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Verix ENGR 245 Lean LaunchPad Stanford 2018


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business model, customer development, e245, engr245, lean launchpad, lean startup, stanford, startup, steve blank

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Verix ENGR 245 Lean LaunchPad Stanford 2018

  1. Ben MBA Bain Capital PE Yale (Physics) Intelligent Lending By Verix Dan JD Goldman, HFA UChicago (Econ) David MBA Bain, Berkeley CS Brown (Math) Soumya MS&E Visa IIT (EE) Interviews: 107 Existing Market, Low-Cost Entrant
  2. Then and Now... Start: Cash Mgmt Finish: Loan Processing Betterment for SMBs (origin: Ben’s optimization paper) Process loan apps for banks (underwrite in minutes, not months)
  3. Original BMC: Cash management KEY ACTIVITIES 1) Infer recurring cash needs from ERP data 2) Know latest rates / terms for short term securities universe 3) Recurring portfolio optimization (first advise, LT vision invest) KEY RESOURCES 1) Treasury mgmt & short- term investing know- how/domain exp. 2) Data for predictive analytics / time-series modeling, optimization back-end VALUE PROPOSITION Arima offers sophisticated outsourced cash management for SMBs. Using predictive analytics to determine recurring cash needs (e.g. rent, payroll, etc), Arima robo-advises / invests in an optimized portfolio of short-term securities on behalf of SMB clients. COST STRUCTURE Cost Summary: relatively fixed development costs to build product, one-time CAC but believe low attrition (e.g. Betterment), cost to serve onboarded customer very low (highly automated) 1) (ST) SW Dev: engineers, web dev tools, hosting, hardware 2) (LT) CAC: one-time to bring customers on platform, low attrit. 4) (LT) Custodian / Banking Back-End Partner: revenue share agreement (Bment/Wfront -> they are web f-end on bank b-end) 3) (LT) Cust. Svs: some req’d ongoing CS / manual account oversight PARTNERS Partners for Near-Term (Free Robo Cash Mgt Advice) 1) Securities data providers (e.g. Bloomberg, Bankrate) 2) Banks (CD providers) Partners for Long-Term (For-Fee Auto Cash Mgt Investment) 3) Custodian back- end (e.g. Apex) 4) Securities brokers REVENUES Revenue Summary: cash mgmt robo adv. tool low cost in ST, LT vision for % AUM-based fee on robo-invest platform 1) One-Time App Fee (ST): QuickBooks app store (~$50) 2) Bank Fee (ST): Banks who grow their CD book through Arima, fee size TBD 3) SMB Mgt Fee (LT): 25 bps of AUM per yr. (vs. ~35bps for Wealthfront or Betterment) CUSTOMER RELATIONSHIP Two Key Tenets to Customer Rln. Fiduciary: customers expect Arima to act in their financial interest Seamless: SMBs want frictionless, auto experience -> no work CHANNELS Delivery Channel: MVP: Concierge/email with web app ST: QuickBooks app store LT: Independent SaaS CUSTOMER SEGMENTS SMBs -Allow SMBs to earn more interest on cash otherwise in low/zero interest checking acct. -Automate any current in- house solution & free up that employee’s time - Early stage tech & small prof. services firms Banks -Helps banks looking to grow their CD book / longer-term financing sophisticated outsourced cash management for SMBs. Early stage tech & small prof. services firms QuickBooks app store % Assets Under Management based fee on robo-invest platform
  4. Stories of our Journey
  5. Three Key Pivots Cash Mgmt Loans SMBs Banks Intake Process What market are we competing in? What customer are we serving? What product are we building? CustomerProductPainPoint Week 2
  6. We tested our cash management MVP, and customers hated it “To be honest, we’re not really interested in any reworking of our financial processes for what amounts to small dollars of incremental interest.” - COO & Co-Owner @ $50M revenue New England distributor Cash Management MVP Week 2 Feedback
  7. So we asked ourselves, what are small businesses actually complaining about?
  8. Pain Point Pivot (Week 2): Moved from a “vitamin” to a “painkiller” “Getting our first loan was a nightmare. The paperwork was endless and the bank took forever to approve it.” - Co-Owner @ NYC e-Commerce Co. Loan Applications MVP Customer Insights
  9. Three Key Pivots Cash Mgmt Loans SMBs Banks Intake Process What market are we competing in? What customer are we serving? What product are we building? CustomerProductPainPoint Week 5
  10. We tried building our “common app for loans” for SMBs, but ran into a wall... Customer Acquisition Get Data / Complete App Processing Underwriting Tools SMB Customer Bank Customer No Digital Integration of Supply & Demand for Loans Pivot to building digital intake for banks
  11. We learned banks know they have broken tech and are eager for sol’ns “We’re not in the business of building every solution ourselves, nowadays. Startups succeed with UX and data, banks struggle there. Fintech needs to work with large banks.” - EVP of Innovation @ .
  12. Customer Pivot (Week 5): New MVP white- labeled digital intake for banks
  13. Three Key Pivots Cash Mgmt Loans SMBs Banks Intake Process What market are we competing in? What customer are we serving? What product are we building? CustomerProductPainPoint Week 7
  14. Loan intake MVP Week 7 Feedback Banks liked our loan intake MVP, but no “rip it out of your hands” moment 1. A “nice to have” but not biggest pain point 2. Some direct competition (Mirador) 3. Major software implementation for bank
  15. “I have four analysts sitting in our Palo Alto office who just do spreading. That’s the bottleneck—I’m waiting for them to finish the spreads so we can underwrite these loan applications.” - Senior Managing Director @ . (Literally leapt out of his chair to show us this step) What was the big pain point for lenders? → Processing
  16. We set out to better understand the spreading process
  17. We mapped out competitors to see if anyone was offering this service Customer Acquisition Get Data / Complete App Processing Underwriting Tools SMB Customer Mid-Size Bank Customer Market Gap No software products automating processing for mid-size banks
  18. We built our new MVP to automate the spreading process
  19. We got a 10x better response when we when mentioned spreading “Can I send this to my credit analyst friends?” “We have analysts making $80k a year who sit in an office in downtown LA just doing this.” “Of course spreading should be automated.” “Let me send you the template we use right now.”
  20. Where We’re Heading Next
  21. Business model canvas VALUE PROPOSITION Remove major process bottleneck Make credit analysts more efficient / cost effective PARTNERS 3rd party Software integrations SMB promoters REVENUES Per application fee (fixed $ amount) [e.g. Mirador] CUSTOMER RELATIONSHIP Initial customization and integration (white label) Continuous feature improvement Long-term support CHANNELS Direct salesforce targeting bank System integrators (e.g., Accenture) CUSTOMER SEGMENTS VP of Small Business Lending - Employed at bank with $1- 50B in AUM -Trying to expand their loan book - Non-score based lender - Banks outside the “top 50” (outsource SW to many vendors) Must oversee underwriting dept. → not loan officer Bank Head of IT (Same bank characteristics as above) Remove major bottleneck in loan processing COST STRUCTURE 1) SW Dev: engineers, web dev tools, hosting, hardware 2) Fintech API partners 3) Cust. Svs: some req’d ongoing CS / manual oversight KEY ACTIVITIES Build integrations, be data intermediary KEY RESOURCES OCR expertise UX design expertise Banking process domain knowledge Direct Salesforce Banks $1-50B in assets Fixed $ / loan application
  22. Pilot Customer Pipeline: High-impact demos with mgmt over next 1-2 weeks
  23. Spreading is just the beginning Tax data processing All financial data Adv. under- writing Year 1 Year 2 SMB loan applications currently take 2 months to process, underwrite, and close. We believe it should take hours, or even minutes.
  24. Target market is $1.8B; SAM $8B Target: $1.8B SAM: $8B TAM: $30B TARGET ASSUMPTIONS 3k banks in segment x 500 commercial loans per bank x 4 apps/approved loan x $300 price/app (spread + UW) $1.8B PER YEAR
  25. Going forward YES, we ARE continuing, gathering more product feedback and piloting with an initial bank/credit union partner • Ben & David will work on this full time through the summer • Dan & Soumya are continuing part time
  28. Loan Applications MVP Week 5 Feedback We couldn’t build our MVP because banks can’t accept electronic apps 1. Borrowers would love a “common application” for SMB loans… 2. ...But banks aren’t integrated to handle electronic applications
  29. We learned more about the nuances of serving SMBs versus banks Customer Acquisition Get Data / Complete App Intake / Processing Underwriting Tools SMB Customer Bank Customer 1. Antiquated tech makes lending slow 2. Expensive to acquire, but high LTV 1. No bank integration → hard to scale SMB-facing biz 2. Expensive to acquire, low LTV
  30. We then asked, which of these pain points is most interesting? Are SMBs Complaining About Same Issues? Are Other Startups Trying to Solve? Lending / Credit Similar Complaints Some Competition Bookkeeping Varied Complaints Some Competition A/R Collection Similar Complaints Direct Competition
  31. Competitor leaf diagram Internal loan processing teams * Currently only do consumer mortgages Lending front-end (digital loan app) * Lending CRM Underwriting tools Data-driven direct lenders
  32. Customer Type Description Interviews Gov’t / Other SBA, IRS, Industry Assc’ns 4 Competitors Direct Lenders, SW Providers 20 SMBs $250K - $50M in Revenue 27 Small Banks < $10B of Deposits 25 Mid-Size Banks $10 - 250B of Deposits 11 Large Banks > $250B of Deposits 16 Our Interviews This Quarter 103
  33. Cost breakdown ($K) ($K) Year 1 Year 2 Year 3 Year 4 Physical Company offices $10 $34 $67 $163 Software OCR (DocParser) $7 $35 $175 $350 S3 $0 $1 $4 $7 Web hosting $1 $5 $25 $50 Misc. SW $5 $10 $15 $20 Human Capital Engineering $300 $600 $1,400 $3,500 Design $- $130 $280 $560 Sales $- $360 $600 $1,500 Total $323 $1,174 $2,566 $6,150
  34. Key resources Physical ● Company offices Software ● Document processing service (DocParser) ● Cloud document storage (S3) ● Web hosting (Heroku) Human ● Engineers (2 at first—one frontend UX, one backend) ● Designers (founders only at first) ● Salespeople (founders only at first) ● Mentors / technical advisors (one banking, one general technology/web) IP ● Brand/trademark/logo ● Integration expertise (e.g., with LaserPro) ● Spreading software
  35. Activities: Product, sales, fundraising ● Work with bank IT team/loan officers to understand inputs and outputs of bank’s spreading process ● Design and build user experience for loan officer and SMB data input ● Identify API partners (DocParser, QuickBooks) and set up their services Product Development Customer Development / Selling Fundraising ● Identify sources of funding and programs ● Complete applications and manage interview processes ● Create marketing and sales collateral customized to individual banks ● Source leads for sales through LinkedIn and founder networks ● Present (demo) product to bank credit officers and processing managers ● Draft contracts and close
  36. Insights: Charge $50 per Loan Application Benchmark vs. Current Approach Test WTP DirectlyMain Value Props 20 minutes per tax return Assuming no screw ups x 6 returns per loan app 3 business, 3 personal ______________________________ = 2 hours per tax return x $50 per hour labor $70K salary, $30K benefits, 40 h/w ______________________________ = $100 per loan app Note: Umpqua Bank Example 60 loans per center per month x 20 centers x 12 months x 2 hours per loan ___________________________________________________ _ = 28.8K hours or ~$2.9M labor (1) Remove Process Bottleneck “I have a stack of applications on my desk I can’t review yet because our analysts haven’t spread the numbers.” -Senior Loan Officer @ First Republic “Doesn't matter what bank you go to, they never hire enough credit analysts. They are always cranky, they are always backlogged. They are the only thing standing between you and the loan approval.” Loan Officer @ CDC Finance (2) Time / Cost Efficiency “My credit analysts could spend more time analyzing the financials instead of transcribing them.” -Senior Loan Officer @ Heritage Bank Q: Would your bank pay $500 per loan for this product? - Goal to start high, test down - 3 potential buyer banks (mid- sized) - (Senior) Loan Officers, no mid- sized bank CIOs (yet) Responses: ● (2x) “I don’t know” ● (1x) Mental math of credit analyst cost of time + bottleneck pain → $40-50
  37. Partnerships Integration partners SMB promoters SF Small Business Commission ● The bank’s core system (ex FIS) holds all of their client and transaction data ● Their spreading program is used to make underwriting decisions ● Use organizations that help small businesses ● They connect with existing SMB lenders and complain about the completion time (30-60 days) and complexity
  38. Products / Services -Intuitive platform - Upload applicant tax return data -Single view of all tax returns and spread financials -Validate tax return data Pain relievers -Less paperwork/emails -Less manual data transformation -Lower risk of incorrect/fraudulent data Gains Creators -Increase number of loan applications that bank can process Value Proposition: Streamlined Loan Application Customer Segment: Commercial Banks Pains -Lengthy intake process -Risk of incorrect data → invalidates SBA guarantee Gains -Low application abandonment -High data accuracy at intake -Quicker decision cycle - Auto “spread the financials” Customer Jobs -Intake loan app data -Process loan app data (validate all correctly formatted/valid), request updated information if needed -Underwrite loan (provide a quote) -Close loan (final approval process) -Send loan data to SBA Updated Value Proposition
  39. Pilot Customer Pipeline: High-impact demos with management over next 1-2 weeks Bank Progress Last Week Steps Next Week(s) Heritage Bank Discussed solution with head of lending Demo next week w/ CIO, COO, & CFO Sterling Bank Solution validated with SVP SBA Lending Demo with EVP, CIO, & network manager Torrey Pines Bank Demo’ed with from former SVP Implementing changes, then demo w/ head of SBA First Republic Re-engaged with lending SVP Scheduling demo next week Union Savings Auto spreading inbound Demo with commercial lending AVP
  40. 18 Q2 18 Q3 18 Q4 19 Q1 19 Q2 19 Q3 19 Q4 20 Q1 20 Q2 20 Q3 20 Q4 2021 Operations & fundraising plan Customer acquisition Series A $ 800KSeed $ 7M Product v2.0 launch Product development Official product launch Prototype Next 3 cust. Dev. activities S&M activities Pilot with 1 bank Sales and Marketing to other mid-sized banks Scale infra. Costs Integration/support Develop relationships with risk analytics providers Loan intakeAdv. underwriting First 100 customers! Fund- raising