As is traditional, I am going back to my 2022 predictions from the start of last year and seeing how right or wrong I was.

It has been an ugly January for public tech companies and we are starting to see this spread to late stage private market valuations where multiples are no longer aligned…The obvious consequence is that late stage fundraising is going to be harder and valuations are going to be lower. Certainly for the next few months.

Correct but underestimated. Public share prices in fintech and insurtech have continued to fall, although they have stabilised or recovered in profitable companies such as Wise and Adyen. Private valuations and fundraising as you know have got a lot harder, and this is not going to change in a few months. We still massively believe in the potential to make finance and insurance more efficient and effective but startups are going to have to make this happen in more capital efficient ways

The payments tech stack moving from lock-in with one provider to a payments automation framework such as Primer

This is happening, with Primer winning leading global clients and partners. However change in payments doesn’t happen overnight, as companies which tried to artificially accelerate it such as Fast and Bolt have discovered. Even Stripe expanded too fast and had to lay off 14% of its workforce. Payments is an area where new billion dollar revenue companies will continue to be built, but change takes time.

Open banking payments (finally) taking off across Europe, creating an opportunity for a payments-focused player who can handle all the edge cases, refunds etc.

No inflexion point here in 2022 but continued growth. Open banking in the UK has found its place in certain use cases such as account top-ups, as well as large ticket payments such as cars purchase, but has not taken off for general retail. Gocardless announced a renewed focus on open banking alongside its $312M fundraise in Feb 2022. The EU outside Nordics has been fairly slow, although SEPA instant starting to make some headway

The financial operations of large companies. So much still to be done here. My prior article on this. Our recent investment in the sector: Numeral

This continued to be a focus area for VCs and founders in 2022, with a number of startups including Numeral making strong progress. My colleague Solène wrote a great round up on the CFO stack in July. Companies such as Payfit and and Agicap are reaching real scale. There has been some excitement on usage-based billing with companies such as Sequence, Metronome and M3ter. Treasury management has been an increasing area of focus for CFOs as interest rates rise, which has been a positive for companies such as Treasury Spring and Flagstone.

Employers becoming more involved in the financial lives of their employees, going beyond wage streaming into a range of products where they can get their employees a better deal (lending, insurance etc). Payroll innovation as part of this.

Demand for this has increased given the strain on people’s finances. The dozens of startups that launched in salary streaming are consolidating. The remaining leaders such as Wagestream and DailyPay are indeed expanding beyond earned wage access to broader financial wellness. We are also seeing demand for financial help expanding from frontline workers to office workers with services such as Otto Finance and Octopus MoneyCoach.

Financial wellness and fairness, helping people make the right financial decisions and improve their financial situation over time e.g. Cleo

On the other side of the same coin you have B2C financial wellness providers such as Cleo. Again this area has seen strong growth in 2022, and it is exciting to see what impact further advances in AI could bring to Cleo’s conversation with her users.

Driving cost out of the insurance stack, either as a ‘bare metal’ insurer, SaaS, claims, or attacking brokerage..

No major new players here that I am aware of. The trend in insurtech more seems to be towards working with brokers, for example for successful cyber insurers such as Coalition and Corvus. There has been a focus across insurtechs on loss ratios, claims, cutting out costs and showing clear path to profitability. The market doesn’t show much confidence in the public insurtechs’ ability to achieve this but the best private insurtechs are making more progress.

Fintech businesses which can be global from day one, levelling the playing field in countries where payments and debt remain overpriced

One hope was that crypto-based rails such as Bitcoin Lightning would enable low cost instant international payments and financial services. Despite 2022 being an “annus horribilis” for crypto Lightning has made steady progress, but is still very small on a global scale. Revolut and others have shown the ability to scale rapidly across many countries but not (yet) fully globally. Lending in particular remains overwhelmingly a country-by-country market.

I plan to expand on some of these with blog posts which will be slightly more frequent over the rest of the year.

Fail on this, I managed three blog posts all year. Fortunately I am able to rely more on my colleagues to write some great content these days.

Overall I was directionally correct for six of eight.

What does 2023 hold?

The funding market is open for fintech and insurtech companies, with plenty of dry powder sitting in funds. Seed funding remains very active. At later stages companies need to show strong unit economics, growth and sensible burn.

We will of course see some high profile bankruptcies or fire sales of large fintechs who can’t get their burn under control, and it is hard to see public markets improving any time soon.

Many of the above trends will continue to hold. A few more areas we are excited about going into the new year:

• Banking as a Service
• The Advice Gap
• Open finance, for example Pensions Dashboards in the UK
• The impact of rising interest rates e.g. on EMIs which can’t easily pay interest
• Embedded finance, probably some VC overexcitement on this last year but there are some compelling use cases and winners will emerge

Marking my 2022 Fintech predictions was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

To set the context, let’s briefly compare the financial affairs of a typical Baby Boomer vs a typical Millennial, both with average-good salaries:

Boomer:

• Defined Benefit pension from their employer guaranteeing a retirement income of 60% of their final salary.
• Relationship with an IFA (Independent Financial Adviser) who invests their money in a balanced portfolio of funds and ensures they have the right life insurance, will and mortgage. They do pay too high a management fee which gives their IFA some nice commissions.
• Speak to their insurance broker for any insurance purchase.
• Bought a house in their youth, struggled to pay the mortgage when interest rates spiked but now have a substantial mortgage-free asset
• Credit card is their main card, roll the balance & so pay high interest
• Watch Martin Lewis and are always looking out for discounts

Millennial:

• Defined Contribution pension through their employer (or even worse they are in the ~10% who turned down free money by opting out). They have no idea if it is enough for a comfortable retirement. Spoiler alert — it isn’t.
• Don’t know what an IFA is and don’t have a will.
• Have mobile phone insurance but not life insurance.
• Select all their insurance/banking through comparison sites
• Are renting or have an interest-only mortgage
• Have some investments: a mix of crypto, shares and ETFs bought through a zero commission broker.
• Switch savings account for a 0.1% better rate, but have no idea how much of their money to keep in cash
• Don’t own a credit card but are a Klarna super-user

The Millennial is paying less in commissions and fees, but they are missing the big picture. Either they need to take the time to educate themselves, or they need decent advice. An interesting anecdote is the rapid word of mouth growth of myfirst which sells new driver insurance on the phone rather than online and emphasises the advice they give new drivers and their parents. Illustrates how even in categories that have become online-first, there is demand for in-person advice.

What should this advice look like? It is not going to be an IFA coming to your home with a leather folder, asking for statements and filling in a questionnaire in pen, then sending you a letter a fortnight later. Neither is it a roboadvisor. These helped bring down investment costs and improved accessibility of creating a rational stock portfolio, but the advice gap is much broader. No-one has yet cracked the code here, but I suspect it will be involve some of the following:

• Using open banking and open finance to automate all data capture
• Either a tech platform combining AI, algorithms for portfolio optimisation and bringing in a human coach where needed, or technology which allows human financial advisers to service 10x more clients without compromising on quality.
• Something you can do on your mobile in the evening on the sofa.
• Combination of video content, whatsapp-style conversations with AI and advisors, and if needed video chats.
• Able to take a holistic view across all your financial affairs: property, job, assets, insurance, budget.
• A personalised experience starting with the basics (get a pension) but able to go into areas like tax optimisation, international diversification and estate planning over time. Or multiple products for people of different levels of wealth and knowledge.
• Potentially provided through your employer, who are increasingly taking responsibility for the financial wellness of their employees.
• Alternatively delivered direct to consumer experience with a trusted front person — a younger (female?) version of Martin Lewis. Or like Peloton this could be a range of trusted instructors targeting different demographics: Olivia Amato gives investment advice to the 25–35 female Londoners earning six figures, while Alex Toussaint preaches discipline and motivation to couples struggling to get on the property ladder.
• Independent of product providers.
• Using social pressure and psychological techniques to provoke action.
• Tracking ESG impact throughout.

There are however some tricky challenges to address:

• Inertia. Financial planning is always at the end of someone’s to-do list. How do you bring urgency to this?
• Regulation. It is hard to provide meaningful advice without becoming a regulated financial advisor, which then carries a lot of overhead and constraints.
• Financial decisions come with lots of complexity, and often no right answer. However, there are plenty of wrong answers and for the vast majority of people there are clear actions that they need to take.
• How to get paid as a provider while remaining completely independent. Ideally the adviser wouldn’t take commissions, but providers are willing to pay much more money for new customers than customers are willing to pay as an explicit fee. Maybe the compromise here is pay per lead, something like Adwords.
• Typical pricing and commissions in sector are a % of AUM (assets under management) which makes targeting young people with smaller savings less attractive.

Despite the challenges this is an area where I see significant opportunity to help people take back control of their financial future, and have been looking for companies for some time. Balderton’s investments in Wagestream, Cleo and Nutmeg have addressed parts of it but not the whole issue. If you are doing anything in this area across Europe and we haven’t spoken please reach out to rmoffat@balderton.com.

[This article is UK-centric but a similar problem exists in most European markets and certainly in the US.]

Filling the Advice Gap: a startup opportunity was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

No prizes for guessing that I believe this would be highly premature. We are still in the early days of insurtech and there are massive global businesses to be built.

First off — why have the share prices of the public insurtechs been hit so hard? The biggest challenge they have faced is that their loss ratios are too high. Lemonade and Root are still at ~90% gross loss ratios. For every $10 in premiums they pay out $9 in claims. It is impossible to build a good business on that margin. A strong traditional insurer would have loss ratios of more like 60%. To be fair the public insurtechs have been reducing loss ratio significantly over time through scale and customer retention. In 2021 the market bought into this trend, but the more sceptical public market of 2022 demands to see actual data. Matteo Carbone gives a good summary here.

The second problem is unit economics. Customer acquisition costs for these insurers were high, retention not high enough, and so LTV:CAC was low and payback time on CAC was five years or more. See this analysis for more.

The third problem is growth. The insurtechs have pushed hard to improve loss ratio and unit economics but this has been at the expense of growth, which has been mostly flat over the last year. Hard to be valued as a growth stock when you aren’t growing.

The question to ask is whether these challenges are endemic to insurtech, or whether they are specific to these three companies. My take is much more the latter. Insurance is a hard sector to enter with plenty of pitfalls, but it is a trillion dollar industry with many profitable incumbents, and tech can bring dramatic efficiencies. I stand by my article from 2015 on the challenges faced by traditional insurers and how tech companies can disrupt them.

There are a number of private insurtech businesses reaching real scale: Zego, ManyPets, Next Insurance, Ethos Life, Alan, Atbay, Coalition etc. Having seen some of their numbers I can say that their loss ratios are good, their unit economics are sensible and they are growing strongly. They are achieving this through great execution, and some combination of the following:

• Addressing new markets which didn’t exist before, such as cybersecurity
• Using telematics and novel data to meaningfully reduce losses and fraud
• Targeting underserved segments such as SMEs and the self-employed
• Operating in ‘easier’ lines of business where there is less competition and loss ratios aren’t as tight as in home and motor, such as pet insurance

At the same time I have also seen many insurtech startups which are either struggling to find product market fit, or are growing fast but with deteriorating loss ratios, unclear long term differentiation, or other issues below the surface. I have spent a lot of the last few years sitting on my hands.

Balderton’s only major investment in the sector remains Zego. From the list above they achieve real underwriting improvements with telematics and target underserved growing markets such as self-employed drivers. They also have great loss ratios, retention and unit economics.

So what have we learnt so far in insurtech?

• Underwriting is crucial. As an insurtech you start with the disadvantage of not having a base of loyal good customers. Where are you using tech to give you a real edge over incumbents? But also do you have enough actuarial talent and data to complement this?
• Telematics (real time data) works. Whether in motor or health insurance, telematics data has repeatedly demonstrated the ability to reduce loss ratios. As data collection becomes cheaper and universal expect telematics to become widespread across many insurance lines.
• GWP is not ARR, and insurtechs shouldn’t be valued in this way. Typical margins on GWP (after losses and service) are in the 20% range, and insurance is never going to have 100% or more net revenue retention.
• An insurance license is not something to be taken lightly, and is not the answer for every insurtech. Cash requirements and regulatory overhead are high.But it does given you the freedom to really improve underwriting
• Your unit economics have to work. This starts with a good loss ratio, and requires you to have happy clients who stay with you. It also requires you to have a good customer acquisition cost, which in insurance is never easy.
• Automation will bring down expense ratios dramatically, but only at scale.
• Brokers are very hard to dislodge. Many startups have tried to bypass brokers without success. Some of the large private insurtechs above have ended up building a successful broker channel.
• If the barriers to entry are low expect competition to intensify quickly. See for example French home insurance where Luko were quickly joined by Lemonade, Lovys, Leocare and others.
• Disrupting a large sector takes time. Disruptors start off being worse than incumbents in all respects other than one really crucial one. Look at the early days of SaaS or Fintech for examples.

I would love to make an investment in insurtech in 2022. I sincerely hope that great founders haven’t been put off the sector by the share price performance of a few companies.

*This post doesn’t at all cover companies selling tech to insurers — topic for another post some time

Reports of insurtech’s death are greatly exaggerated… was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

January has been a long month but we still have 11 months ahead of us so it is hopefully not too late to write about the year ahead. Particularly as the correction in public tech company valuations over the last few weeks may have changed this outlook.

It has been an ugly January for public tech companies and we are starting to see this spread to late stage private market valuations where multiples are no longer aligned:

• Adyen stock is down 28% in the last month as I write this and its market cap of $52B is only slightly higher than Checkout’s recent private round at $40B.
• Robinhood is down 33% in last month and 66% in the last year. Its market cap is now $10B. For reference Trade Republic raised from Sequoia at a $5.3B valuation on AUM of $6B, less than 10% of the AUM at Robinhood.
• Lemonade is down 27% in last month and 68% on last year, now at $1.7B market cap. Root insurance is down 48% in last month and 92% (!) in last year, valued at $400M.

The obvious consequence is that late stage fundraising is going to be harder and valuations are going to be lower. Certainly for the next few months.

Why are valuations decreasing?

The fundamentals haven’t changed: tech is eating the world and that applies even more so in financial services. Great fintech and insurtech companies are going to continue growing fast. They are delivering better products at lower costs and that is disrupting trillion dollar markets. Reaching profitability in this sector takes time, as it does in most SaaS businesses, but if the unit economics work then it is a matter of reaching enough scale.

The challenge is that the risk-adjusted cost of capital is increasing: partly due to higher inflation and interest rates, but mostly because institutional investors are becoming more risk-averse. Investors are going to be less tolerant of companies that make a loss for many years with the expectation of turning a profit, and they are going to be more focused on “how does this go wrong” than “how does this go right”.

What does this mean for a fintech startup or scale-up?

• At seed/A stage, focus on how you can quickly demonstrate strong product-market fit with more modest amounts of capital.
• Unit economics really matter once you are at series B and beyond.
• Productivity of your product and engineering team matters. It is impossible to perfectly quantify the RoI of your product team but the exercise is worthwhile. What should the impact of your product roadmap for 2022 be on the bottom line, and how does this compare to your spending on product and engineering? Small teams can be extremely productive. Growing headcount by 200%+ each year puts enormous pressure on this
• Underwriting matters. We are already seeing this in insurance where low loss ratios in the pandemic (as people drove less and stayed at home more) have gone back to pre-pandemic levels, leading to prices hardening. In lending not so much yet (apart form a blip as stimulus payments in the US stopped) but it will probably come.
• As a result of this funding a debt book at a sensible price may be becoming more of a challenge

Enough on the market backdrop and back to sector trends.

What are some of the areas I am excited by in 2022?

• The payments tech stack moving from lock-in with one provider to a payments automation framework such as Primer
• Open banking payments (finally) taking off across Europe, creating an opportunity for a payments-focused player who can handle all the edge cases, refunds etc.
• The financial operations of large companies. So much still to be done here. My prior article on this. Our recent investment in the sector: Numeral
• Employers becoming more involved in the financial lives of their employees, going beyond wage streaming into a range of products where they can get their employees a better deal (lending, insurance etc). Payroll innovation as part of this.
• Financial wellness and fairness, helping people make the right financial decisions and improve their financial situation over time e.g. Cleo
• Driving cost out of the insurance stack, either as a ‘bare metal’ insurer, SaaS, claims, or attacking brokerage.
• Fintech businesses which can be global from day one, levelling the playing field in countries where payments and debt remain overpriced

I plan to expand on some of these with blog posts which will be slightly more frequent over the rest of the year. It is going to be an interesting year and I am looking forward to it…

Fintech and Insurtech in 2022 was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

From our side, this was a “no brainer” investment: a clear pain point for any business doing payments operations; a product-first founding team with strong relevant startup experience; shipping fast with early lighthouse clients.

To expand let me go back in time to give the full history of how our investment came about.

It started at Google London in early 2009, when my sales strategy team hired a new associate Camille Tyan who turned out to be a star. Neither of us stuck around for long — I was at Balderton by the end of the year — but we kept in touch. I tracked Camille through his journey as founder of Payplug and then as he started Logic Founders with eFounders, who we already knew well through our successful coinvestment in Aircall.

In January this year Camille started describing his first business with Logic Founders, something around business payment operations and treasury, and immediately caught my interest. We were well aware through our portfolio of the pain points tech companies face in working with traditional banks for payments. Often the companies are still having to make payments manually, with separate two factor authentication and manual rekeying. At best they need to transform individual payment orders into XML or flat-format files, then send to their bank in that bank’s unique format with an SFTP or EBICS server. Then they need to check for any errors and reconcile payments to their ERP. This adds cost, time and errors.

Compared to the innovation we have seen in consumer ‘pull’ payments, with the likes of Stripe, GoCardless and Primer, B2B ‘push’ payments have seen very little activity. This is despite B2B payments volume of more than $100 TRILLION each year. A new company can choose to work only with a neobank that offers decent APIs, or a payments-as-a-service company that has partnered with a bank, but most companies want to continue working with their existing banks rather than bringing another third party into the payments flow. This is an area I have been boring people about for some time, for example in this Sifted article: “Fintech doesn’t need another banking app. We want software”

We immediately loved the concept of Numeral, that a client could integrate to every bank through one API and automate payments through their entire lifecycle, from initiation to reconciliation. Importantly this is as a software-only API-first layer, Numeral is not in the flow of funds. The closest comparable business would be Modern Treasury in the US, but the B2B payments systems in Europe and the US are completely different.

I have been continually pestering Camille this year to get more time with Numeral. I first met Édouard in September and then Hichem in October. Both blew me away with their depth of knowledge on the sector and the rapid no-nonsense way in which they are building the product and business. Édouard’s first role was launching Jumia, Rocket Internet’s African eCommerce business, in Egypt, which was a great initiation into startup hustle in a new market. He was then VP Product at iBanfirst in international B2B payments where he learnt a lot about this market. Hichem saw a more traditional bank as an architect at Boursorama, then was a tech lead at B2B neobank Qonto. Their product focus, intelligence and experience give them deep credibility with clients.

We spoke to their early clients Swile and Spendesk and received two of the most positive client references you can expect to hear. It is really strong validation of Numeral for a successful scale-up business to choose a new startup for something as critical as payments operations. Numeral’s customer pipeline is broad: any business processing volumes of transactions per month such as in fintech, insurance, real estate or crypto.

In sum, we were really excited by Numeral, so we’re delighted we eventually persuaded Édouard and Hichem to let us invest. Thank you guys! It’s an area we have plenty of relevant experience in from years of working with our investments in fintech such as GoCardless, Primer, ComplyAdvantage and Revolut; as well as API-first SaaS businesses such as Contentful and Vivenu.

It is still early days for Numeral, but we can’t wait to get behind the team to support their growth internationally and through the payments operations stack.

Looking forward to fixing B2B payments operations together!

As always a huge reason for our partnership is the founders. Adrien and Pierre are incredibly deep in this sector, having worked at pioneers in systematic investing such as Societe Generale and Julius Baer. Both are super-smart and well-connected. They are first-time entrepreneurs coming from large companies but have demonstrated an ability to hire great people, iterate product rapidly and cut through sales cycles. They also complement each other well, with Adrien as the commercial lead and Pierre deeper in the product and operations. Both founders are French but they have built an organization that is global from day one, with Adrien between Paris and Stockholm, Pierre in Hong Kong, and further offices in New York and now London. That they already have clients in three continents is a testament to the quality and universal appeal of their product. We are yet to meet in person but we have overcompensated by spending a lot of time on video calls together (once I persuaded them to turn their cameras on).

This is Balderton’s second investment in the capital markets data & analytics sector following our investment in Credit Benchmark a few years ago. For me personally this is a new sector but I was fortunate to be able to lean on the deep experience and networks of my partners Rana Yared and Tim Bunting.

For those of you new to systematic and factor-based investing let me first give a quick intro to the sector and then talk about why we are so excited by Premialab.

Quantitative or systematic investing includes any form of investment which is based on an encoded strategy rather than human discretion. It has been around since the 1970s, in its most simple form as index tracking funds that track for example the performance of the S&P 500. The simplicity, robust performance and low fees of systematic strategies have led to the dramatic growth of this type of investing. Over one trillion dollars are held in systematic strategies today.

One of the developments in systematic investing in more recent years has been risk factors. The performance of any investments can be explained to some extent by the underlying risk factors. This started with the Capital Asset Pricing Model that I learned in my MBA: expected return on an asset is proportional to the underlying volatility of that asset. It developed into the Fama French three factor model and over time into many underlying factors such as Momentum, Size, Value, Quality and Carry.

Increasing numbers of investors are building portfolios composed of systematic factor-based strategies. Fund managers aim to maximise returns while minimising their exposure to any one risk factor. All the major investment banks now offer factor-based strategies. The challenge for the asset manager is that different US equity momentum strategies all have different compositions and performance. Until now there has been no single place where investors can compare across strategies. Premialab have done the hard work to collate and normalise all this data to allow a holistic view across fund types and asset classes (equity, credit, commodity, fixed income, foreign exchange).

Even for investors who are not investing in systematic strategies it is important to understand their exposure to different risk factors. For example, perhaps their outperformance in 2020 was because they were long Quality factor risk. The challenge is how to define the different risk factors. There are academic definitions but what you really want is a real-world consensus across factor-based strategies. Premialab provide this with their Pure Factors. This allows the performance of any portfolio to be decomposed into the underlying risk factors.

Premialab is the first company to bring together data from the leading 17 providers of factor-based strategies. This has taken all of their experience and network in the sector and five years of intensive work. On top of this they have built a world-class analytics and risk engine which clients tell us they would love to use as a standalone product.

All of the above is highly impressive but our experience in software over the years is that it means nothing unless you can sell it. Happily Premialab have already shown an ability to sell into some of the smartest asset managers, insurers, pensions and sovereign wealth funds. We have rarely heard such glowing client references.

We are still in the early stages of the journey but we at Balderton are loving working with Pierre, Adrien and team so far. And I look forward to one day finally meeting them in person.

Why Balderton are partnering with Premialab was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

To be clear on definitions here:

CAC = fully-loaded Customer Acquisition Cost (marketing, sales, onboarding)

Monthly contribution margin CM = Monthly revenues — monthly variable costs (COGS, account management)

Retention in month i= Rᵢ

12 month value (‘LTV’) of a customer = CM₁ R₁ + CM₂ R₂ + …+ CM₁₂R₁₂

Aim for CAC payback < 12 month value.

CAC payback time = the number of months required for customer value to exceed CAC.

Simple.

But why 12 months? It is a nice round number. But, as with the food pyramid it is based more on frequent repetition than any real science. For sure there is some logic that growing a business rapidly ends up requiring a lot of capital if CAC payback time is long. However there are important differences between a business with low retention versus one with high retention or where user revenues increase over time (net negative churn). In the former a CAC payback time of even 6 months might be desirable, in the latter a payback time of 24 months might be perfectly acceptable

There are examples out there of successful businesses with CAC payback times of well over 12 months. For example much of the wealth management and pensions industry. For a typical personal pension year one revenues are tiny. On a salary of £40,000 someone contributing 8% into a pension would put in £3200 in year one, so average assets under management for the year would be £1600. Taking net revenues for the pension provider at 0.75% of assets, year one revenues would be only £12. Yet a personal pension provider would be willing to pay much more to acquire that client. [note: I originally wanted to include data from some public companies here, but none that can I find publicly report their customer acquisition costs or unit economics…]

A more recent example are the two big insurtech IPOs of 2020, Lemonade and Root. Lemonade’s payback time on CAC is ~3 years given their retention rates according to my back-of-envelope maths (with help from Twitter). According to this analysis it is as long as seven years, but I think this is a bit too tough in its assumptions. According to their S-1 Root’s CAC payback time is also ~3 years (CAC of $332, $909 average premium, ~20% margin, 51% retention to year 2 and 65% to year 3*).

This has inspired much debate in the insurance industry, in particular as Lemonade and Root’s retention rates are not great. Despite this Lemonade and Root’s combined market cap in December was $9B. Both have built strong brands and are demonstrating improving underwriting performance and an ability to improve revenues per client. We also don’t know what long term retention will be: maybe the 50% of customers who remain after year two then stay forever. The standard in the personal lines insurance industry is a multi-year payback on CAC, with insurers offering teaser rates in year one but then ‘price-walking’ customers onto a higher rate at renewal (although the UK regulator is now cracking down on this).

Looking outside of fintech the mobile games industry is another interesting example of different payback times. Great mobile games keep players for many years. Candy Crush is an 8 year old game on mobile and (as of 7th Dec 2020) top 2 grossing in the US iOS app store. While there is plenty of user attrition in the first few months, the users who remain stay forever and on average pay more over time. I know of very successful mobile games which worked with a 24 month payback on CAC (example). On a smaller scale one of our regrets at the Wooga board was not spending more earlier on marketing for our best games, given their strong retention and improving ARPDAUs.

On the flip side in mobile games, if you make hypercasual ‘throwaway’ games (e.g. Voodoo or Kwalee) with a day 30 retention of 5–10% and day 90 of 1–2% you had better make sure you are paying back CAC very quickly. Good hypercasual studios aim for a maximum 30 day payback on CAC.

To be clear the shorter time it takes to pay back your CAC the better (and if you can grow organically even better). However if you are in an industry where this isn’t feasible, and where users have long lifetimes, then you should think carefully about whether 12 months is right for you.

Would love reactions to this and other examples of companies targeting payback times of more or less than 12 months

As further related reading I can recommend this recent post by Christoph Janz: https://medium.com/point-nine-news/why-your-ltv-might-be-higher-or-lower-than-you-think-f35539291701

The pseudoscience of a 12 month payback on CAC was originally published in Balderton on Medium, where people are continuing the conversation by highlighting and responding to this story.

First off, this isn’t our usual Series A investment. The vast majority of our investments from our venture fund Balderton are at Series A. However we can make the occasional investment a bit earlier or later than this (and we also have our later stage Liquidity Fund taking secondary stakes in Series C+ companies). For example our first investment in Revolut was in a £1.5M round.

We aren’t a prolific seed investor so on the rare occasions we do invest early we have to be super-excited by the founders and the idea. That is definitely the case for Primer.

First off the founders. Paul Anthony (top middle pic above) and Gabriel Le Roux (centre pic) have a uniquely strong combination of tech, product and commercial skills across startups and one of the world’s most successful payments companies. They met at Braintree where they worked with some of the most sophisticated payments clients globally on their payment architecture. Paul was EMEA head of solutions and Gab was head of EMEA startup growth before moving to SF to work as product owner for commerce transformation. Previously Paul was one of the early employees and over time CTO of Deko (formerly Pay4later) where he built the world’s first online retail finance payment method. Gab worked for Rocket Internet in Global Savings Group and Easytaxi. They are also an Anglo-French team which matches well with our équipe at Balderton :-). Both Paul and Gab are incredibly intelligent, driven, ambitious and passionate about solving the pain points in payments.

Secondly the idea. The concept of Primer is abstraction of the entire payments stack. If you are a startup getting going on payments you will start using Stripe, Adyen, Braintree or similar. As you grow your options are to stay locked in to one provider or to start to manage your own set of multiple payment options.

Neither option is a good one. In the first case you are locked in to one provider who probably charges you too much and doesn’t offer all the alternative non-card payment mechanisms you would like to have. This is something we have seen first hand through our investment in Gocardless, and will increasingly become an issue for bank to bank PSD2 payments.

In the second case you need to build time-consuming integrations with multiple PSPs, alternative payment methods and fraud systems. This creates a fragile system which is hard to change and hard to reconcile into business intelligence. It is hard to optimise for cost/conversion/uptime. It also impacts user experience with multiple checkouts with different UX.

Primer will offer a unified payments API which captures and tokenises payments data, routes transactions to the best possible provider and is a single source of truth for BI. This allows the merchant to easily add additional PSPs, payment methods, fraud providers and business logic over time. The very biggest merchants are already building something like this themselves but for 99.9% of merchants it remains an unsolved problem.

Most parts of a modern tech stack are already built in this standardised API-driven way. We need to see this happen for payments as well, so that managing payments becomes friction-free.

Other companies have tried to address this issue in the past but have tended to get acquired before reaching scale (Zooz acquired by PayU, Processout acquired by Checkout, Optile acquired by Payoneer). Our thesis here is that Primer are the company who can go all the way.

We are very happy to lead this round and join our friends at Seedcamp, Speedinvest and some great angels including Taavet Hinrikus the founder of Transferwise.

The average person is still struggling to make ends meet, ten years after the last recession. This has a few consequences:

• Employers are taking more responsibility for the financial wellness of their employees. The feature that grabbed the most attention in 2019 was income streaming: the option to get paid while you earn rather than waiting for payday. This sector took off in the US in 2019 (Earnin, Payactiv etc), UK is picking up (Wagestream*, Salary Finance), continental Europe still very early. However the scope here is much broader: financial coaching, budgeting, saving, investing, pensions, life insurance.
• Gen Z are actively using apps to help them get control of their finances such as Cleo* and Yolt. These are enabled by open banking and aggregators such as Plaid, but what really matters is how they relate with their users: conversation, personality and intelligence. Features such as auto-save and overdraft protection are just that — features.
• Regulators have killed off most of the last generation of payday lenders but the underlying sub-prime and near-prime need for credit hasn’t gone away. Credit card debt in UK and US remains very high, way higher than debt from any other source of short term lending such as Amigo Loans or Klarna.

Neobanks have had a massive 2019, despite a press narrative which has shifted from supporting the underdogs to looking for negative stories. Even the followers have had a big year, although consolidation eventually has to happen. In the end cost leadership will count.

European Insurtechs such as Zego*, Wefox, Alan, Cuvva and Luko have started to show significant traction and high growth, leading to some big funding rounds, although some way behind the big US players still.

Banking in the UK has seen AISP usage take off, but PISP remains nascent. PSD2 in other large European companies remains very early

We didn’t have a big fintech exit (other than Assurance multi-billion sale to Prudential) and valuations of public lending fintechs have continued to struggle (although payments companies have done very nicely).

Companies are struggling to get control of credit card spending in an era where invoices have been replaced by dozens of SaaS tools, Google/Facebook spend on cards, self-managed T&E and contactless payments. This has led to the rapid growth of dedicated spending cards such as Brex, Pleo and Spendesk; and of SaaS/spend monitoring tools such as Productiv, Pepper and Cleanshelf .

Clearbanc has taken off by offering easy credit to startups. To build a good credit model you first need $100M of losses…

VC firms seeing the sheer size of the mortgage market are willing to bet big that startups can disrupt it. The positives are that an underserved ’niche’ in mortgages can still be many billions of dollars, and that the cost inefficiencies are small in bps but high in €. The negative is the difficulty of getting to a competitive cost of capital, and that it takes years to demonstrate the performance of your new ML-powered underwriting model.

The least said about the politics the better.. .

Merry Christmas all!

*Balderton investments

This is how much the UK workforce is lending to their employer by the 25th of each month, just before they get paid at month end*. And they are lending this money to their employer at zero interest.

Many of these employees are struggling to make ends meet towards payday and relying on expensive overdrafts or credit cards to do so. If they could only access the money they have already earned that month they would be able able to avoid these high interest rates and fees.

The principle of Wagestream is simple. You worked today, you should be able to get paid today.

This was how salary worked many years ago. Slowly it migrated to weekly, then fortnightly, then monthly. There are good reasons for this: people have month-end bills and tax to pay. However, a big chunk of spending is everyday. There are also bad reasons: payroll is a pain to organise, salary advances even more of a pain, employers don’t want to have to do it too often, and some companies rely on holding this cash to balance the books.

Wagestream solves this problem in a way that works well for employees and employers. Employees can access up to 40% of the cash they have earned so far that month, for a small convenience fee. They also get to see how much they earn each day. Employers still pay at month end, they see higher uptake of additional shifts and higher retention, and integration is very easy.

What we loved about Wagestream was the simplicity of this proposition and how well it works for all involved. We are a big believer in bringing financial health to the mass market, having already invested in a dozen ‘Fintechs’ including Revolut, Cleo and Nutmeg.

The question as an investor was whether Wagestream could build real competitive advantage, but the company have more than convinced us on this.

First off they are an exceptional team who are executing fast. Co-founders Portman and Peter complement each other perfectly. Peter has deep enterprise sales experience as Yplan COO and Living Social UK CEO amongst others. Portman has co-founded several companies building successful mobile apps and social games, including selling JTC to GSN Games where he was CIO.

As experienced founders, they were able to move very fast and assemble a top quality team from their network. Wagestream is just over one year old as a company and has already signed up some of the UK’s bigger employers such as Rentokil, Roadchef and David Lloyd.

What Wagestream is doing is not easy. They have to provide consumers with a top-quality mobile experience; handle complex and sensitive financial data; integrate smoothly to companies and partners and fund a balance sheet. We also see a huge potential for Wagestream to expand the financial services they offer to employees over time.

We are delighted Wagestream chose Balderton along with Northzone to lead this round, reflecting our deep experience in Fintech and across UK PLC. We are looking forward to helping Wagestream bring financial health to many more employees over the coming years.

*Calculation:

30M UK workers

Earning average £30K per year, £2500 a month. 75% are paid monthly.

30M x £2500 x 75% x 25/30 = ~£50B.