Can Transactional Finance Provide Valuation Bumps to P2P Tech Companies? (Part 2)

Looking at various business models that involve “selling” suppliers money, vendors’ projections versus reality can be far apart.

The first challenge is when you sell money, many times using call centers. The analogy I like to use is some investment advisor cold-calling me and asking about my personal portfolio. Huh? You want to know details about my investments, but we have no relationship or trust.

Selling money involves negotiation and selling skills. It’s not always as simple as uploading an invoice on a platform and getting some money on an ad hoc basis.

Many vendors charge a small implementation fee, subscription fee and a 20% to 25% to 50% gain share on the income earned. If your average basis point awarded for suppliers is 40 basis points (about 7% APR), and you are accelerating payment by 30 days, you need tremendous scale to make these propositions work. Knowing you need scale, you invest heavily on the sale side, paying big bases for enterprise sales people who go market the latest early pay technique to the Fortune 1000. The burn rate is serious. And depending what stage the vendor is in, the burn rate typically is others' capital — their investors.

Vendors do not publicly release their actual finance numbers, and there is no apples-to-apples comparison. I could say I handle $20 billion in payments or had $1 billion offered to my suppliers. But what we want to know is how much discount was earned from finance.

We are certainly beyond proof of concept, and many vendors will find their plumbing and value-added services are greatly rewarded. But like The Receivables Exchange, the forerunner in the invoice auction market, sometimes you have to transform your model. In this case, from a small business platform to one that focuses on large corporates, given its equity ownership by the NYSE and now ICE.  This comes with a different set of challenges — just because the opportunity is enormous does not mean instant success.

As the investors come to terms with these challenges, there will be markdowns in valuation. Fidelity has marked down its investments in startups like Dropbox, Snapchat and Zenefits. Valuing private companies is extremely challenging, even in late-stage companies that show general cash flow positive trends or at least aren't bleeding cash. Transactional finance is an important component for many of the P2P vendors in the market.  There have been many lessons learned as tech vendors have turned to selling finance, but the realities are selling tech is different than selling finance.

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