Tradeshift’s Christian Lanng on Capital8, Financing, and Supplier Adoption

The first installment of our discussion with Tradeshift’s Christian Lanng covered a range of topics, including an expressed interest in buying OB10 (at his price) and more. The fireworks continue today (and also see our response to Christian’s statements).

Spend Matters: You claim higher adoption rates for e-invoicing. Why does this matter for supplier financing?

Christian Lanng: Our adoption rate for true e-invoicing is 70%+ in less than six months. If you include CloudScan, it’s 100%, because CloudScan captures everything -- this is the secondary channel. But yield of financing is not just adoption; what is also driving yield is how we target the right segment, which is to say the long tail of suppliers. Finally, the last parameter is funding cost, for supplier financing. This is important because Tradeshift already has very advanced semantic analyses of content (this is in fact how we build CloudScan). We use this to give CapitalAid and other financing parties access to a proprietary risk model to gauge factoring risk.

A lot of material is being considered in this model, including all past transactional data. This has led us to a model that has low funding costs with much less than 3% bad debt. We can guarantee a pretty high yield, and the rates of return are in the range where hedge funds are buying into the model.

Spend Matters: When was CapitalAid launched? Is it a division of Tradeshift? Will it work with other providers?

Christian Lanng: Tradeshift has no ownership in Capital8 and no management position. They are two completely independent companies. However, Capital8 does have individuals who have been involved with Tradeshift from the beginning (in an advisory, investment, and board capacity). More people will be announced as part of the CapitalAid board, including high profile names.

I also think one of the key differentiators in philosophy between us and the competition is that we don’t do a hard binding between the financing solutions and the platform. Tradeshift will work with other financing partners as well. We are committed to being platform-neutral, and this is why we didn’t take a stake in CapitalAid. We are working with other funding solutions. Anyone can build an app for Tradeshift today, including in the finance area. If you want to be a platform, you need to remain neutral. We represent a huge opportunity to prove that large-scale adoption can happen through a platform. That said, we are very, very excited about the CapitalAid opportunity. We think this is an industry game changer.

Spend Matters: You have a reputation for being very critical of other models in the industry. Why is this and why does it matter, in your candid view, for supplier financing?

Christian Lanng: I am extremely passionate about this industry and especially some of the build-in flaws. It’s always irritated me that people have been trying to justify inherently bad business models, ones that only serve the operators and the supplier fee model.

I believe that the supplier network and financing industry mess we find ourselves in goes down to two core flaws. First, no one has been building software for the supplier. The supplier was seen as a cash cow as part of the network equation (e.g., Ariba). Just look at most of the interfaces these operators offer to an supplier trying to send an invoice.

Now suddenly because everyone is talking about finance, the model flips and providers like OB10 and Ariba realize that the suppliers are the ones they need to deliver value to. But to change this, you must change your entire organizational mindset from subsidizing the cost of enterprise applications like Ariba Buyer and P2P from the procurement and accounts payable organization on to the supplier to providing actual value for the supplier and realizing how the customer is in this equation. I think for some of the other players in the market, they don’t realize how big a change it is in the value model and the business model.

From the start, Tradeshift has been building a brand that is here to help suppliers. And in doing so, we want to disrupt the market. There is no reason for the existing model; the cost structure is fake (surprise - it doesn’t cost 15 basis points to send 10kb of data). Disrupting the market includes changing the business. We have been focused on supplier value from the beginning. In the Tradeshift world, two-thirds of our apps extend functionality and value to the supplier, including services like Paypal integration, QuickBooks integration, etc. Providing more value to the supplier side won’t conflict with who we are or how we are seen by the suppliers.

Spend Matters: What do you think the uptake will be (with suppliers) in % range terms for early payment financing?

Christian Lanng: Reference the previous 70% adoption in six-months figure for e-invoicing (which climbs to 100% with CloudScan). We honestly don’t know what the uptake will be in this place. When we did a structured push with supplier-centric apps before, we had a more than 30% uptake in the past. We think we can get in the high double-digit numbers on adoption.

As we conclude our interview with Christian Lanng, we will consider how Tradeshift and Capital8 calculate the cost of capital for suppliers and related financing costs and rates. We will also include an update on Tradeshift activity as well.

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