The a16z Marketplace 100: 2023; Does Revolut’s $33bn price tag stack up anymore?; The closed loop opportunity opens up;
In this edition:
1️⃣ The a16z Marketplace 100: 2023
2️⃣ Does Revolut’s $33bn price tag stack up anymore?
3️⃣ UK crypto companies call for help to break a banking barrier
4️⃣ How big techs interact with incumbent financial institutions
5️⃣ Value added services (VAS) becoming the main value proposition
6️⃣ The closed loop opportunity opens up
7️⃣ Who are the enablers of embedded finance?
And many more….
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The a16z Marketplace 100: 2023
One thing I personally noticed is the growth of social commerce.
It’s not just a transaction: Consumers seek out personalized and entertaining shopping experiences.
In 2022, livestream e-commerce sales were estimated at 17 billion dollars in the United States. Also known as live commerce, shopping via online streams on social networks is becoming increasingly popular across the globe. By 2026, e-commerce revenues created by live online shopping are forecast to nearly triple, amounting to approximately 55 billion U.S. dollars.
After a Covid-induced spike in ecommerce (in which 10 years of growth were crammed into three months), we seem to have settled back into a more normal balance between brick-and-mortar and online stores (a split of approximately 85% brick-and-mortar vs. 15% online). However, this doesn’t mean consumers are shopping in the same places.
Of the three new entrants to break into the top 15 this year, two are in the shopping category. Static ecommerce sites are making way for more interactive, curated, and even gamified digital shopping experiences.
After jumping 73 spots last year, live-shopping app Whatnot (where sellers hawk their wares in video shows) cracked the top 10 at #9. Though Whatnot’s original focus was on collectibles, they’ve since expanded into over a dozen other product categories, including sneakers, vintage clothes, jewelry, and more. The platform has become a place for live sellers to build businesses: more than 100 users raked in close to a million dollars each on the platform in 2022. Whatnot ascent may be a harbinger of what’s to come in U.S. ecommerce: after all, live-shopping is already a $137 billion a year industry in China.
Since launching in September 2022, Temu quickly became one of the top-downloaded apps across the Apple App and Google Play Stores. The app represents a new kind of AI-powered, social commerce experience for the U.S., inspired by shopping trends in Asia. In Temu’s hyper-curated algorithmic feed, consumers are served personalized recommendations of discounted items from thousands of merchants. Shopping is literally gamified, and users receive credits for inviting friends and engaging daily.
If we annualized Temu’s first four months of data — and if it were private — the company would have cracked the top 10 of this year’s Marketplace 100.
Temu is now actively following TikTok’s marketing-heavy U.S. launch strategy. Like TikTok, it has a deep-pocketed Chinese parent company willing to invest huge sums into customer acquisition so it can continue growing outside the Chinese market. And like TikTok (as well as fellow Chinese shopping app SHEIN), it also needs a large number of users for its recommendation algorithm to work.
Source a16z
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The tenuous state of Silicon Valley Bank will change the accessibility of venture debt
The implications on startups, investors, and the private markets will be profound
Implication 1: Valuations have much further to fall and down rounds will become more common
By Q4’22, private tech valuations across most stages had fallen modestly from 2021’s heights, but were still up compared to 2020, per CB Insights’ valuation data.
While there was a bit more deal structure in later-stage financings (as we note here on page 3), valuations were still elevated and had more room to fall given how dramatically the situation on the ground had changed.
In fact, as highlighted below, tech valuations in Q4’22 for Series C deals were actually up 20% over full-year 2020 levels. Valuations for Series D+ deals were up 30% vs. 2020.
It’s feasible that companies with momentum and metrics were the ones raising in the more challenging climate of the past year, and so they might still have been able to command premium valuations.
But companies that didn’t have the metrics were availing themselves of debt to avoid “pressured valuations,” as SVB noted.
Debt helped companies delay taking the medicine of a lower valuation, dilution, and tough conversations with the team. In some cases, it also helped companies avoid (or perhaps delay) layoffs or even failure because of an inability to raise equity capital.
So, implication 1 — of the reduced availability of venture debt post-SVB — is that propped-up valuations will be “pressured” and start falling faster, as they have in the public markets. This will mean more down rounds.
Implication 2: Startup mortality will increase
When there’s cheap and plentiful debt that can be used to extend runway and avoid compressed valuations, it makes sense to take advantage of that.
But even with venture debt available, dealmaking has been slowing down and is currently trending even lower through mid-March 2023.
Investors are becoming increasingly discerning, evidenced by the longer time period between rounds. All this while startups need more access to equity funding, now that debt is less of an option.
So we have a slower financing market, more discerning investors who need to support the existing winners in their portfolios, and less debt available.
Expect harder decisions to be made by VC investors about which companies to back and which ones to set adrift.
Implication 3: Layoffs at startups will intensify
86% of unicorns (456 out of a sample of 531) have actually increased headcount since Q1’22. In fact, 37% (198/531) of unicorns have grown headcount by more than 50% vs. this time last year.
Companies, investors, and boards of directors that have not taken the time to seriously consider their expenses are about to do so. This means startup layoffs will intensify in the near term.
Source CBinsights
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Does Revolut’s $33bn price tag stack up anymore?
Revolut is currently Europe’s most valuable private startup, as it clings onto a public valuation of £27bn from a July 2021 fundraise led by SoftBank and Tiger. But now some of its investors are reevaluating their positions.
One of the world’s leading secondary brokers, Setter Capital, has Revolut holdings listed at a discount of more than 50%, according to documents seen by Sifted — and two fintech investors also tell Sifted that a number of Revolut’s existing shareholders have already marked it down internally.
Valuation in context
Revolut isn’t an easy business to value.
It has 28m global retail customers — far more than competitors Monzo (7m) and Starling (3.5m), which are focused on the UK.
Its £27bn valuation is more akin to the incumbent UK retail banks that it’s aiming to disrupt. At the time of writing, its valuation is third only to HSBC and Lloyds in the UK — despite having 12m fewer global customers and not being able to lend or accrue interest on deposits.
HSBC reported a $17.5bn profit in its last financial results (for the 2022 financial year), while Revolut’s stood at £39m ($48m) in its latest (for 2021).
Revolut is not very profitable, yet. In 2021, it recorded its first profit before tax — of £39m — thanks to revenues nearly tripling, from £220m in 2020 to £636m in 2021.
No banking licence
Revolut may be the biggest digital bank in Europe, but its investors will want it to get still bigger — and not having a banking licence in the UK will hold it back. Without one, Revolut can’t become a primary bank account for UK customers, or offer lending products like mortgages — the key revenue sources it would need to unlock to catch up with incumbents.
In an interview with Sifted earlier this month, Revolut CFO Mikko Salovaara said the fintech’s UK banking licence was coming “imminently, shortly, in the very near term” — but there are still some significant roadblocks standing in its way.
Revenue potential
Revolut’s revenue streams are also changing — in a way that’s likely to devalue the business.
In 2021, crypto trading accounted for 30% of Revolut’s revenues, CFO Salovaara told Sifted — but this dropped to around 5% in 2022 as the crypto boom ended.
Exit value
Revolut’s CEO Nik Storonsky has not ruled out fundraising again — he told Sifted last November that the neobank will come to market if it wants to shore up some more cash for global expansion.
If he did, he’d be tapping growth investors for capital — and they’d want to know about the company’s path to IPO.
But the fact that Revolut’s auditor couldn’t verify the most recently available financial figures for the company casts a big shadow over their ability to do so.
Revolut will likely do all it can to avoid having to fundraise and “mark to market” for as long as these jitters last.
Source Sifted
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UK crypto companies call for help to break a banking barrier
The demise of crypto’s favourite American banks has slimmed the industry’s access to the traditional financial system, fuelling theories that crypto is being run out of town, at least in the US.
Fewer banks accepting crypto means fewer places for companies to park their customers’ assets. But this trend — dubbed “Operation Chokepoint” by a fevered few on social media — isn’t stopping at America’s borders. British banks are going cold on crypto, too.
NatWest and other large UK banks have imposed limits on how much money can flow to and from crypto exchanges. Citing a challenging regulatory environment, online payments provider Paysafe recently said it would wind down services to UK customers of Binance, the largest trading shop crypto has to offer.
Coupled with the wobble in America, the trend has set off alarm bells. Lobbying group CryptoUK this week wrote to the UK’s economic secretary Andrew Griffith expressing “deep concerns” about blanket bans and restrictions of transfers from UK banks to crypto asset platforms.
The group urged the government to “find a path forward” and consider facilitating meetings between banking and crypto C-suite heads.
One can see why they think it’s worth a shot. The UK government has been explicit about embracing crypto.
Lisa Cameron, an MP who is the chair of the all-party parliamentary group for crypto said she raised crypto’s banking issue with Kevin Hollinrake, parliamentary under-secretary of state at the Department for Business and Trade.
“It’s counterintuitive to the UK’s crypto vision. De-banking the industry could undermine the UK remaining an international hub of fintech,” she said.
The more pressing issue is whether banks — in their aversion to risk — are actually doing more of a disservice to UK consumers.
The risk is that the business will just be carried out offshore, where it’s harder to track down money or executives. As we have seen in the past year, companies in offshore jurisdictions can still sting customers. FTX in the Bahamas and Terraform Labs in Singapore are prime examples.
The banks already do know-your-customer and anti-money-laundering checks for crypto companies in the UK. Authorities in Britain have not been explicit at all about the risks to banks in accepting crypto business, unlike in the US. So what has changed?
But asking banks to embrace crypto remains a hard sell. A bank’s choice of its customer is a decision made by a private, commercially minded company.
In any case, one individual familiar with Westminster’s approach to digital assets told me recently that the government was not concerned with being first on digital assets, nor was it swayed by any advantages afforded to a first mover.
Source Financial Times
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How big techs interact with incumbent financial institutions
Most often, big techs offer financial services in unchartered territory — that is, in segments of the market with low penetration of incumbents, in some cases growing the pie, or market size, for all participants. This can be seen as a “blue ocean” market entry, which can be via:
Creating new markets and new segments: With new innovative products and technology, which have a limited substitution effect to the traditional banking services, at least in a first stage (e-wallets, peer-to-peer, cryptos, and so on), big techs can gain entry into markets. For example, when Alibaba introduced Alipay in China, it substituted small cash transactions and did not have direct competitors because Chinese banks at that time did not offer e-wallets services or provide similar services. This may change over time as customers get used to substituting existing products with new ones.
Entering underserved or untapped customer segments: Big techs have filled demand gaps in products traditionally not served by incumbents. For example, Amazon offers merchant lending to small sellers in its marketplace platform who might not have accessed a bank loan due to insufficient accounting records. In China, big techs offer microcredit for unbanked rural populations and financing for small merchants with no formal accounting records7.
Less often, big techs enter financial services to compete directly with incumbents, in market segments where they already have significant penetration — which can be seen as a “red ocean” market entry. For example, Alipay and WeChat Pay are competing for banks’ market share in merchant acquiring business. Big techs also can act as investors in financial firms, sometimes acquiring them outright, as with Alibaba’s purchase of the traditional property insurer Cathay Insurance. More common are partnerships or joint ventures. As noted earlier, big techs typically seek to provide the customer-facing parts of the value chain, leaving banks with the more heavily regulated functions. This relationship is exemplified by the Google-Citibank and AppleGoldman Sachs partnerships. In some cases, banks could also act as the funding partner — for example, banks in China fund microloans to individual consumers and SMEs via WeBank, a digital bank partly owned by Tencent (see case study). Finally, big techs act as suppliers (vendors) for incumbents, providing them with specialized services such as cloud computing, data analytics, cyber security, and disaster recovery. These observed modes of interaction were mapped in the exhibit below along key product lines.
Source Oliver Wynam
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Value added services (VAS) becoming the main value proposition
Value added services (VAS) have been, for a long time, an element of the acquiring industry. Now, the development of platform ecosystem retailing solutions — where payment is one of the many services available — has turned VAS into mainstream solutions to which payment acceptance has become a complement and, comparatively, a commodity.
This is happening in the merchant acquiring and the retail technology businesses alike. Stripe and Shopify used to be connected to each other, with the former providing payments solutions to the latter, but are no longer cooperating as both have now become orchestrators competing against each other. This is an example of how VAS are now de facto the value proposition to merchants, with payments going from being a central core service to a complementary addition.
Stripe started as a linear business model (PayFac and acquirer), then evolved to a platform, and has now finally become a full merchant journey ecosystem value proposition. As such, it is pursuing expansion to in-shop acquiring, in-shop smart terminals, and wallet solutions for merchants to offer to customers; Stripe currently services two million merchants and processes $640bn GMV.
Shopify also started as a linear business model (software for merchants to set-up e-commerce), then evolved to a platform and has now become a full merchant journey ecosystem serving the entire merchant (product lifecycle) value chain; it has since expanded its reach to payment services with its Shopify Payments services.
Source Arkwright Consulting
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Generative AI stands to change how work happens in one industry after another. But software engineering’s transformation isn’t done yet
Copilot has caught lightning in a bottle. GitHub’s AI-powered companion for developers, suggesting the code you might want to write next, is a hit in more ways than one. It’s beloved by engineers, attracting more than a million within about a year and delivering a substantial boost in productivity. (Even if you’re a top engineer, it might write half your code or more.) It also stands to become a commercial blockbuster. Charging $10–19 per seat per month, Copilot could grow to generate $1 billion or more in annual revenue among GitHub’s 100 million users.
Copilot’s success has set off a gold rush. Founders have raced to bring the power of large language models to all kinds of other industries, building tools to help professionals write, code, design and create media. There’s “Copilot for lawyers,” “Copilot for doctors” and “Copilot for designers,” and many more “Copilot for X”’s.
These are all exciting directions. We think generative AI stands to transform one industry after another, making all kinds of professionals more effective at work and delighting waves of consumers.
But there’s a lot more to do for developers. Copilot, which leverages OpenAI’s model Codex, may be just the opening salvo in AI’s transformation of how software engineers work. Andrej Karpathy predicted in 2017 that neural networks would create a new generation of software, “Software 2.0,” and we may see the same reinvention of the tooling that helps people make software — a “Developer Tools 2.0.”
There are many opportunities here. Some founders are iterating on the in-editor, get-help-while-you’re-coding experience Copilot popularized, trying different interaction patterns or different models. Think of Replit’s Ghostwriter, Soucegraph’s Cody, TabNine and others.
Many other opportunities lie further afield. You might target work engineers do beyond writing code, like debugging and documentation — or other work engineering orgs do, like incident response. You might think of value props other than “write code faster,” like “write code that’s more performant or more secure.” You might throw out the plugin form factor and rebuild an entire application. You might focus on personas other than the software engineer, like the data scientist who needs a boost writing in notebooks (see: Hex), or the data analyst toiling away writing SQL queries. There’s a wide waterfront of opportunities to explore and many places to hook into developers’ workflows.
Source Sequoia
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The closed loop opportunity opens up
As fintechs discover the limitations of the interchange model, some will go so far as launching their own closed loop payment systems.
Closed loop payment systems have existed in some form for nearly as long as the card payment networks. Gift cards and fuel cards are two common examples. They focus on a narrow payment use case: often the same type of consumer, purchasing the same type of goods, from a specific type of merchant.
These systems don’t need to support the majority of payments for the majority of consumers and merchants. This narrow focus allows these system operators to handle the roles of issuers, networks, and acquirers, and so cut them out of the payment flow and keep premium economics.
In the past it was immensely costly to build the technology and acquire sufficient merchants and consumers to justify closed loop payment systems. However, the cost of building such products has decreased, and the channels and playbooks for acquiring significant user bases have matured. Closed loop payment systems are now a viable strategy for an increasing number of businesses.
That said, it’s still not easy to start a new closed loop payment system. Most of the companies exploring this are already at significant scale and are knitting together large pre-existing merchant and consumer user bases. For example, Square’s Cash App Pay connects Cash App’s ~50M+ consumers and Square’s ~5M+ merchants.
By cutting out the traditional issuer-network-acquirer middleman, Square has the opportunity to more than double its net take rate.
It’s not just consumer businesses that are exploring this. Other platforms that sit atop B2B payments have released some interesting potential precursors to such a network, like Quickbooks’ Business Network and Bill.com’s network payments.
Source Matt Brown
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Who are the enablers of embedded finance?
The distributors of embedded finance rely on two sets of providers to manufacture the embedded-finance offering and grant access to it.
- Technology providers (fintechs) provide the platform through which distributors can access, customize, and offer embedded-finance products. Some, including Marqeta, provide point solutions for specific categories of financial products, such as card issuing. Others, including Unit, Bond, and Alviere, operate platforms that offer distributors multiple financial products, such as deposits, money movement, and lending.
- Balance sheet providers (licensed or chartered financial institutions) are responsible for manufacturing embedded-finance products, providing risk and compliance services, and offering access to funds for lending and deposit products. Balance sheet providers sometimes partner directly with technology providers to create an integrated embedded-finance offering for distributors. For instance, Stripe is partnering with Goldman Sachs and other banks to offer embedded finance to platforms and third-party marketplaces.
A few banks and fintechs, including Cross River Bank and Banking Circle, fulfill both of these functions. Having built their own technology layer on top of their own balance sheet, they provide embedded finance to distributors such as retailers, business-software providers, marketplaces, and OEMs by themselves, with no need for additional partnerships.
Source McKinsey & Company
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Blockchain As A Service (BAAS)
Blockchain-as-a-service (BaaS), the combination of cloud computing and blockchain, is an offering that allows users to leverage cloud-based solutions to build, host and manage their own blockchain apps, smart contracts and functions on the blockchain. The BaaS providers manage all the necessary tasks and activities to keep the infrastructure agile, operational and easily accessible. It is an interesting development in the blockchain ecosystem that is indirectly aiding the blockchain adoption across businesses by helping enterprises simplify operation process and reduce deployment cost. It is based on, and works similar to, the concept of Platform-as-aService (PaaS) model.
Source NutBaaS
