Category Archives: Startups

Why Start a Company in a Regulated Industry?

This post was originally posted on the TrueAccord blog.

We are nearing the end of the sales pitch, and the exec I’m speaking to is almost convinced. I feel it: he likes the product and likes the innovation but he has to ask; he can’t let me off the hook.

He leans forward and looks me right in the eyes. And then it comes. The question.

“Tell me more about your Compliance Management System.”

Without a word, I reach into my bag, and grab a folder. It’s massive with hundreds of pages, all properly categorized: FDCPA, TCPA, FCRA, ECOA, GLBA, you-name-it. Here are the results of hundreds, maybe thousands of work hours. I slap it on the table, and it makes a loud noise even in this cavernous conference room.

We both smile. I passed the test.

I confess, my dreams have been weird lately. This is what being a founder in hard-core financial services feels like. You should be ready for prodding questions, a lot of upfront investment, and heavy oversight. We aren’t alone: companies like Standard API, LendUp, Even, Vouch, Blend Labs and others all operate in highly regulated industries. So why take on a challenge like this, instead of building a messaging app, or a video-streaming app? Why work on “boring” problems, when you can build something that bloggers will muse about and any angel investor can love?

For my co-founders and me, and for others like us, the answer is three-fold: 1) solving real problems, 2) solving hard problems, and 3) unlocking huge opportunities. A heavily regulated market is a clear signal for all three.

1. Solving real problems

77 million Americans have a debt collection related item on their credit report. 106 million are unbanked or under-banked. 5.5% of adults nationwide have used a Payday Loan in the past 5 years. Think about these numbers: these are real people with real financial problems. They struggle daily.

I don’t know if there’s a financial bubble in tech, but there’s definitely a cultural one; many of us build meta-startups that help other startups get built or are plain me-too’s. We sometimes work on cool ideas that aren’t too meaningful. I once had an engineer decline an offer to fix debt collection, only to work for a mobile gaming company and promote modern day gambling.

I want my work to touch real problems because that’s how you make a difference outside of our echo chamber. Increased regulatory scrutiny comes on the heels of unscrupulous business tactics that exploit human suffering – real problems that need solving.

2. Solving hard problems

Did I mention we spent thousands of hours on our compliance policies? It didn’t stop there. Replacing dial-for-dollars call centers with a machine learning system takes time and dedication. So does underwriting mortgages or short terms loans. These industries require an understanding of human psychology, risk management, data science, predictive analytics, customer care – and all has to be delivered to pass intense regulatory scrutiny. Lending, collections and similar processes have been done manually for decades because building a machine to make nuanced decisions is hard. It’s hard to accumulate the data required to optimize them. It’s also hard to convince investors to be patient; the pool of funders and founders they are willing to support, is surprisingly small. That’s a worthy challenge. Again, regulated markets tend to create entrenched incumbents with little incentive to change – exactly where disruption is needed.

3. Unlocking huge opportunities

Payday lenders’ annual revenues are estimated at $11B. Debt collectors’ are at $15B. Thousands of companies pop-up in both markets due to surprisingly low barriers to entry, and disappear due to the complexity of continuous operations. Increased regulation favors organized, well funded market participants that can consolidate that activity in a way that is demonstrably better than the incumbents’ approach. Technology can help us solve these problems at scale, with convincing economics, and a compelling case for compliance and information security. Here, too, regulation signals the amount of money that flows through these markets – and the size of opportunity for those who can play.

Bottom line

Regulated industries present unique challenges, and require a mindset that combines technical daring and innovation with respect to the legal framework. When you do engage, though, they can present interesting, challenging problems that have huge impact and many opportunities. This, for me, is worth the hassle.

– Ohad

Hiring inexperienced employees helps me beat the talent wars. Here’s how I do it.

Building a stellar team is one of the key activities for a new company. I’ve noticed that hiring dynamics (who gets hired or courted) and success stories (how CEOs discuss their hires) often focus on credentials: which school new hires went to, companies they were a part of, and roles they filled. Conversely, one of my competitive advantages in hiring is hiring the less experienced based on their aptitude and attitude, and helping them grow. This has worked well in FraudSciences, where all the analytics team (including me) had very little experience before coming on board; in Klarna, where the Risk team’s leadership is still comprised of talented people whose first job out of school was at Klarna; and even today, at TrueAccord. Experience is important when you have a specific problem to solve and limited time to solve it. At any other time, hiring inexperienced people is a competitive advantage when everyone else focuses on experience. Why, then, isn’t that a more common practice?

Maybe because hiring inexperienced people early is difficult: they’re, well, inexperienced. Often they won’t come up with unique insights early on because they are unfamiliar with the domain. They will make rookie mistakes. They will be too much or little action driven. They definitely won’t help you hire them by signaling how or where they can help. But following just a few rules will allow you to define where inexperienced people can fit in your organization, make the best of them, and enjoy the advantages: a strong drive, a unique type of creativity sparked by zero pre- and misconceptions, and a much easier supply and demand dynamic. Here are a few pointers for succeeding in hiring inexperienced people.

First, know your domain and how to hire for it. I wouldn’t be able to hire inexperienced engineers, but for data science and operations roles it takes me roughly 20 minutes to know whether an interviewee is a right fit. Knowing the type of skills and mindset you’re looking for is imperative.

Second, you must have an initial mental model for the problem they need to work on, and some kind of onboarding plan (even if that only means a few hours of your time). You can’t just say “here’s a problem, solve it for me” – that’s setting your new hire to fail. The good news are that if you maintain proper documentation and involve every hire in a newer hire’s training, soon they will be able to do the onboarding themselves.

Third, invest a lot of time in mentoring. Identify when they need to “level up” and what that “leveling up” means, then guide them through the process. I learned that the ability to translate a perfect mental model to reality and deliver an MVP is a key capability. I’m ruthless in forcing team members to deliver when I feel they’re ready, even at the cost of their extreme discomfort. Once they’ve leveled up and understand the lesson, you’ll get constant improvement. Bonus: plan ahead and let them take on new roles in your team as they evolve. In the best-case scenario, inexperienced people are like stem cells. Having no previous experience, they’ll immerse themselves in your product, and become ideal candidates for product, marketing and customer success roles.

Fourth, teach them how to say no. By definition, being their manager and an experienced operator means that your opinion will be over-weighted. You won’t identify all of your mistakes in advance, and if the whole team follows you blindly, they’ll exacerbate the situation. You can hire opinionated people, but it’s also crucial to make them aware of your mistakes when you make them, so they don’t delude themselves that you’re perfect. Properly voicing your opinion is an acquired skill, and they need to learn to disagree.

Last, be prepared for mistakes. They will happen, and you’ll need to help them identify, analyze and correct them. Don’t just let them fail. However, know that hiring this way can definitely yield false positives, and be prepared to identify them fast. In the long run, no one likes being stuck in a role they clearly don’t fit.

Are inexperienced candidates the answer to all your hiring woes? Of course not. Experience still plays a huge role in leadership and specialist roles. Still, they represent an incredible talent pool. Especially nowadays, when talent is scarce in many tech hubs, hiring and growing them can fuel the growth you need to make your company successful.

My answer to “How are you doing?” and hacking the startup CEO game

Wow, I haven’t posted in a while. TrueAccord is my main focus.

I once read a great piece – in PandoDaily, I think, but can’t find it – about how every startup CEO fears the “How are you doing?” question. How we all need to pretend all the time that everything’s going great. How we should continue to pitch, show the world how awesome we are, even when all is going badly.

I don’t like thinking that this is true since I learn my best lessons from other startup CEOs, as long as they’re willing to share. I learn from their stories about how awesome their company is, sure, but the best discussions revolve around difficulties and how we can overcome them. I also know that “all is going badly” is a typical, and temporary, entrepreneur mindset that can change in minutes. So even if people are defensive, I’m constantly looking for conversation starters that will get folks to tell me more, not less.

I found a good hack for overcoming this barrier and getting good conversations going. When I get asked the question, I say: “You know how startups are: one day you wake up and everything’s terrible, the next day everything’s great. Today’s great. Yesterday was pretty terrible.” I adapt the “terrible” and “great” based on stuff that I feel I can share – difficult time with a contract, a great hire, whatever makes sense.

If said in the right environment and with the right tone, I’ll get some nods approval. Someone might even say “Yeah, today is bad for me”. That’s my in to start a meaningful talk. That’s when I learn my best lessons. You should do that too.

Nobody’s doing great all the time. A little bit of vulnerability goes a long way in getting important exchanges going. Who knows, you might make a friend. Try it!

 

STARTUPS DON’T GET SOLD. THEY GET BOUGHT.

This was originally posted on Swedish Startup Space.

In 2008 I was the Head of Fraud Analytics for FraudSciences, an Israeli startup developing fraud prevention solutions for eCommerce. One evening in January of that year, we convened to talk about our annual plans. Our COO, a quiet guy in his 50s, said: “First thing’s first: the PayPal test results are in. They want to work with us. But they want us to bear their logo”. Then he let out a small smile, and went silent.

The room was completely silent, too. We’ve never contemplated an acquisition. Everything was going great. Last summer, we ran our system on PayPal’s data as part of due diligence for our impending C round. We were geared for war, and we felt like we were going to win. Nothing was going to stop us.

Other than a $169,000,000 acquisition offer from PayPal, that is.

ALWAYS HAVE A NUMBER.

Fast forward to 2011. I was the VP of Analytics for Analyzd, a predictive analytics shop I started with my brother, Yuval, after leaving PayPal in 2010. Our staff of four flew in to Stockholm from Israel, San Francisco and Berlin and we were running full speed with Klarna’s Risk team, trying to rethink strategy for Klarna’s European expansion as part of a consulting project. It’s been a few good months since we started working and spirits were high – the home team was open to our suggestions, and making a lot of progress. At the same time, Yuval was pitching VCs on an innovative merchant risk product Analyzd was working on. When Sebastian, Klarna’s CEO, asked me to join him in a meeting room, I was preparing for a status report.

If you ever saw Sebastian, you know what his selling technique is. More than 190 cm tall, bright blue eyes, he stares directly at you as he makes his proposition. Now he was staring at me. And he was basically asking, “how much for the whole team?”

Were we planning to get acquired? Not really. We had a lot of incoming opportunities, and a brewing funding round. We knew that high growth startups are almost never valued the same way by founders and potential acquirers. We also knew that this wasn’t our last venture, and Klarna was a rocket ship destined for greatness. So we gave an audacious number; Klarna had to want us bad enough to agree, but wouldn’t feel ripped off if we delivered.

For better or worse, Sebastian accepted.

HOW DO I SELL MY STARTUP?

I get asked this question every few months, interestingly, never by people in the Bay area. The large number of talent acquisitions by Facebook, Google and Yahoo, driven by an incredible competition for talent, is misleading. A group of engineers getting acquired before releasing anything isn’t the norm, but rather the exception, and if you’re looking to flip a company before creating value, I can’t help you. This post discusses getting the offer and deciding whether to sell or not.

ARE YOU TIRED?

Tired founders are one of the most common reasons for selling. At FraudSciences, our team of 3 years was interested in fighting, but the founders had a 4 years’ lead on us, having started working on the technology as early as 2001. They were tired, and they wanted to cash in, and it was their right to do so.

If you’re tired and want to rest and vest, take the offer. Enjoy the short-lived fame of an acquired founder. Recharge, rethink, and then move on to your next thing. Leaving to start something new becomes much easier after some liquidity.

Before you sell, though, consider why you’re tired. Is the company doing well, but you’re tired of your role as CEO or CPO? Maybe getting a strong operator to help you can take some load off. Are you financially strained? VCs have become much more sophisticated in providing liquidity to founders and executives. Neither are reasons to sell if you don’t really want to.

IS THE ACQUISITION ROCKET FUEL FOR YOUR PRODUCT?

Why did you start this company? For many of us, the answer is that there’s a problem we’re passionate about and want to solve. When the acquirer is the right one, joining forces with them can supercharge your business. PayPal with eBay, Android with Google, there are many incredible examples.

In Analyzd, though a much smaller team, we wanted to build a think tank for risk management that will change the way the industry thinks about itself, its goals, and the way it operates. Driven by Klarna’s tremendous growth, we reached amazing achievements in two years, while Yuval built the company’s Product organization from scratch. Would we have reached the same goal going at it alone? I want to believe so. But we made it so much faster with Klarna, and were also able to participate in its amazing success. That’s an all-around win.

MONEY COMPETES WITH MONEY.

If you’re not tired, don’t view an acquisition as supporting your long-term goals and generally tend towards not selling, make sure you make the most out of it. A good acquisition offer effectively gives you a price. It may be a good opportunity to raise your next round and end up with a bigger war chest, with lower dilution than you would have otherwise. Money competes with money. Use the offer to jack up your price, stuff your coffers, and grow your business.

BOTTOM LINE

If you received an acquisition offer, congratulations! You already created value that someone is interested in. Startups don’t get sold, they get bought, and someone wants to buy you. Price negotiations aside, are you ready to sell? Should you sell? What are good reasons to sell? Don’t discuss an acquisition for the wrong reasons; negotiating the sale is much more than just the price, and it will wear you out and kill your business if it falls through at a too late stage. Consider your options, understand what you set out to achieve with your company, and go do it.

Dealing with Account Take Over? Here are my top tips (O’Reilly post)

Online payments and eCommerce have been targets for fraud ever since their inception. The availability of real monetary value coupled with the ability to scale an attack online attracted many users to fraud in order to make a quick buck. At first, fraudsters used stolen credit card details to make purchases online. As services became more widely used, a newer, sometimes easier alternative emerged: account takeover.

Account takeover (ATO) occurs when one user guesses, or has been given, the credentials to another’s value storing account. This can be your online wallet, but also your social networking profile or gaming account. The perpetrator is often someone you don’t know, but it can just as easily be your kid using an account you didn’t log out of. All fall under various flavors of ATO, and are easier than stealing one’s identity; all that’s needed is guessing or phishing a user’s credentials and you’re rewarded with all the value they’ve been able to create through their activity.

Read more on O’Reilly’s programming blog here.

Why did PayPal buy Braintree?

(Pasting my Quora answer here)

PayPal wants to be anywhere payments happen and it seems to be willing to pay a good price for that. Beyond the standard dynamic where the leader buys one of its most affordable up and coming competitors, PayPal acquired a few nice assets:

– The Braintree team is strong, with multiple highly talented folks that are both well known in the industry (= strong advocates) and generally capable.
– The product is superior to anything PayPal has in gateway tech. PayPal acquired Verisign’s gateway a long time back but that integration was not synergistic. With new PayPal management and Braintree’s product, they can get better access to a large and growing volume of gateway payments. This is a good and needed complement to PayPal’s portfolio.
– Last but not least, PayPal bought a foothold in the upmarket – medium and large merchants that usually do not use standard PayPal products due to lack of UX flexibility and integration, as well as strong presence in mobile payments.

So, bottom line, PayPal acquired a team, a product and a market. A smart move.

How to get the most out of your acquired entrepreneur

I have a friend, let’s call him Joe, who’s an entrepreneur. Joe’s company was acquired a couple of years ago by a larger company, and Joe was left in charge of a suite of products only he could run for this company. He was doing very well but had the usual corporate complaints: it was too rigid, it was too slow, he didn’t enjoy it. We shared some of our war stories.

Then, one day, Joe was walking by a conference room where his CEO was hosting a group of b-school students, talking about acquisitions. The CEO calls Joe in, introduces him to the class, and says: “do you know what is the first rule when acquiring a company? Fire the entrepreneur. They never fit in, and they give you bigger headaches than anyone else could”.

As Joe was telling me this, I think he agreed with his CEO. I did too. Entrepreneurs are often celebrated and applauded in the Bay area, hailed as business leaders and innovators. That’s often true. However, there’s another thing that’s true, that acquirers find out quite often: most of us are individualistic, unmanageable hotheads who can’t, or at least won’t, play well within the corporate culture. It makes sense, too: had most entrepreneurs been able to or interested in participating in the corporate power structure or dynamics, most of them wouldn’t have become entrepreneurs.

Since I first heard Joe’s story, it resonated in many stories I’ve subsequently come across. Entrepreneur meets CEO. They become business BFFs. CEO acquires entrepreneur, hoping for higher returns and synergies. The entrepreneur is exhilarated: finally, he’s able to super charge his strategy in a much bigger organization. Acquisition goals? We’ll get them in no time. I’ll just do what I always do. The time bomb starts ticking.

Fast forward 12 months and the situation is almost beyond repair. The CEO has an energy ball running around the building calling his middle managers lazy and their process folks idiots. Every second person in his company is irritated by this person sitting in meetings making everyone else feel stupid. Plus, the guy’s team has set up a barricade and is unwilling to integrate with corporate systems, come hell or high water, because theirs are better. In the meantime, the entrepreneur is plucking out hairs due to the slow pace. Everyone’s so slow! Everything requires permission! He’s being asked to provide status updates and someone can override his operational decisions! All hell is about to break loose.

Not an ideal scenario, is it? That’s the worst case, of course. The usual case is a much more tame version of the same problem, with the entrepreneur still being unhappy and looking to eject as soon as his vesting has crossed some major milestone. How do you prevent this from happening? Here’s some advice.

  • Fire the entrepreneur. Joe’s CEO’s advice still holds. Hiring entrepreneurs to do what they did with their companies, only internally, seldom works. If you need a team, get the team. If you need the product, get #2 in the company to run it. Move the entrepreneur aside and let him work on something interesting and open ended, usually solving a really hard problem.
  • Keep them self sustained. The best use for an acquired entrepreneur is as head of a business or functional unit, separated from others and hopefully with its own infrastructure. Let them run free. If you put an entrepreneur in a role that requires them to touch all parts of the organization – well, they will. Big time. That can prove successful in one use case only: when you put them at the top, like eBay did with David Marcus. Otherwise, be ready for some turmoil. Entrepreneurs didn’t get to where they did by setting up committees and inclusive communication, and there’s no reason to believe that they’ll start when you acquire them.
  • Manage by KPIs/challenges. Once you have them overseeing a well defined area, give them concrete targets to hit. An unchallenged entrepreneur will get bored and either eject or try to redefine his mission, which often means stepping on other people’s toes. Set goals. If they’re met quickly, set more aggressive goals. Aggressive targets and the free hand to pursue them is what drives entrepreneurs. Give it to them and you’ll get an effective force. Let it slip and you’ll get mayhem.

Entrepreneurial people can be a positive force, if I may say so myself. Acquisitions happen because they, we, create value. However mismanaging an entrepreneur often results in both sides being less happy and successful than they could have been. Taking a few precautions can help your acquisition dollars do so much more for you.

 

Don’t pitch me, bro: 4 common payment startup ideas that you should avoid

You think I’m kidding? I’m not. The days of payment providers and payments companies set-up and grown the way they have, trying to replicate a PayPal model, are gone. Consumers don’t care enough and cannot effectively differentiate your service from others to really choose to sign up. I looked at that several times in the past.

Still I get pitched on ideas I find far fetched and, frankly, a waste of time for smart entrepreneurs. There are many possible smart, ground breaking and really difficult directions to take in payments; the following ones are not, and anyone who understands payments will advise you to stay away from them.

  1. The mobile wallet: Square (PayWithSquare) isn’t gaining traction. gWallet is failing. Serve isn’t taking off and ISIS is… well, you get the picture. Mobile wallets aren’t working: merchants are slow to adopt additional hardware that will allow them to accept these. NFC is years behind in adoption and many large and small players, including me, just don’t believe in it. Consumers are slow to adopt a solution that gives them no advantage over credit cards, and even giants with big pockets can’t get them hooked.

    Signing people up and getting to add their credit cards is impossible without high, unsustainable customer acquisition spend. No startup can grow this way.

  2. Micro-payments: I understand the rationale. Payments should be as easy as Liking something. People don’t pay for content because it costs too much. We can start from digital goods and charge a large percentage that will cover costs.

    It all sounds good until you realize that it doesn’t work. Consumers don’t pay for content by the pound since they are used to free content. Paywalls have limited success and even that success is always with big brands that spend millions on advertising, reducing market size to a minimum. More importantly, zero cost of goods sold – a blessing and a curse – allowed large take rates and supported many interesting business models, ones that cannot expand to any other vertical. Once you’re hooked on these sweet 30% (or 10%), you can’t really go to tangible goods with their lower margin and fraud and other issues. No payments company really grows out of that niche.

  3. Split bills: oh, the ever eluding perfect offline shopping experience. Entrepreneurs mean well – the experience does need a revamp. Is it really about not having to split a bill at a restaurant or the downtime of waiting for your check to arrive? As it turns out, these are very weak drivers to action when they are required to (again) sign up and add a credit card. It’s not that consumers don’t respond to call to action at those points; apps like OwnerListens prove that they do. They just don’t respond to THIS call to action. They want to do something, just not split the bill.

    The reason is simple: the actual shopping experience, while indeed a big issue, is just the tip of the iceberg when you approach it as a payment application. What you’re trying to build is the network of merchants and consumers, and you’re again faced with the two sided chicken and egg problem, with a weak call to action to consumers and not so easy integration for merchants. Adoption never crosses the usual suspects on Emerson street in Palo Alto, and even they are growing tired.

  4. Facebook Connect checkout: an alternative to the previous idea, here we have an attempt to streamline online checkout. This one fails not only because consumers are not too enthusiastic about giving their Facebook details in financial settings – they are not – but also since much like with the mobile wallet idea, they have a current option they like just as much. Credit cards work, and no incremental solution is going to displace them anytime soon.

The payments landscape is fragmented, commoditized and highly competitive. It is ripe for disruption, but that disruption will not come from new card-based services but from innovations in payroll, cross border trade, emerging markets, new identity trust authorities and other interesting ideas. Research those, and stay away from ideas that will take you nowhere. We need your energy focused on the right things if we are to really see a change in the coming years.