• Dec. 7, 2016, 6:12 pm

Top takeaways for alt-fi startups from Money 20/20

LAS VEGAS, Nev. — Attending the top financial conferences in North America has its perks.

We’re not talking boxed lunches and awkward Uber rides. Or, the “you’ve got to be kidding” lengthy airport delays or the painfully unrealistic connector flight times to get there. We’re not even going to mention the day care that set up shop in the room next to me at Circus Circus.

We’re talking about cornering the leading experts in the business after attending one of the biggest and best gigs on the calendar.

Prime Revenue CEO P.J. Bain said he has been in business for a couple of decades with the scars to prove it. Director of Decision Support Robert Murphy has a decade’s worth of experience in mergers and acquisitions, investment banking, private equity and financial technology.

I spoke with them at the conclusion of Money20/20 in Las Vegas in late October. The largest financial industry gathering on the continent, Money20/20 attracts more than 10,000 attendees from thousands of companies worldwide looking for the latest developments in fin-tech.

Alternative finance was a popular topic over the four days, with executives from many of the biggest names in the industry participating in panel discussions about the opportunities and issues facing an industry preparing to enter a more mature growth stage.

PJ Bain

PJ Bain

Mr. Bain and Mr. Murphy took a few moments to share their thoughts on the current state of alternative finance and where it could be headed.

Successful IPOs, high valuations and, in the short term at least, successful models have combined to produce a crowded marketplace. It has also caused acquisition costs to rise and profit margins to be threatened.

That puts much pressure on all companies, but especially those with 10-figure valuations, to acquire enough customers to be able to maintain that high status.

“It will be quite the dollar fight,” Mr. Murphy suggested.

Mr. Bain said many alt-fi CEOs do not have decades of business experience. Such executives are wise to learn business history and read books like Geoffrey Moore’s Crossing the Chasm.

book“Early adopters are easy get but at some point you have to cross that chasm to get to mass-market penetration,” Mr. Bain explained in describing the book’s message.

“It’s hard to solve problems but have best business practices.”

While some areas of marketplace lending are indeed becoming crowded, Mr. Bain said with the types of investors participating at the levels they are, it is hard to see companies packing it in and walking away.

But that climate could soon change, Mr. Bain suggests.

“At some point, as soon as there is a bit of blip that impacts those crazy valuations there will be a consolidation.”

That may be as long as a couple of years away, he added.

Director of Decision Support Robert Murphy

Director of Decision Support Robert Murphy

Mr. Murphy said the pending interest rate hike will also have a say, as it will cause defaults and delinquencies to increase.

“That is when you discover who has the best algorithm and underwriting criteria.”

A veteran of several down cycles, Mr. Bain suggested a few indicators to watch for this time around.

Crazy valuations are often an obvious one, Mr. Bain said, though not all of the time.

“Sometimes they are simply an indicator of crazy valuations, but they can also be a precursor.”

A billion is not always a billion either, Mr. Bain explained. There can be many different types of terms which make a company a safer investment than it may publicly appear to be.

Another sign to look for is the amount of detail a company provides about what they do, why they do it, and even how they do it, Mr. Bain said.

“A really bad sign is when a lot of people from startups say talking points with no substance or depth to them. Nothing they say makes a lot of sense.”

Closely associated with this are what Mr. Bain referred to as “like” companies. Those are the ones who say they are “like Prosper” “like Lending Club” or “like Prime Revenue.” In a space with so many competitors, a company “like” another, larger and more established company is going to struggle if it does not offer a unique solution to an actual problem.

Beware of companies with a great marketing machine but no track record, Mr. Bain said. Look to see if they have solved actual business problems.

To illustrate his point Mr. Bain told a story about a conversation he overheard at a reception the previous evening. A banker and a venture capitalist were talking about a company they both liked. The venture capitalist said they liked the company but they just needed to figure out how to generate revenue.

“That’s not a business in the world I live in,” Mr. Bain said. “The staying power comes from real originations, real success, and real customer satisfaction that will keep those customers coming back.”

“We want repeat customers around. We want a win-win, not a zero sum game.” – Robert Murphy

The problem may be the company isn’t solving one, Mr. Bain suggested. Many entrepreneurs have a solution for a problem that either does not exist or which is not a widespread concern.

“I do believe that if you don’t really understand what problem you are solving for a customer and it’s a really painful problem or you are creating an opportunity for them that makes their world better than you don’t probably have a lasting business.”

Prime Revenue provides immediate on demand access to capital for 20,000 suppliers in 70 countries, Mr. Murphy said. That solves a clear pain point of capital access by employing technology to produce a more efficient process which gets more capital to more companies in more ways, making it possible for newer companies and those with different revenue patterns to secure financing when required.

“In our industry it is twofold,” Mr. Murphy explained. “Technology is enabling financing to be more democratized and accessed more efficiently.”

“We want repeat customers around. We want a win-win, not a zero sum game.”

Building on Mr. Murphy’s point, Mr. Bain added that Prime Revenue processes $10 billion in 13 different currencies every month.

Those numbers reflect a clear marketplace need, one affected by the recession, Mr. Bain explained. That made people revisit their perspective on cash, with EBITDA becoming less important and cash flow more.

The need to maintain reliable cash flow increases when volatility is both high and low, and lessens in a steady environment, he added.

By unlocking working capital stuck in the supply chain, companies can grow without accessing expensive external solutions, Mr. Bain said.

But before that can occur all parties have to be confident the process is secure. Make the process transparent and they can make a decision with confidence.

“If a financial institution will purchase an invoice from supplier, instead of taking the supplier’s word we give them visibility into the buyer’s enterprise resource planning system so they can see how much the invoice is for, and the date when it will be approved,” Mr. Bain explained. “Then we initiate instructions for the money to be moved on that day.”

“Our competitors are still the banks, and they have that ‘trust us’ big bank mentality. When that exists there’s an opportunity to create transparency and when you create transparency efficiency almost always follows.”

“When you create efficiencies you solve real business problems for real business customers.”

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