Like many of you, i watched Billions this week on Showtime and was privy to one of the better take downs / straight talk moments in evaluating a startup business. The moment came when Bobby Axelrod was analyzing his wife's meetings with investors for her small 'healthcare' business, and he was being pushed to tell her why she wasn't ready for funding.

What is it that you do that you’re the best in the world at? You offer a service you didn’t invent, a formula you didn’t invent, a delivery method you didn’t invent. Nothing about what you do is patentable or a unique user experience. You haven’t identified an isolated market segment, haven’t truly branded your concept. You need me to go on? So, why would an investment bank put serious money into it? I all but told you ahead of time, but you wouldn’t listen. Now you’ve heard it, but it’s too late. You weren’t ready.
— Bobby Axelrod, Billions 2016 "Currency"

In essence, he's arguing the different between VC back-able businesses, with a defendable moat (e.g. unique technology/IP, brand, distribution), and those that frankly are not. Now mind you, those that are not can be quite successful, scale, make money for the founders and beyond. But they downside protection just isn't there to justify considerable investment from rational investors at an early stage (later stage businesses are less likely to be completely demolished in undifferentiated markets, and hence have return profiles that can work for some investors).

I bring this up today because of a few discussions i've been having with entrepreneurs in FinTech for some time. Many of the largest FinTech companies, particularly in the most recent cycle, have moved the needle ever-so-slightly against the status quo - e.g. originating fully online, instead of partial online, partial phone, or offering a service like Virtual Card Numbers (which has been available through the mainstream networks for a decade) in a more user friendly manner. Are these really 'defendable' moats?  Can investors truly argue that these businesses have enough downside protection to warrant investment?

On distribution, there's always the argument that startups who use digital strategies cannot compete long-term with brick and mortar physical presence and/or expansive direct mail strategies of the biggest players when they want to scale, particularly from say 100k customers to 1M, let alone 1M to 10M in the US. Are physical branches really as efficient as bank research organizations would have you believe? If younger customers go into a branch less than 1 time per year, how can that possibly be efficient use of investment dollars? The same arguments can be made for direct mail - I recently counted 45 financial services (mostly credit card) offers in the month of February in my mailbox. I didn't even open a single envelope, let alone apply for any of these. Is this really the path to growth over time?

So we come back to Axe's quote above. What is the formula?

  1. Are you the best in the world at what you're doing?
  2. What was invented here? The product, formula, distribution?
  3. Is there something unique to what you've built? Can you patent the design, process or technology itself?
  4. Do you have differentiated brand in the market segment you've selected?

Good starting point. Not sure we're seeing many players who can check these boxes today...