Entrepreneurial Opportunities in FinTech Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020 Wharton FinTech Industry Lunch & Learn Series Philadelphia, PA January 20, 2015

George A. King

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@whartonfintech

Wharton FinTech

Wharton FinTech

whartonfintech.org

#WhartonFinTech

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Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

Tuesday, January 20/ 12PM/ JMMH TBD

Want to launch a FinTech Startup? Join us for a discussion with George King, Chairman of Infrastructure Group, Inc., and a successful startup executive and investor. George will provide insights into how to start a company in today's booming FinTech environment.

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How to Launch a FinTech Venture during 2015 to 2020

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Wall Street Law and Finance

• Mudge Rose law firm • Credit Suisse investment banking • 300+ closings / $20B capital raised / $8B

advisory engagements

• Infrastructure Group, Inc. consulting to FinTech • Investor in FinTech companies in US, UK & EU • Assisting a leading pre-IPO FinTech company

FinTech

Entrepreneurship

• Co-Founder, regulated broker dealer • Co-Founder, telecom that did $6B

Goldman Sachs IPO; second telecom went public via reverse merger into a public company

• Founder, Infrastructure Group, Inc., asset management & principal investments

• Tech principal investments since 1997

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Table of Contents Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

1 2 3 FinTech origins

Current FinTech market state FinTech 2015 to 2020

• Lack of innovation plus the financial crisis created problem

• Software, technology and entrepreneurs created solutions

• Companies in FinTech @ 2015 illustrate strategy for FinTech founders to learn and use

• Startup success principles

• Case for Social Impact FinTech

• Society trend opportunities

FinTech origins Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

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FinTech is the response to problems in financial services and the economy

• Rise of FinTech rooted in several factors:

– Lack of innovation by incumbents left traditional players vulnerable to new approaches that increased access, reduced costs, and improved the customer experience

– Financial crisis dried up traditional sources of credit, leaving individuals and businesses to turn to alternative sources

– Resurgence of technology, summarized by Marc Andreessen in 2011: "software is eating the world")

• Stanford Social Innovation Review identified FinTech as a growing concern to traditional financial institutions (1/13/15):

– “Boardroom conversations at the largest banks and financial institutions are…increasingly concerned about nontraditional competitors—Paypal, Venmo, Square.”

– Concerns are fueled by negative perceptions of banks: “[A]ccording to the National Journal, ‘Seventy-one percent of Millennials would rather go to the dentist than listen to anything big banks have to say.’”

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

2004 2005 2006 2007 2009 2010 2011 2012 2014

Mill

ion

s

U.S. Financial Crisis1

1. Federal Reserve Board. Numbers not seasonally adjusted 2. The National Bureau of Economic Research, “US Business Cycle Expansions and Contractions “

Total Consumer Credit Owned and Securitized ($Tn)

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FinTech is about ten years in the making but was accelerated by the crisis

FinTech is at least 10 years in the making

FinTech 2015 to 2020 is history yet to be written

2005

2006

Prosper

On Deck

Mint founded

2008

IOU Central

Wealthfront

2010

Kabbage

Funding Circle UK

Betterment

2011

QuarterSpot

Sofi

GLIF (UK listed) multi platform

2012

Pave

2015 2013

First Lend It Conf (NY)

GLIF adds Africa platform to US & EU

Fundera

Lendio

2009

Mint sold to Intuit

2007

Lending Club

Biz2Credit

2014

Lending Club IPO

On Deck IPO

“We have a chance to rebuild the system. Financial transactions are just numbers; it’s just information. You shouldn’t need 100,000 people and prime Manhattan real estate…” –Marc Andreessen, October 2014 1

2007-2008: U.S. financial crisis begins

1. http://www.bloomberg.com/news/2014-10-07/andreessen-on-finance-we-can-reinvent-the-entire-thing-.html

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Orchard Platform – Online Lending Ecosystem

Current FinTech market state Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

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Pave

Pave is a nine person FinTech lending platform focused on “thin credit files” which tend to be millennials and ex-pats working in the United States who do not have credit history in the US system.

• Pave combines data analytics, algorithms, big data credit inputs – but adds proprietary credit underwriting additions related to education, training, and job history factors that are discounted or ignored by the traditional credit scoring methods

• Pave has an efficient headcount team, and every team member, including the two founders, spends several hours each week in customer service online or by phone

• The Pave cost of customer acquisition is close to zero, which is radically better than the same metric for Lending Club, Prosper and other consumer focused FinTech firms that tend to spend heavily on customer acquisition

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Second Market

Second Market completed more than $1.4 billion of private company secondary transactions in 2014, a 4x increase over 2013. All transactions were company controlled. Second Market operates with a small team of approximately 50 and includes a regulated broker dealer platform in its corporate structure.

• Second Market was launched with a web site interface in 2004

• The company has evolved from a focus on pre-IPO shares to secondary trading of assets that are not available to be traded on a public exchange

• The heavy compliance focus of the Second Market platform is a key to client acquisition; the legal counsel can be a factor in the choice to use Second Market

• Second Market has been one of the most nimble and adaptable FinTech business models; their embrace of the regulated broker dealer has enabled Second Market clients to access transactions that would historically not be available to investors in private and pre-IPO companies

SecondMarket facilitated over $1.4 billion in private company secondary transactions in 2014, 4x more than 2013.

Take an in-depth look at the types of transactions we facilitated, who we worked with, and more.

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QuarterSpot

Adam Cohen - Co-Founder, Chairman, Chief Executive Officer Prior to QuarterSpot, Adam served as Chief Executive Officer of GotCoders, a startup incubator that assists entrepreneurs from concept to commercialization. From 2000 to 2004, Adam served as Chief Software Developer for JetBlue Airways where he led the development of the world’s first FAA approved Electronic Flight Bag, JetBlue.com and the TrueBlue Loyalty Program. Lance Emanuel - Co-Founder, Director, President & Chief Operating Officer Prior to QuarterSpot, Lance served as General Counsel & Chief Operating Officer of GotCoders. He holds a BBA with distinction from the University of Michigan Ross School of Business and a J.D. from the Benjamin N. Cardozo School of Law. Eric Hexter - Chief Technology Officer Prior to QuarterSpot, Eric was Chief Architect of Online Product Engineering for Dell Computers, where he was responsible for the architecture of dell.com, the 5th largest ecommerce site on the internet. Eric is recognized by Microsoft as an influential thought leader in the field of web development and sits on a number of product advisory boards. Eric earned a BSME Mechanical Engineering from Ohio University and specialized in robotic simulation and research. Jim Chonko - Chief Analytics & Risk Officer Prior to QuarterSpot, Jim served in the risk modeling and analytics group at JPMorgan Chase, responsible for the pricing billions of dollars in auto loan origination. Jim also served as Senior Vice President at Citibank, leading the Small Business Lending portfolio risk analytics and modeling team. He earned a B.S. in Mechanical Engineering from Cornell University and a Ph.D. in Physics from Columbia University.

SecondMarket facilitated over $1.4 billion in private company secondary transactions in 2014, 4x more than 2013.

Take an in-depth look at the types of transactions we facilitated, who we worked with, and more.

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AltFi delivers unique insight into the very latest FinTech developments through its news and analysis service, covering every part of the Alt.Finance space including crowdfunding, P2P finance, online invoice funding and online seed investment.

• The team behind AltFi is hugely experienced and includes David Stevenson, editor, who is

– Columnist for the Financial Times (the Adventurous Investor), Investment Week and Money Week

– Experienced media entrepreneur (he has set up a number of online media companies focused on online TV and viral videos)

– Knowledgeable investment expert and one of the first journalists to write about the AltFi sector in UK national papers

• The AltFi team is respected and trusted by all sides of the Alternative Finance and FinTech sectors

– This ability to work with all sides of a transaction needs to be carefully monetized

– Transparent disclosure appears to be one of the key principles in the AltFi approach to being trusted by the market

SecondMarket facilitated over $1.4 billion in private company secondary transactions in 2014, 4x more than 2013.

Take an in-depth look at the types of transactions we facilitated, who we worked with, and more.

AltFi

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GLIF

GLI Finance Limited (AIM:GLIF) is a loan business, quoted on AIM. We originate and invest in loans, providing finance to small and medium sized businesses in the US and UK.

GLI Finance Limited (AIM: GLIF) originates and invests in loans, providing finance to small and medium sized businesses in the US and UK. The Company aims to produce a stable and predictable dividend and a double digit ROE, whilst at least preserving its capital value. The Ordinary Shares have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or under the securities legislation of any state of the United States of America. In addition, the Company has not been, and will not be, registered under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”) and investors will not be entitled to the benefits of that Act.

SecondMarket facilitated over $1.4 billion in private company secondary transactions in 2014, 4x more than 2013.

Take an in-depth look at the types of transactions we facilitated, who we worked with, and more.

FinTech 2015 to 2020 Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

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Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

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Know yourself and choose primary strategy - build to flip (sell) or operate • In general, as innovations become mainstream, valuation multiples decline toward the “gravity factor” of discounted cash

flow valuations. Be proactive in the strategy implications of this framework

Act on requirements for a sustainable startup • Not unique to FinTech: (1) operational profit (or you are living for your next capital raise); (2) right capital structure (or you

are not a founder / owner but rather an employee of capital per the legal terms you agreed to); (3) right corporate governance (complex choices & fiduciary / legal); (4) right people (in adversity, team sticks together)

Business cycles for startups in transformative sectors are short • When “innovative goes mainstream,” intense competition and “mass market” quickly follows

• Many examples: software, computers, email, internet, internet search, deregulated telecom setting loose fiber optic data movement, mobile phones, tablets, cloud technology, telecom small cells enabling rapid mobility infrastructure, apps

Do not let virtue of focus become narrowing • Focus must be balanced with out of the box thinking, reactiveness to new inputs, and making time for what matters

• You must get new inputs (people, places, knowledge) to think three steps ahead and anticipate change, opportunity, risk

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1,000

500

100

50

30

25

Qualify Leads Update Sales Plan

Cultivate Ask Close Process begins with Market

Survey 100%

90%

75%

25%

10%

5%

Prospects by number

Probability of close

Closing funnel of “process, prospects, probability” requires FinTech startup additions

• Closing sequence: Information mode (15%), cultivation mode (70%), close mode (15%)

• Project management: Design (Business plan and model), architect (math), project plan with 15% contingency, execution

• 5 W’s and 2 H’s: Who, what, when, where, why, how – and how much money

• Fast assessment: Who are you? What do you do? Why do you do it?

FinTech Startup Additions

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Social Impact FinTech is the new frontier opportunity for 2015 to 2020

“When the venture capital market exploded in the 1980s, it changed the face of entrepreneurship, the global economy, and our society for the better. New products and services flooded the market. Fierce competition drove affordability and quality up.

Impact investing is poised to change the trajectory of poverty, crime, homelessness, education, green energy and much more. It just needs to be unleashed.”

Sir Ronald Cohen is Chairman, Big Society Capital and Chairman of the UK’s Taskforce on Social Impact Investment, and Matt Bannick is Managing Partner, Omidyar Network and Co-Chair, U.S. National Advisory Board on Impact Investing

Forbes Opinion

Capital Flows

September 20, 2014

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Social Impact FinTech exists today – case study of SME loans

• Small businesses are a large part of the U.S. economy:

o Employ half of private sector workforce – about 120 million people

o Have created two out of every three net new jobs since 1995

• Banks have prioritized larger businesses since the financial crisis:

o SME loans on the balance sheets of banks are down about 20% since the financial crisis from $700 billion in 2008 to less than $600 billion in 2012

o Loans to larger businesses have risen by about 4% over the same period.

• For banks, loans below $100,000 are costly, risky, and carry heavy burdens of capital charges, regulatory cost and ongoing compliance requirements

Source : Harvard Business School, “The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game” & Federal Reserve (New York), "Small Business Credit Survey” (Fall 2013)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<50K 50K-100K $100K-250K $250K-500K >$500K

Small Business Need Credit Access Percentage of Applications from Small Businesses by Loan Size

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Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

• Millennials have been the focus of FinTech companies, given their status as early adopters

• Older population has unmet financial needs for access to small business loans (for jobs via SME expansions and SME startups ) and retirement tools – these present FinTech opportunities in 2015 to 2020

An increasing proportion of those 55 and over want to work

Over 92 million Americans are not part of the labor force, close to an all-time high. This number has spiked since he start of the financial crisis

WSJ reports unemployment at 5.6% and the broadest measure of underemployment at 11.2%. Average hourly earnings of private employees are down 0.2% since November 2014. Data as of 1/10/15.

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Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

“The King of Calculus – A math teacher has become a global sensation”

“Jim Fowler is a 33 year old assistant math professor at Ohio State…after videotaping a batch of calculus lectures over December 2012, Fowler won a go-ahead one month later to roll out his course via Coursera, a leading provider of massive open online classes, or MOOCs…

Fowler’s first six-week course, Calculus One, attracted 35,000 active enrollees. Since then, 110,000 additional students have started the 23 hour course, putting it in the top 3% of Coursera’s offerings…College age students make up only 25% of Fowler’s enrollment…

Ohio State originally parked him in a non-tenure track, but once his online calculus class became a hit, university officials took a second look – and decided that Fowler ought to be on the tenure track after all….”

Online courses disrupt the expectation that all education is brick-and-mortar, just as FinTech is altering the financial

landscape

The USC Marshall School of Business Advisory Board includes executives from General Electric, Co., Boeing, Co. and Walt Disney, Co., who say they need more hires with analytics talent, said James Ellis, the school’s dean.

“We find it invaluable to have people who can synthesize data” and suggest changes based on those insights, said Melissa Lora, president of Yum Brands Inc.’s Taco Bell International, who serves on the school’s corporate advisory board.

In Fall 2014, USC’s Marshall School began its Master of Business Analytics program with 30 students and will enroll 60 more in 2015. The cost is $47,000 tuition.

1. George Anders, “The King of Calculus – A math teacher has become a global sensation.” Forbes. September 29, 2014 2. Lindsay Gellman, “Big Data Gets Master Treatment.” The Wall Street Journal, November 6, 2014.

Large corporations are making data a priority but continue to focus on traditional delivery

models

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• TECHNOLOGY: “Tech is the new finance” is by now cliché among insiders, who perhaps don’t realize all the ways that is true. Finance, after all, is full of companies with powerful incentives to behave badly, regulated by equally powerful government bodies designed to keep them in check.” (“Key Words” column by Christopher Mins in The Wall Street Journal, November 25, 2014.)

• INNOVATION: “Reinventing Money” is the Bloomberg Markets cover story (page 30 to 72 inside) of Bloomberg Markets, November 2014 issue. From the introduction:

• REGULATORY: Richard Farley, Esq. is a lawyer and author writing about the financial system – “The necessity or the extent of an uneven regulatory playing field justified by a need to protect insured deposits and avoid bailouts is something people of good faith can disagree about…” / Farley is of the view that “The federal government is making the banks the gatekeepers for leverage in corporate America.” (“Opinion” column by Richard Farley in The Wall Street Journal, November 25, 2014.)

Startup Strategy: How to Launch a FinTech Venture during 2015 to 2020

“It goes without saying that technology has always been essential to finance. What’s happening now is of a different order. It isn’t playing out in the back office. It tends to be consumer facing. Rather than using technology to support and enhance the efforts of traditional institutions or to develop new products for them, fintech companies are creating new financial infrastructure. Fintech entrepreneurs aren’t out to support established players. Most of them, in fact, are committed to doing exactly the opposite.”

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Infrastructure Group, Inc. 445 Park Avenue, Suite 900 New York, New York 10022 gking@infrastructuregroup.net

www.infrastructuregroup.net

@whartonfintech

Wharton FinTech

Wharton FinTech

whartonfintech.org

George A. King Wharton FinTech