Network Effects: How to Build a World-Class Fintech Company

[Music] also going to be discussing what the principles and the processes involved in scaling a fintech company and just for time purposes I'm just going to be jumping right in with Kevin Mr Wonderful of course you have seen thousands of business pitches throughout your time at Shark Tank and I must say a lot of them are if I can call them out of the box so I have been binge watching shk tank in the last few weeks I call that research um some of them are bubbly Blaster an alarm clock that can wake you up with the smell of cooked bacon to name a few so let's just say that in comparison fintech may not be you know the most exciting thing that you that you see so what would make a pitch for a fintech company on the show get your attention two attributes they knew their customer acquisition cost and could prove it over at least a 2-year period of time or at least 18 months so they knew the attrition rate and then had they adjusted their cost of compliance to the new rigorous platforms of compliance the reason that eight out of 10 fail over 36 months and I've seen many many fintech deals and all kinds of vertical is they're never able to get their customer acquisition costs below lifetime value within a two rounds of funding so everybody's optimistic at the beginning they generally say look let's let's go in at a pre money of 5 million raise 2 million bucks whatever it is they burn that out pretty fast and they go for another round and if they haven't proven customer acquisition so let's say the first 10,000 accounts well today you can't even get funded and so but at at a period in in 2020 when a lot of these came out they got a second round slightly up sometimes maybe at 8 million or whatever but then they went to zero uh when they never got customer acquisition and that was prior to The Regulators doing what they've done since you know the FTX Fiasco and of course this week and the whole I mean it's it's been a pretty rough run yeah we're we're going to get to FTX and we're going to get to uh regulation but John I want to move on to you here do you agree with Kevin and obviously just you know to give a bit of background about John he's helped several fch startups um most of which had had over a million dollar Investments through um our crowd so how did you build or scale uh these startups in order to secure this level of investment and do you share um Kevin's opinion look um I run an interesting company which is half fintech half investment platform and so we're the cross of venture capital and financial technology the premise behind what we do at our crowd is how do all of you not just enjoy watching Kevin and his Partners at Shark Tank and imagine wow that would be cool to invest in that company how do you actually get to invest in Venture Capital worthy companies together with co-investors like sequ Kleiner or whatnot and for most people that's like that doesn't work right in other words the all the good deals are locked up all the good deals are going to people like Kevin or me and you guys aren't invited right in other words it's a it's a closed party tell I can't sleep at night and so I think the idea and it's happening now more and more is to break this closed Club up okay let everybody in okay but do it in a way that you won't just lose money but that you can make money and get Venture returns which are what the the big boys do so at our crowd we're managing about $2.3 billion we have 400 50 uh portfolio companies across a bunch of sectors fintech being one of them and our idea is to do Venture the right way with diligence and checking you know everything from acquisition cost to your return on investment but on the other hand allow individual accredited investors you have to meet with The Regulators uh uh regime and their demands and then you can get in for a a specific deal for $10,00 ,000 or you can actually get into Venture Capital Funds top quartile funds for $50,000 and that's turned out to be a winning model and we're excited at the the future growth of that we're going to talk about regulation more in depth in in a minute but since we're talking fintech I have to talk about arguably the greatest fintech invention which is cryptocurrency you've mentioned FTX so we've seen the crypto's fluctuating nature but it's still a force to be reckoned with for many um you just mentioned that when you invest in a startup eight to 10 eight out of 10 times you lose your money you lost about $18 million with FTX and that's a lot of money so what are I try not to think about that too often sorry I'm reminding you in about a 100 people anyway the the the question here and I think this is what you know people here would like to know are for you what are some of the Lessons Learned if you will that will you keep in mind the next time you invest in any fintech um uh company let's just not confine this to crypto well you know the the FTX experience and now most recently The binance Experience doesn't change the potential of digital payment systems and so unfortunately it sets it back from the regulatory environment because if you were skeptical about crypto prior to fex and binance you have a lot more fuel to burn now and certainly the US regulator as you can see with the l ation going on with the remaining US exchange coinbase U that's that's that's a difficult situation I think coinbase has gone to bat against the SEC three times struck out this will be the fourth time I anticipate they'll strike out again uh you can't beat the regulator that's the lesson I learned and and and and remarkably when we were here last year and I just think this is got to be just pure luck we we were talking about the fact that you know between FTX and binance they own 97% of the market of cryptocurrencies and digital payment and the chance that somebody new could come and gain share was impossible and here we are now and last night M2 I mean how crazy is that because they now stand to siphon off some huge percentage of what's remaining because they're the only compliant player stand standing and they just did this and so for me it's it's look at the volatility of what's occurring here and the opportunity too because the adgm and the regulator here has been saying for three years during the crypto volatility it's all about compliance and M2 now is the only one that has the rigor and the capital behind it and the technology to pull this off so I've been racking my brain trying to figure out how do I get a piece of this because I got killed on FTX I got absolutely screwed on binance this is the one I got to invest in because I keep going till I'm right that's how it works because I know this is going to work for somebody and it's it's Phoenix technology that owns 30% of M2 which is private and they're going public on the adx so yes I'm going to buy that and you know speaking about the regulatory landscape I mean you you were not a believer in in the crypto World beforehand but when the regulatory landscape changed and you have said this before when more countries were starting to you know adopt this you know new kit on the Block let's call at that time that's when you started you know investing um was regulation your turning point is is it enough now is the regulation that's happening now enough or does more need to be done in your view because the worry over a decentralized financial system is still very much there so well it's a very simple answer I end for for pension and Sovereign wealth I create indices o USA is an index you know these are things that Al spot my indexing company but I know the demand for just just take Bitcoin the granddaddy digital currency of them all most Sovereign wealth funds would allocate 100 to 300 basis points for just that asset if they could on a compliant basis on an exchange that was compliant and an exchange that had the infrastructure to allow them to report on a 24-hour cycle because most mandates only allow up to 5% in any one position 20% in any one sector and the software has to push up now that was what FTX was trying to do that's what binance was trying to do to get linked to financial institutions they never got there I'm hopeful that M2 will pull that off because then they will get the 300 basis point allocation which I estimate is a trillion dollars yeah because they don't touch this stuff yet and so we're at the beginning of something very interesting I'm sure there'll be other competing exchanges coming but just by luck or maybe hard work or combination of both here they are when the biggest competitor kills itself that's that never happens but it happened here all right we're going to move away from crypto a little bit but still staying on the regulation part of things because I think it's very important so John you obviously operate in many countries the regulatory landscape is a very big determinant of how certain fintech Technologies get adopted whether it's cash wallet or crypto or credit cards whatever it is so when the banking power is taken to a large extent from the hands of banks obviously tension arises and this will affect whether a VC will invest because depending on regulation some things may work in Ecuador but may not work in Brazil and you know different countries have different regulations obviously so is how a fintech company can navigate that if it's oper on a global level and in your experience how can they navigate it look I I think it's um you know how the old Facebook had a description of a relationship and they often said it's complicated uh that's sort of the way that fintech entrepreneurs work with Regulators because on the one hand if you are going to try to start a company and you're going to wait to launch your product or service and not get into the market with your great new idea before everything is completely buttoned down without any kind of risk or chance of you screwing it up you're not going to make it okay I in fact I I'd be hardpressed to think of an example of a company I mean when I went out and and pitched my investors to build our crowd in the beginning and I said look I'd like to build a platform that allows you to select a company okay and if you're cred investor you should be able to put money to work okay in doing that according to what's called regd in the US and whatnot and I had friends who not jokingly said look John um I know you're going to end up in lenworth which is the federal penitentiary in Kansas will bring you kosher food okay in other words people were certain that I was I was headed to some kind of horrible thing the reality is you have to be smart you have to study the material and most people don't have tolerance they don't do this the problem is you go to lawyers and you'll get 10 lawyers you'll get 10 opinions on this stuff they're very few consensus matters especially when you're breaking through I remember I was a seed investor in a company called The Lending Club where I got in literally in the very first round it peaked and I got out near about a n billion dollar uh uh end valuation but they did something very smart they started lending money to small uh borrowers early the regulation wasn't there but then they at a critical point they shut down the platform and they made themselves good with the SEC and whatnot they came back fully regulated it worked they made money when we started it was just in our business it was just the beginning of What's called the jobs act you know where all of a sudden they were regulating what they called crowdfunding now we're not really crowdfunding we're like Venture Capital investing democratically but it turns out that we operate under the same exemption that a normal Venture fund runs because we act like a venture fund and you simply have to be able to deal with complexity it is complicated and once you do get regulated today for example we're not just regulated in the US and in Europe and in the UK and in Hong Kong and in uh Singapore and here at adgm in a whole bunch of other countries it's a mode come get us okay start competing with us we've been at this for 10 years building this knowledge building the data okay which has been audited and reviewed by these regulators and it's not just good for them it's good for the consumer because consumer doesn't want Crooks okay you can you know push the envelope but if you're a crook and you're you know a criminal you're going to go to jail and that's what's happen happening okay and I I think that regulation is something which good entrepreneurs uh can get behind great um let's talk about the investing side of things Kevin on the show obviously you use your gut feeling a lot of the times to see if this pitch is worth investing in uh or not but are there other signs in your view that an investor or Venture venture capitalist should look for when investing in a fintech company and how can fintech companies or entrepreneurs present themselves as just that well I I have to share some data with you um after 16 years let's just take the sharp tank as an example which has the benefit of a 100 million eyeballs watching it in syndication so it generally reduces customer acquisition cost dramatically that's the secret sauce of it but within the Sharks portfolios typically they do 12 to 17 deals a year close half of them and then and every year we collect we have we have big teams now we've been doing for so long so we often collaborate in diligence afterwards or whatever but and this is maybe it's it it's you think you know you think you know out of the 10 or 12 year closing the three you're going to make all your money on in the next 3 to five years and I can tell you with certainty you know know nothing you have no idea what's going to happen and 5 years later 7 years later from that vintage batch some crazy outcome occurs that pays for all of your mistakes and I've stopped trying to guess or trying to find attributes I just diversify I do 10 12 14 Deals and maybe two of them end up being a th000 X and we've had some really big outcomes on crazy stuff the one I talk about from last year a lot is base Paws cat DNA testing why would you spend $29 to test your cat's DNA where you can buy a new cat for $5 I I never understood that and and yet Anna the the entrepreneur was so compelling um in in her and I was the only one investing I okay it's just great TV and I'll write it off later she sold that money to a Pharma K pair division that that company for so much cash the show had to do an NDA that they would not disclose the purchase price wow it was insane and I just said to her and she's very wealthy now I said I love cats I I love cats I mean that's the outcome and it paid for like three seasons worth of mistakes and so I tell everybody inventure capital I brought I'm glad you brought up Equity crowdfunding because the jobs Act created start engine I'm an investor in that and we put out about3 to $400 million a year with equity crowdfunding and it's actually flat this calendar year when real VC money is down 30% so this democratization you're talking about is very important and it's working and the out comes of the same but I encourage everybody if you're going to do Venture deals you got to do seven or eight because you have no idea what you're doing I want to jump in on this Kevin is so right I think probably you've got to multiply it a little bit diversification is your only answer in Venture Capital but you've got to look at it from a multi Vector standpoint don't just diversify in numbers right you need shots what I would look at it as shots on goal okay you're not shooting penalty shots you're shooting from a little bit farther it's harder to hit okay but if you don't take 10 shots or 15 shots you're not going to do it but the beauty here is that when you hit the goal it doesn't just return 50% on your money or return twice your money you can get tens or 50 or 100 or if you're Mr Wonderful you can get a thousand okay it's happened yeah but the reality is that you you have to have those shots but in addition to that you have to in my opinion diversify according to sector because sectors go up and sectors go down and you can be the smartest kid on the Block and you're investing in a bad sector you're toast okay there was a a time there where if I can mention it here cannabis investing was super hot everybody body was doing it okay if you were foolish enough to go in and invest then you ended up losing your money you literally became toast because the whole sector crashed became you know completely uh commoditized autonomous thriving okay yeah back in 216 217 people were I think smoking that cannabis they were absolutely convinced that there was going to be autonomous driving in just a year and I actually was I was hosting um on uh CNBC and I had the CEO of Audi who told me we were going to be having autonomous fully autonomous cars in 2017 and 18 and I said impossible it's not going to happen said watch well we're waiting Cruise just shut down so if you try to choose a sector and you bet on only that sector mistake diversify according to sectors diversify according to state es okay early all the way to late if you can because you never know about vintage like in wine venture capital is critical in terms of the year I happen to think that this year's vintage is awesome because prices are down as Kevin spoke before Venture Capital prices are down at really half price so every smart investor knows you buy cheap and sell high you're going to make money so you have to diversify shots on gold but diversify according to sectors and vintage this is this is great advice for the investors I know our time's up but I wanted both of you to give your advice also to the entrepreneurs the other side of the coin how can you present your ftech company to people like you and get an investment be able to articulate the opportunity in 90 seconds or less explain why you can execute on the plan and you better know your numbers if it's going to be fintech you better know your CAC your Rass and all the numbers numbers that that all investors Now understand to find success or failure in uh in fintech's a tough space yeah it's a tough space and John obviously you're you're not on in the show business so the time limit will not be there for you I'm guessing no look I I actually agree with uh Kevin on this when you're sitting and pitching somebody you've got about 90 or 120 seconds before they're bored yeah and you you'll see it they'll pull out their phone they won't look you in the eye and that meeting is not going to go well you have to make sure that your pitch is crisp that you really have thought about it okay and then you have to deliver the message with passion if you are boring or you are simply one of these monotone uh persons okay it happens some not everybody's you know a TV star okay you can uh project that way then go find a partner who can okay because the bottom line is that every everybody is seeing we at our at our crowd we select between 1 and 2% which is a very high percentage of the deals that we see that we actually invest in most people are investing in less than 1% so when you walk in to pitch an investor at a reputable or significant fund you've got one in a 100 chance you've got to deliver that message well thought out and with a lot of passion ladies and gentlemen Kevin oi John medvid