Monday, 21 October 2019

A Analysis

After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my post from yesterday for much of the reason why.

As clearly predicted yesterday, the better funded of the payment processors will initiate a pricing blood bath they'd likely kill for...

From PayPal's subsite on Mass Payments:

Paypal Mass Pay Site Screenshot

 As you can see, PayPal has already imbued its service with much of the attributes that are being offered by the Bitcoin payment processors. They also have a material advantage as of right now, a massive installed base.

I also cannot emphasize enough how damaging the all too necessary customer service option is to margins. You see, the problem is most service companies don't put enough into customer service and handholding of the customer. From an optimal perspective, this should actually be part of the marketing and sales process, but it's often either non-existent or implemented as an after thought after enough customers start bitching and complaining, or worse yet (and likely most often the case) leaving!

As a company with mature management, it appears as if PayPal is trying to head this off at the pass as it attempts to change consumer behavior and prod them into adopting its new electronic currency payment system...

Paypal Mass Pay Site Support Screenshot

 Now, let's compare PayPal to the newly funded Bitcoin payment processors...

Bitpay

Funding Rounds (3) - $32.50M

- See more at: http://www.crunchbase.com/organization/bitpay#sthash.yvlqpNtr.dpufBitpay prices

An interesting departure from the per transaction/fee model, Bitpay implemented a subscription system which benefits those customers who perform a large quantity of relatively small transactions moreso than those who process large orders.

I calculate Bitpay's most recent $30 million series A round to have been at around 9.2x sales, valuing the company at $160 million. This is a guestimate, of course, since I do not have access to internal numbers.  

Next we have Coinbase...

Funding Rounds (3) - $31.70M

- See more at: http://www.crunchbase.com/organization/coinbase#sthash.CD8IPTp6.dpufCoinbase 

There's also Circle, founded by Mr. Allaire of Coldfusion fame (sold to Adobe Systems).

Funding Rounds (2) - $26M 

- See more at: http://www.crunchbase.com/organization/nfc-direct#sthash.dd0DaxHc.dpuf

Circle has not publicly launched yet but promises to bring a new level of simplicity and user-friendliness to the bitcoin payment ecosystem, concentrating more on a banking paradigm then the technical bent that bitcoin is known to represent. This is all you need ot know about the Circle business model as it relates to this discussion of impending margin compression...

Circle

Free=Margin Compression!

Let's see how this plays out for customers. The most lucrative segments for this industry is the SME (small and medium business enterprises) who process anywhere between 10 and 1,000 transactions per month. Why? Because there are simply more SMEs than there are big companies in the world. Let's see what the two biggest bitcoin processors look like when stacked up against PayPal's Mass Pay product for the SME market...

image019

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Of course, the Bitcoin transactions are likely a loss leader for additional, value added services for many companies in the not too distant future. As a matter of fact, I feel that the payment space will quickly become commoditized by Bitcoin technology - forcing these companies and many more (I'm talking about you Mastercard, Visa and Western Union) to innovate and offer significantly and materially better value for the buck.

Imagine what this competitive landscape will look like when Mastercard, Visa, American Express, Discover and Western Union jump into the fray. Of course, before that a much greater portion of the VC and private equity community will wake up and realize the opportunity in Bitcoin to pour more cash into it than sugar into a Bubble gum machine (emphasis on "Bubble"). The key is to get in early, and get in right. But how does one do that and where will this tale of uber margin compression end?

Well, the research report from which this info is being prepared will be offered to accredited and instituional investors starting next week, at least those who have an interest in UltraCoin. 

My next article on this topic will explicitly illustrate how UltraCoin can assist ALL players (that's right, including PayPal, Bitpay, Circle, Coinbase, Mastercard, Visa, American Express, Discover and Western Union) as well as their direct customers, in climbing up both the food chain and the value proposition ladder - thus rapidly repairing the margin compression damage they are about to bring upon thier business models.

 image014

 

So, I'm off to the races to raise money for UltraCoin, my uber-disruptive startup, and I come across the resistance of certain parties to take common stock. Now, the standard in the professional VC community is to take preferred stock with a stack of anti-dilutive measures, control premiums and liquidation preferences. VCs and their lawyers say this is the only way to do it because it protects them on the downside and allows them to maintain control of their investment and manage dilution on the upside. Basically, they say, it's a hedge. I have some very prominent, very successful and experienced investors coming in andg doing the right thing. The reason is because they "get it". My task is to educate the rest. 

Marc Andreesen characterized VC start-up stock as an out-of-the-money call option on the success of the company. Well, I agree with this in part. The founders common stock is more like an OTC ATM call, or warrant, on the success of the company. The preferred stock, which is what most VCs go for, is more akin to a straddle consisting of an ATM long-dated OTC call paired with a long dated ATM put. This put is not free. It's not even cheap, and it is not as necessary if the deal is properly sourced and underwritten.

Now, I'm not the typical Fintech entrepenuer. I'm a little older than most, I'm probably better at forensic valuation than the vast majority (see Who is Reggie Middleton?), and I'm more than willing to point out when and where I think the establishment is doing something wrong. "Because everyone else is doing it" or "Because that's the way we've always done it" are not acceptible reasons.

Case in point, the preferred stock myth. Let's address the reasons given for demanding preferred stock.

  1. It protects them on the downside - This is true, but venture capital is a very high risk, high return asset class. Its much more additive to the risk/reward proposition to manage downside risk primarily through the investment selection and underwriting process, ex. spend your resources selecting and vetting the best managment team and investment prospect rather than trying to manage downside before you even get a stab at the upside. Think about the groom that puts more time into the pre-nup than he does into finding out what his bride to be is actually about.  
  2. They say, it's a hedge. Well, in the investment world hedges aren't free. They have a real cost and the determination of the effectiveness of any hedge has to take into consideration the cost of said hedge. If it's too expensive then the risks of the hedge may well outweigh the rewards. This is particularly true for investments that go well from a capital appreciation perspective.
  3. It allows them to maintain control of their investment and manage dilution on the upside and downside. The energies, time and resources dedicated to and consumed by the competition to gain and maintain control and proportionate share in a company materially detracts management from running the company as well as pitting multiple factions (equity holding management, common shareholders and founders, Series A, B, C [& X, Y and Z] shareholders and executives) against each other. If there was one uniform, common share class, these factions could be fighting for the betterment of the company as a whole versus the betterment of their own individual positions (often to the detriment of fellow security holders and management and/or the company as a whole).  

These costs and detriments are real. Let's take the case of the very successful example of Facebook's VC funding and eventual IPO. Who do you think made more money in this deal, the founders/original common shareholders or the VCs who chose the preferred/hedged/put-call straddle route?

The True Cost of the VC Control Premium  Here is the spreadsheet that generated the chart. Feel free to play with it yourself. Hopefully, more people will realize the value of going after a strong management team with a strong product amongst a disruptive opportunity. Focus more on the attainment of reward. Proper reward underwriting is its own risk management.

 

My Twitter Updates

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ReggieMiddleton @rwfortunato Depending on how things go at the hearing, I may definitely take you up on that offer. Legal fees are… https://t.co/M8H78M0up8
Thursday, 22 August 2019 12:45
ReggieMiddleton @CryptoNana4MAGA @ArcadiaEconomic Thank you all. The court date has been moved to Monday, the 26th.
Thursday, 22 August 2019 04:43
ReggieMiddleton Our response to SEC allegations has been filed and is now public. While it may appear voluminous, it should be cons… https://t.co/f3SH6jTNpo
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ReggieMiddleton @fortunekr75 @venmo We have our own internal USD token. We actually use our metal tokens as private currency for transactions.
Tuesday, 06 August 2019 14:41

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