Non-Linear Growth

A glimpse around the next corner; mind the curves.

September 8, 2011 • 3:08 pm 1

Working with Friends

Last week I wrote about the value of repeat relationships in the venture capital and private equity business. I used the example of a portfolio company that recently raised capital from a firm we have worked with on a repeat-basis. I intentionally left out the investor’s name as well as the companies knowing that this new investor wanted to more formally announce their investment after labor day.

Well… today, Intel Capital announced a significant investment in Meritage portfolio company IP Commerce. A couple of years ago, Intel joined our syndicate at Crisp Media. Our work there – at the Board and investor levels – has been constructive and collaborative. Crisp is better for it.

I’m excited that Intel has decided to join us at IP Commerce. Special recognition goes to Bavanipratap Rana and Vibhor Rastogi who spearheaded Intel’s work on the transaction. Both worked effectively and collaboratively on the financing all the while doing their jobs by protecting Intel’s interest. We won a few points to, but that is how it should be. In the end, IP Commerce gets more capital, a new supportive investor with lots of leverage points and another effective voice at the table to help the company navigate the huge opportunity it is pursuing.

Some might believe that corporate VC’s like Intel Capital are somehow lesser VC-lifeforms. That has not been my experience. I’d gladly have Intel join the syndicate at any of my companies. Welcome to the team guys and congratulations to IP Commerce for successfully completing this financing. On and up!

Filed under: Payments, Portfolio

January 21, 2010 • 6:29 pm 3

When Platforms Collide; Mobile and Payments

A few weeks ago, I wrote a post that covered my areas of investment interest for 2010. Three of the areas I find most interesting are the mobile ecosystem and the payments sector and the theme of “platform” business models. You can find that post here. The natural question I’ve since been asked is:

“What about mobile payments?”

My friends at PYMNTS.com asked me to join in the discussion in their Briefing Room on Mobile Payments. My answers are here. As you will see, the format of the briefing room is five questions, with the emphasis on the intersection between payments and mobile application development platforms. I tried to answer the questions as directly as possible, but in the process, a couple of things went unsaid.

So, to add to the Briefing Room post, I should say I’m a big believer in mobile payment. The phone will be your “wallet” some day, although I can’t tell when. My sense is that adoption for online and mobile web/application payment will precede mobile payment at the traditional point of sale. I’m most interested in mobile payment in economies where electronic payment is an emerging alternative like developing economies and in last cash markets where the connectivity enabled by the mobile phone provides an entry point for electronic payment services to displace cash.

Regardless of the sector, I’d argue that mobile payment has to add value to the payment process to fully take hold. It is not sufficient to simply replace an existing electronic payment transaction with a mobile originated payment. That will cost more to the merchant, because it adds layers to the value chain and fundamentally adds no value.

Show me an opportunity to invest in a payment business leveraging mobile with a clear value proposition in a market segment that is accessible in the near term and you are likely to find a very engaged and interested prospective investor.

Filed under: Mobile, Payments, Platforms

January 4, 2010 • 11:23 am 7

Areas I’m most likely to invest in during 2010

I have always been fairly thematic in my investment approach. For me, the process starts with identifying big markets that are either 1) emerging (and will therefore be created over the next several years) or 2) undergoing some structural shift that will enable new entrants to grab market share from incumbents. I have seen Companies succeed in both types of markets and so I don’t have a preference for either approach. In 2010, there are a several big themes that I’m tracking which are likely to influence my investment selection during the year.

Everything is a service

For several years I’ve been spouting off about the notion that “everything is turning into a service”. I outlined some detailed thoughts on this trend in a post titled “The future is in services” last June. As I look several years out, I see several big value chains threatened by this trend, creating opportunities for upstarts. For example, I think there will continue to be pockets of attractive investments in SaaS. But where I see big opportunity is in cloud based services and platforms that enable the cloud to become a true utility to the enterprise, small business and even consumers. Transforming computing from a product into a service is a non-trivial shift that will take many years, but the march is on and the direction of the trend is undeniable. Computing, storage, etc. will all primarily be purchased as a service in the not too distant future.

Platforms

For me, 2010 will be the year of the platform. The notion of open platforms that enable third-party developers to innovate on top of the platform by consuming API is alluring to me. I’ve already put my money where my mouth is on this one as several of my investments have ”platform” as a core component of their product and go-to-market strategy. Communications is an areas that has largely been untouched by the platform trend. It seems to me that the time is ripe for the network to begin opening up. I’ve written about this in the past on my firm’s blog; you can find that post here. The post is a bit dated, but I think you will get the point. Location services is another area where I think there are platform plays emerging.

Payments

I have an inkling that innovation is finally coming to payments. There have been some big exits in recent months, including BillMeLater and Revolution Money. Neither is particularly reflective of the type of innovation I think is coming in payment, but both show the size/scale of businesses that can be built given the massive size of the payments sector. With PayPal opening up its platform to third-party developers, there is going to be a rash of new payment application development in the coming years. As an investor in IP Commerce, I have a special perch from which to watch this trend. I’m staggered by the diversity of payment applications being developed on top of the IP Commerce platform. Several have already caught my eye as potential new investments and I believe more will do the same in 2010. I’m also tracking some big last cash markets, which I think are finally opening up to electronic payment providers.

Mobile

Mobile is an area I have tracked closely for several years now. And while some would argue that the market has disappointed, I would counter that we are still in only the early innings of a very long game. I continue to believe firmly in the mobile web, or the web optimized for the display needs and the unique capabilities/properties of mobile phones. I’m less enthusiastic about applications being developed for the iPhone/Android/RIM and other operating systems; or at least less enthusiastic about investing in companies that create those apps. There is just too much OS fragmentation for application developers to manage effectively and it is difficult to make any particular app stand out in the crowd.. As 4G networks begin to roll out, more bandwidth may obviate the need for a downloadable app. In some ways, apps remind me of PointCast; remember that? I’ll continue to track this trend closely, but as it stands, my money is on the web, not the apps in the long-run. Regardless, I’m more interested in the infrastructure and plumbing in mobile than the consumer-facing application side. The fact is that the mobile use case is fundamentally different from the web and it enables usage paradigms that are not relevant on the tethered web. As a result, the capabilities of the plumbing for mobile need to cater to what is unique about the mobile experience, creating an opportunity for new players to stake out a dominant and differentiated position.

I’m likely to make two new investments in 2010. I am more likely to prioritize my review of investments that synch with the themes outlined in this post. I’m also more likely to make investments in these areas than other areas I’m not tracking as closely. Having said that, I think it is critical to marry a thematic (and therefore planful) approach to identifying great investments with an opportunistic approach. So I don’t rule out making investments in other areas in 2010. I know there will be several entrepreneurs with whom I interact who light a spark causing me to dig deep into areas not outlined in this post. Frankly, I look forward to having that spark lit; it is a great part of the process of discovery that the VC business requires.

Filed under: Cloud, Investment Selection, Payments, Platforms, Themes, Venture Capital, Wireless, , , , , , ,

December 15, 2009 • 2:24 pm 4

Why cash is such a tough competitor; last cash markets

I’ve been spending a bunch of time recently thinking about last cash markets – markets that are still dominated by cash payment – and how electronic payment can penetrate these markets. Some of these markets (vending, taxis, paid parking) are huge (measured in billions). The lack of connectivity with the point of acceptance is a huge issue for some of these verticals; low cost “back-channel” the point of acceptance is an absolute requirement for electronic payment to crack some of these markets.

I was grateful when my friends at PYMNTS.com put me on the hot seat with five questions about the topic. You can find their full Briefing Room on last cash markets here.  My answers appear below. I’m interested in your thoughts.

1.       Smaller ticket sizes, among other factors, in the taxi and vending industries have resulted in their being the last cash markets in the U.S. What barriers still exist on both the consumer and merchant sides to continue to migrate these markets to electronic-based payments?

In order to understand why cash markets still exist, I really think you have to think about cash is an incumbent competitor to electronic payment. Like any competitor, you have to evaluate the value proposition relative to the competition. For the merchant, cash is fast, reliable and low cost (although not costless) to accept. For the consumer, it is accepted ubiquitously, and requires no trust of an institution. When framed this way, it becomes clear that just how fierce of a competitor cash is.

The value proposition differs by vertical market; each with different needs. In some verticals, like the taxi and vending verticals, near-zero cost and near-immediate acceptance are absolute requirements. For electronic payment to crack these verticals, the cost of acceptance for the merchant must drop below the cost of accepting cash and the immediacy of collection must match the near-instantaneous immediacy of accepting cash.

 2.     Consumers have more payment options than ever at their fingertips. Why are consumers still loyal to cash?

For some consumers, particularly the credit challenged and the unbanked, cash will remain king. Some don’t have access to the classes of services that would enable them to pay electronically. Some choose not to access electronic payment services because of skepticism of the institutions that facilitate electronic payment. Whether by lack of access or choice, fundamentally this class of consumers has no other way to pay.

3.     Payments is all about cracking the chicken and egg problems of changing consumer behavior and changing merchant behavior. From your perspective, what side of the chicken and egg debate is the hardest to solve for?

I’m a big believer that the chicken and egg “choice” is a false choice. Said differently, any solution that wants to displace cash must have a simultaneous value proposition for the consumer and the merchant. If the value proposition is weak on either side of the market, the solution will not take hold, no matter the strength of the value proposition on the other side.

Cracking these markets is about solving a problem for both sides of the market simultaneously and getting them to adopt the solution in lock-step.

4.     Pundits have been telling us that the cashless society is right around the corner for the last fifty years. What’s taking so long?

In verticals where the point of acceptance is highly distributed, the availability and cost of connectivity required to facilitate electronic payment is a huge hurdle. For example, I think about every parking meter in the world as a point of acceptance. The up-front and recurring cost to network every one of those points of acceptance makes the economics of accepting electronic payment infeasible. Taxi’s and vending machines suffer from the same “lack of connectivity”. The more distributed the point of acceptance and the lower the collections per point of acceptance, the bigger the barrier to adoption.

Only now are solutions becoming available that leverage “nearly-ubiquitous” connectivity; the mobile phone. The mobile phone provides an already in place back-channel that costs the merchant nothing, because the connectivity is already in place and is paid for by the consumer.

5.     What cash-based sector will be the last to convert from cash – why and when?

Without delving into illegitimate or illegal business activities that will always be dominated by cash, the sectors that will be last are those with the most fragmented and infrequent point of acceptance. In addition to taxis and vending, I’d add paid parking, charity events and even panhandling. In these verticals, it is just unrealistic to think that electronic payment can ever fully displace cash. Cash is too strong a competitor to be easily or fully displaced.

Filed under: Payments, , , , , ,

November 18, 2009 • 1:05 pm 2

Reactions to AmEx’s acquisition of Revolution Money

Karen Webster of Market Platform Dynamics asked me to share some quick reactions on the announced acquisition of Revolution Money by AmEx this morning. As a result, my thoughts are cross-posted on PYMNTS.com. Karen asked me to address the following questions/issues:

What was your initial reaction to the news?

My initial reaction was that AmEx move to purchase Revolution is a direct reaction to two big moves PayPal has made in recent months. First, last November, PayPal announced the acquisition of BillMeLater. If the incumbents needed a signal that alternative payments were ready for prime-time, PayPal/BillMeLater provided it. AmEx’ acquisition of Revolution Money only solidifies the trend and highlights how controlling the payment instrument is as important as controlling the back-end. Related to this, it is clear that AmEx wants to buoy it’s at-risk issuer-side revenue streams with the transactional revenues that are characteristic of alternative payment instruments.

Second, and perhaps more importantly, PayPal’s recent PayPal X developers conference is sending ripples through the industry.  In my mind, this highlights how the coming battles in payment will be about controlling how payment services are integrated at the point of payment wherever and whenever the user wants to access it. Bullet number three in the press release makes it clear that the legacy payment infrastructure must open up through APIs that allow developers to access new payment instruments and core processing infrastructure. In my mind, none of the incumbents have the skills, capabilities and resources to create a truly open platform that application developers can easily consume. PayPal made a big case around mobile at PayPal X and as bullet number four of the AmEx/Revolution Money press release highlights, mobile will play a key role at the edge of the payment network.

AmEx likely chose Revolution for its innovative management team and culture and for its scale, relative to other alternative payment instruments in the market.

Where do you believe AmEx will get the biggest bang for their buck?

In the short-term, AmEx certainly has the opportunity to drive Revolution’s services through its existing channels. With 4 million small businesses as customers, there is an opportunity to drive Revolution as an alternative payment instrument but also to enable SMB B2B payments. The long-term opportunity is, however, much bigger and much more strategic. AmEx can use Revolution’s P2P service as a wedge to drive AmEx services into emerging payment venues, like social networking sites, mobile, and instant messaging services. In the long-run, the opportunities to drive new payment instruments through hyper-fragmented software and web-based channels is compelling.

Also, in the mid-term, this could also create compelling transaction fees for Amex in the offline world as Revolution inherently uses PIN authentication.  The implication is lower merchant fraud with this instrument but the platform could also be used to create a new PIN debit network tied to, perhaps, a broader push by AmEx into offering DDA’s for their cardholders.

How will this affect the payments industry overall?

For the past year, there has been pressure building on payment industry incumbents to open up their infrastructure, enabling massive innovation and new payment instruments at the edge of their networks. The combination of PayPal’s recent moves and AmEx’ acquisition of Revolution Money solidify that trend. As a result, I think you will see the core processors and other payment networks looking for ways to rapidly open up their infrastructure to enable innovation on top of their services.

Where do you expect AmEx will deploy Revolution Money first?

It looks to me as if Revolution will continue to attack online and mobile channels as if it were an independent entity, but leveraging the AmEx brand and weight in the market. Beyond that, I expect AmEx to work to bring Revolution’s alternative tender types to Amex’ installed base.

Conclusion

There is no denying that innovation is coming to payments. That innovation is happening at the edge of the network through new payment instruments and through the opening up of the core industry infrastructure to software developers. As a result, highly-connected software-based platforms and their associated APIs will play a key role in the industry’s evolution. Such platforms enable low cost service delivery and massive and unpredictable innovation at the edge of the network.

Filed under: Payments, , , , , , , , ,

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