their order, even if that was harder for users. Yelp said hey that defeats the purpose of saving the user from create two accounts, creating two passwords, putting in two credit cards, etc. That’s not the vision we had for a really easy user experience, and we were at a standstill, so that original Yelp-GrubHub partnership of 2012 never got implemented.

Years later, Yelp ended up acquiring Eat24 and then selling it to GrubHub, for quite a big markup. But the only reason we were willing to sell the company is that GrubHub finally agreed, five years later, to the partnership where you could actually fulfill the order for food delivery right in the Yelp app powered by GrubHub and Eat24’s combined inventory. So we joked that we had to go build this transaction platform, acquire Eat24 and grow it, do all this stuff, just to get that GrubHub integration that we had agreed on five years prior.

GI: That’s awesome! Circling back to the beginning of this story, what are the two or three biggest reasons for the impressive gross transaction volume growth? What were the three keys to success?

MG: To give more granular numbers, we had $700 million in annualized gross revenue at the top line in 2017. Earlier, when Yelp acquired the company in early 2015, they had hit $150 million in annualized gross transaction revenue. So we grew it very quickly under Yelp in two years, but even independently, it went from a standing start to $150 million. So the question is, how did that happen?

1: BD Partnership with Yelp

One major part of the story was that Yelp became Eat24’s number one external source of new users, and in turn, Eat24 became Yelp’s biggest transaction platform partner, across all these verticals that I told you about outside of just food delivery, because it was the perfect place to discover your new user.

So I think there’s a lesson here that sometimes, early on founders of consumer apps typically get the advice not to over-focus on business development. Sometimes, however, if you choose the partnership very carefully and really work hard at it, you can create outsized value through BD as an early stage startup.

BD can really be a rocket ship for your company. And I think related to sub-bullet number one is that Eat24 was by far the fastest at making product iterations and taking full advantage of the Yelp platform. We would tell 10 platform partners across food delivery and other categories, “Hey here’s a new change. Here’s a new way you can process a credit card for example. We would suggest other ways to make transaction flow more efficient. Can you please do this? And this will get you more traffic, more revenue, more momentum on our platform.” We would come out with these ideas and Eat24 would code overnight, and implement the ideas we talked about by the next day. They would run circles around our other partners.

Eat24 had this amazing ability to do extremely fast engineering turnarounds without product quality suffering and without major bugs. Our other partners would take one to three weeks, sometimes drag their feet for months going back and forth. So if you can find a rocket ship to hitch onto with the BD partnership and you can become their kind of preferred partner, that can be extremely valuable.

2. Scrappiness and Unique Marketing

Number two, one of the key defining features of Eat24 was an extreme scrappiness and a complete sense of independence from the norms around the typical playbook of how to build a consumer app.

Just because everyone was advertising on Facebook and Google around 2014 or 2015, didn’t mean they were going to, in fact, when they saw the rates on Facebook advertising kept going up and up and it didn’t seem economical, they pulled back and famously did a blog post and said, we’re not going to do CPA advertising on Facebook at all. We’re breaking up with Facebook! It was a really funny blog post that got a lot of attention. Instead they did all this awesome guerrilla marketing across paid TV, radio, PR stunts, and email marketing.

They would do late night, cable television spots, buying remnant inventory through Comcast Xfinity, and produce low cost television ads. And then they’d re-syndicate the same ad spots on YouTube, and with video what’s interesting is, you know, most people think that, producing a television spot costs upwards of $10k all the way up to $50k or a $100k, depending on talent production, quality. They would produce this video content for maybe $1k. Then they would get the spot out there, very authentic, using computer graphics and really funny content, and then they would just publish it and it would really connect.

3. Creative Team

And that gets me to number three, which is a focus on creative.

Eat24 to this day still probably has the best creative content generation team that I’ve ever met. They did exceptional work. And I say this before my time and the acquisition — they get all the credit for building this amazing team that we used to liken to a writer’s room for The Daily Show or The Simpsons.

The team was led by a really smart Berkeley English major with a dry wit and an amazing sense of humor. And you wouldn’t know it normally when you were talking to her that she was able to produce this great comedy, but when the team got together, the jokes they would write were incredible.

They would write a weekly email that pretty quickly got to an audience of 2 or 3 million users reading it every week and those users would order food again. It was magic and a big part of reactivation of users, instead of paying to reacquire existing users, a problem that many transactional startups have. Eat24 didn’t have to spend a dime on that — people were just reordering for free, and a big trigger was reading that weekly email.

And then that same creative team could be repurposed to go do those funny television spots for cheap audio spots and funny PR content and it was so entertaining that naturally built an audience. So to me that was really interesting. You asked for three things, but if you had asked for a fourth, the product was just really clean, really dead simple to use.

And I think the founder was just so laser-focused on removing all obstacles and making the lowest friction easiest app that he could, with a kind of no BS style of building the company and running the product team that really worked as well.

GI: Interesting — those aren’t necessarily things I thought you were going to say! Partnerships, scrappiness, creativity. Oftentimes we get so focused on, company revenue growth, and how they have all these great customers and acquire them really cheaply. But I think the lesson for me here is focusing on your strengths and just focusing in general on who your user is and how to acquire them in the lowest friction way possible.

MG: 100%. I mean, it got to $150 million gross revenue and I don’t even know that they measured their CAC or CPA in a traditional sense (for offline marketing channels). By the time we acquired the company and then we grew to $700 million gross revenue, we had figured that all out. But still, to get to that kind of growth before the acquisition and not even be on top of your CAC math would get you kicked out of the room at a lot of VC pitches, but, by the way, they never needed to raise outside funds. The team never raised a dime of outside venture capital because it was profitable with 30% EBITDA margins and they were able to grow off their own cash, which was also incredible.

GI: A lot of people like to say that the acquisitions are where companies go to die, and post-acquisition just don’t really work out. Why was the Eat24 acquisition successful?

MG: Yeah. I think McKinsey did a study that 70% of M&A fails. So this is certainly the exception rather than the rule to be able to go from $150 million to $700 million post acquisition in two years. And we went from about 150 employees to 500 employees in that same time. That’s not easy to do, but it was a lot of fun.

Once we did the acquisition, the founding CEO of Eat24, Nadav, asked me to take over as CEO. He said, “Mike, I’m not a corporate guy. You should do this thing.” Like we talked about, he was totally avant-garde. He had never raised venture capital. He had never worked for like a tech company in his life. He said, I’ll help out as long as you need me, and then when I’m not needed anymore, I’ll go out and I’ll support from the sidelines. He gave me a whole team and all his direct reports and they all stayed on at Yelp. Both the founders and the Yelp Board asked me to run Eat24 as a subsidiary — so I did that!

It was trial by fire. There’s also another interview we can do on all the mistakes I made and all the battle scars and hard knocks I learned so not to sugarcoat it. But today we’re talking about the kind of growth trajectory and the good stuff.

Part of Yelp’s acquisition thesis in the first place was the value we could unlock by all being one company. When you have a BD partnership that’s really working, that’s when Corp Dev can make sense, and we thought we could really double down on this thing and grow it like a rocket ship. Before Yelp was worried about, “Hey, this is a third party company, and if we help them too much, what are the risks, or we can’t give them, for example, data back on which restaurants we’re seeing have better retention when we send certain new users there.” There was a lot they could see, but there were some data that Yelp had that Eat24 couldn’t originally get to. Now post-acquisition we could just go full blown, fully transparent on which restaurants have the most traffic on the front end in the first place or the most delivery searches, which was a real advantage, so that Eat24 sales reps could go call these restaurants. There was so much we could do when it was fully integrated and I think that helped unlock the next part of the growth curve.

By the way, a risk when you’re doing a BD partnership with a larger platform is for the other companies partnering with us, frankly, they weren’t very happy about it. I got calls and I had to call proactively as we were announcing the acquisition and said, “I know you’re probably not thrilled. We’re going to leave the transaction platform up, but we will be owning a company that’s a direct competitor.” But it unlocked a lot of value for us, and so that’s the lesson for startups out there too when you look to have these early BD conversations. They might lead to M&A interest that could be interesting to you later on, or the public company might end up acquiring your competitor. You have to bet on yourself and whether you can be the most compelling platform partner.

We were also able to just dump a ton of resources into the team to professionalize the management. We brought a world class business analytics team and the power of the Yelp sales team, which was really accomplished and great at opening up the top of the funnel on the restaurant side, as well as extra consumer acquisition, so there were all these resources to be able to dump in.

That’s part of why GrubHub was interested to acquire Eat24 for $287 million just two years after Yelp had acquired it for $134 million. That’s also how Yelp finally got the partnership with GrubHub we wanted, and we thought that would be an even better user experience to pool those two resources and let GrubHub focus fully on delivery while Yelp focused on top of the funnel.

The next chapter for food delivery is being written now. Thanks for a fun interview!

Follow Mike on Twitter @newmike and Grace @graceisford for more articles like this one.

How Eat24 Scaled to $700M in Gross Revenue in 5 Years was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

Over the past 3 months, we’ve witnessed 2 fascinating trends: accelerated adoption of telemedicine and telehealth with visits surging 50%, and a spike in pet ownership with the ASPCA seeing a 70% increase in animal adoptions.

And these trends are nothing new. Telemedicine has faced several favorable tailwinds over the past decade to facilitate more widespread telemedicine adoption. With my prior investment in the medical professional network Doximity, which recently launched a new telemedicine platform that already supports over 1M calls a month, I deeply understood the magnitude of the opportunity. The explosion of telemedicine coupled with millennials increasingly favoring pet ownership and nearly 40% of households owning at least 1 dog (with more dogs than kids in San Francisco!). The U.S. pet market is nearing $100B in 2020 and Chewy, with a market cap of nearly $20B, is one of the 20 largest venture-backed companies of the past decade.

Today, Grace Isford and I are excited to announce an investment capitalizing on both of those tailwinds: Airvet, the first pet-driven telemedicine and telehealth platform. Unlike any of the other pet telehealth platforms on the market, Airvet approaches the market with a philosophical difference to put pets and pet-owners first. Pet health is also relatively underpenetrated in telehealth and telemedicine today.

As pet owners ourselves, our love of pets and commitment to keeping them healthy made us particularly excited about the investment. Rebecca has 13 pets (including horses, cows, chickens, a cat and a dog) and Grace has 2 dogs who are members of the family. We know the cost and convenience factor of a virtual vet especially if it means saving a late-night emergency room trip.

Pet owners can download the Airvet app and start using the product immediately — you can video chat with a vet on-demand for any urgent matters (at any time of day) or schedule an appointment with your primary vet. The product is sticky and users typically come back several times a year — a dramatic improvement from the norm of pet owners seeing their existing vets once every 9 months. The pet love for Airvet is also exemplified by some of the highest app store ratings we’ve seen — the #1 rated pet telemedicine app with 4.9 stars across 2.3K reviews.

Vets view Airvet as a revenue-generating tool both for curbside in-person pickups and maintenance checks. It’s easy for vets to use and sign up with with high vet and hospital engagement. While you can’t do all pet examinations or surgeries via virtual vet, Airvet is particularly effective for maintenance checks, after-hour visits and facilitating curbside check-in so a pet-owner can virtually chat without in-person contact.

We are especially excited about Airvet due to founder and CEO Brandon Werber and his vision for the company. When we first met Brandon (virtually), he made time for us less than 24 hours after his wife had delivered their first child! His dedication to the company and focus on surrounding himself with those who can help him execute and grow his vision is unparalleled. Like us, Brandon shares a love of pets, and also possesses a unique empathy for vets, having grown up in a vet household himself, and is uniquely motivated to improve the experience for all involved. He also is the proud owner of two adorable french bulldogs.

It’s only just the beginning. Airvet is in a unique position to expand further into other pet health verticals and continue to forge partnerships with major players in the pet space.

At Canvas, we take pride in helping our founders fulfill their visions to meaningfully change the world and we couldn’t be more excited to partner with Airvet to dramatically improve the pet health experience. For any pet owners out there, try Airvet out for your next check-up or vet visit today!

Our Investment in Airvet was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

https://thisweekinstartups.com/e947-mike-ghaffary-general-partner-at-canvas-ventures-shares-strategic-advantages-founder-university-shows-how-startups-can-identify-evaluate-strengthen-defensibility-in-their-markets/

Mike Ghaffary Shares “Strategic Advantages” @Founder.University was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

At Canvas Ventures, we generally invest anywhere from $5M up to $20M in Series A and Series B rounds. We will also get involved at the seed stage in special cases, often where there is an existing relationship with a founder or a market.

These are my focus areas:

1. Marketplaces
2. Consumer
3. Software

My previous investments can also give you a sense of what I’m interested in.

Why do I like those types of companies?

1. Marketplaces: these are businesses that connect supply and demand, and in my focus area through software, such as Uber, Lyft, and Airbnb. They have two-sided network effects that create defensibility once the company achieves scale. This makes a marketplace company more durable once it reaches a certain size. So much has been written about this that I don’t need to rehash it here, but here is my professor from business school 15 years ago that opened my eyes to two sided network effects, and here is a VC post on it. Another helpful data point is NFX’s research that 70% of the value created by tech companies since the Internet became widespread in 1994 has been from network effects businesses. Canvas has been fortunate to invest in many successful marketplaces, such as Transfix and Zola.
2. Consumer: I’m particularly interested in useful consumer apps that might actually land a place on the first screen of your phone, even if they aren’t inherently social or viral at first. That’s what got me interested in Yelp, Strava, Superhuman, and others.
3. Software (SaaS/Enterprise): as a computer science major, I will always love software of nearly all types. I try to focus on areas that are either connected to my work experience, my investment experience, or an interest area, such as these:

• B2B marketplaces coupled with enterprise software (because I love marketplaces)
• Software for local businesses or SMBs (based on Yelp experience)
• Productivity software (such as Superhuman)
• Software to help you scale or run sales, support, or other functions as you grow to 500 employees (such as Stripe, which helped us as we grew to that stage at Eat24)

This doesn’t mean I’m only looking at those types of companies. I’ve invested in everything from insurance companies (Metromile) to coffee shops (Philz Coffee) and legal startups (Atrium).

I do tend to take more meetings in the first three categories above, so if you have a company that falls in there, I want to hear about it. You can find me on twitter, and my DMs are open: @newmike

For marketplaces, I like to ask myself the questions below through the process of getting to know a marketplace. Of course, these won’t all get answered in a first meeting, but a few founders have found this checklist helpful:

Marketplace Checklist: 15 Questions

1. Which side of the network values the other side more?
2. Is there an effective and proprietary method for distribution to each side of the marketplace, especially the more highly valued side?
3. How strong are cross-side network effects, is there a metric that can measure that, and how has it tracked over the last year?
4. Are there same-side network effects, and how strong are they?
5. What are switching costs for each side?
6. What are LTV and CAC for demand and supply side?
7. What does liquidity look like, and how do you measure it (e.g. average amount of time from supply being posted to fulfilled/met with demand)?
8. What is frequency of use (transactions per month) for demand and supply side?
9. What is average transaction size for demand and supply side?
10. What is the marketplace take rate or monetization model, and what is the the sustainable take rate over time and why?
11. Does it get easier to acquire incremental supply and incremental demand as this marketplace grows?
12. How fragmented is supply side?
13. Is there an initial focus on one or two geographies or categories, and how strong are the network effects there?
14. What is the winning strategy for that initial market, and what is the plan to scale beyond that?
15. Is there a new product enhancement to the marketplace/transactional user experience, such as Eat24 allowing more convenient food ordering from a mobile app vs. the old model of making phone calls and needing a paper menu?

Additional Marketplace Resources and Links:

• https://hbr.org/2006/10/strategies-for-two-sided-markets
• https://medium.com/@nfx/70-of-value-in-tech-is-driven-by-network-effects-8c4788528e35
• https://andrewchen.co/marketplace-startups-best-essays/
• http://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/
• https://techcrunch.com/2017/05/25/anatomy-of-a-managed-marketplace/
• https://web.stanford.edu/~izhutov/papers/AnatomyOfAServiceMarketplace_1116.pdf
• https://andrewchen.co/how-marketplaces-will-reinvent-the-service-economy/
• https://twitter.com/arteeninLA/status/968256415738380288
• https://a16z.com/2016/07/20/marketplaces-guide/
• https://www.battery.com/powered/why_airbnb_is_way_more_competitive_than_uber/
• https://www.battery.com/powered/beyond-ebay-lessons-from-the-experts-in-scaling-todays-online-marketplaces/
• https://blog.usejournal.com/the-anatomy-of-a-marketplace-16b9d4ee8174
• https://medium.com/@jgolden/four-questions-every-marketplace-startup-should-be-able-to-answer-defb0590e049
• https://www.nfx.com/post/network-effects-manual
• https://www.nfx.com/post/network-effects-manual

Where I’m Investing and 15 Marketplace Questions was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

Possible Finance is doing what I previously thought was impossible. They are helping people on the lower end of the credit spectrum — those with little to no credit history — gain access to credit and improve their financial future without being predatory. Possible Finance is accomplishing this as a mission-driven company that leverages machine learning to do good while building a profitable business.

The mission of Possible Finance is to improve the financial well-being of people that typically fall outside the scope of traditional financial services. They are starting with affordable short-term loans because this product is needed most by so many people. As they build deep and trusted relationships with their customers, they will be able to leverage data and build out other tools and non-loan products that can further improve individual financial wellness.

While one can argue that all debt is bad, the reality is that people at every level of the credit spectrum need access to short-term loans from time to time. These loans provide a cushion to get through the financial bumps in life. According to the Federal Reserve, about 46% of Americans report they don’t have enough to cover a $400 emergency expense.¹

Existing short-term credit options are almost entirely single payment products.These products are expensive, don’t build credit history, damage credit history because they pull a credit report, and become debt traps for borrowers who cannot pay them back. The better solution is an installment loan product with a manageable rate that helps build credit history so that the borrower will have even better credit options in the future. Possible Finance provides this solution.

For perspective, two pervasive types of single payment loan options are payday loans and bank overdraft fees. It is helpful to understand how both work in order to fully appreciate the alternative provided by Possible Finance.

Payday loans: The average payday loan is $375. It comes due in 2 weeks, and the borrower must pay an average fee of $55 PLUS the total amount of the loan in full at their next pay-cycle. On average, this payback is 36% of the borrower’s next paycheck. The borrower’s options are to payback the loan in full, take out another loan, or pay another $55 to keep the loan out for another two weeks.The typical borrower keeps the loan out for five months and pays an average of $520 in fees on top of the $375 they originally borrowed. Of those borrowers who eventually pay off the loan, 41% report that they pay it off with some type of windfall — a tax refund, help from a relative, a second job, etc. In each two-week cycle, three percent of borrowers charge off, or default on the loan. To do so, they either do not deposit money into their bank account or they close their bank account altogether. However, lenders can be very aggressive and sue for wage garnishment and other recourse. Now the borrower has even bigger problems.

Bank overdraft fee: Perhaps an even more egregious product is the bank overdraft fee. Bank overdraft fees account for 62% of all spending by underserved consumers on single payment credit products.² Of the people who overdraft, one-third report they did so primarily as a way to borrow money, and the median that shortfall borrowers are trying to bridge is $24 for three days. Keep in mind that bank overdraft fees can be the only option people have who have little to no credit history, as they cannot even qualify for a payday loan. Whether an overdraft amount is $1 or $1000, the average overdraft fee is $34. Typically, if an account is not positive within 5 to 7 days, the account holder gets hit with another $34 fee. While overdraft fees are “technically” not a loan, if you were to consider overdraft fees in a lending context, the calculation would be as follows: if you were to take out a $24 standard loan and pay an additional $34 to borrow the funds for three days, this loan would have a 17,000% APR.⁵ In total, Americans spend $24.5 billion dollars a year on bank overdraft fees.²

Possible Finance is solving this gap in consumer funding in a thoughtful way. I led the Series A investment in Possible Finance for 5 reasons:

1. Possible Finance is an installment product and NOT a single payment product. The Pew Charitable Trust has recommended that small loans be repayable in affordable installments, and has found that borrowers fare better when the loans have their costs spread evenly over the loan’s life, rather than front-loaded via an origination fee. Possible Finance took these recommendations to heart, and has set up all of their loans to be repaid in installments, with no origination fees or prepayment penalties. In contrast, Pew also found that the average payday loan takes up 36% of a borrower’s next paycheck, which most borrowers can’t afford. Possible Finance steers clear of debt trap loans like these, and instead lets borrowers pay back loans in installments over at least eight weeks. And, Possible Finance will not loan more money until the first loan is paid in full.
2. Possible Finance improves credit ratings. Because Possible Finance has an installment product, they are able to report payment information back to all three primary credit bureaus (Equifax, Experian and TransUnion). This is important because when customers pay back the loan, they build their credit history. They are then able to get access to even better financial products and interest rates in the future. In contrast, single payment products cannot be reported to bureaus and do not improve credit history.
3. Possible Finance does not pull a credit bureau to underwrite the loan. This is important because pulling credit bureaus negatively affects a consumer’s credit score. Instead, Possible Finance uses machine learning and bank data to decide who to loan money to and how much. By using this approach, Possible can loan to individuals who have no credit history or limited credit history and can help them build their credit score. Again, this is good because it helps people get access to even lower rates in the future. In contrast, most single payment products pull credit reports.
4. Possible Finance meets ALL state by state regulatory lending requirements and interest rate caps. Unlike many other companies in the short-term lending space, Possible Finance registers and gains approval to operate in every state they are doing business in. In contrast, there are some companies that provide short-term loans, but claim that they are a tip or a service fee because this allows them to get around state licenses and rate limits. Possible Finance works collaboratively with regulators. In fact, Possible Finance recently collaborated with the Pew Charitable Trust to pen a comment letter to the CFPB in support of 2017 rules to reform short term lending. The letter urges the CFPB to keep in place the 2017 rules which greatly increased consumer protection against harmful practices in short-term lending.
5. Possible Finance is incredibly user friendly. Consumers can borrow up to $500, without a credit check, and have access to funds within 5 minutes. Additionally, Possible Finance will allow borrowers to delay payments, without hurting their credit score, up to the maximum time period allowed by the credit bureaus, with no fee or penalty.

Possible Finance is helping more than 94 million Americans who are non-prime but pay an unfair $97 billion per year for short-term credit products that are expensive and unsustainable “band-aid” solutions that drive them further into debt. Possible Finance is reversing the detrimental debt cycle by helping these small-loan payments actually build credit reported to all major bureaus.

Beyond improving the financial well-beings of thousands already to date, Possible Finance is also building a differentiated proprietary dataset, analyzing over 35 million lines of bank data to date using machine learning to reduce both risk and cost. This data will only become more beneficial over time as more data is aggregated, and this will allow them to expand their suite of financial products and services for years to come.

At Canvas, we take pride in working closely with our founders to help them make their vision a reality. I’m excited to see Possible Finance continue to build and deliver a service that I used to believe was impossible!

You can read more about this announcement on Techcrunch and Geekwire.

Sources:

1. https://www.washingtonpost.com/news/wonk/wp/2016/05/25/the-shocking-number-of-americans-who-cant-cover-a-400-expense/?noredirect=on&utm_term=.fe65a4c92a59
2. https://s3.amazonaws.com/cfsi-innovation-files-2018/wp-content/uploads/2017/04/27001546/2017-Market-Size-Report_FINAL_4.pdf
3. https://www.consumerfinance.gov/about-us/newsroom/cfpb-unveils-prototypes-know-you-owe-overdraft-disclosure-designed-make-costs-and-risks-easier-understand/
4. https://files.consumerfinance.gov/f/documents/201708_cfpb_data-point_frequent-overdrafters.pdf
5. https://www.creditkarma.com/advice/i/what-is-credit-card-apr/

Possible Finance — Our Investment in Financial Wellness was originally published in Canvas Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.