Under the Hood - Demystifying VC | 0.03

Today's theme: Payments

Hi, it’s Julius and Claus from the HEC Paris Alternative Investments Society VC team

Under the Hood is a newsletter about recent developments in the Venture Capital industry, our perspective on key trends, and deep dives into how VC works.

Today, we’re covering the Payments space with three sections:

  • Deal in the Spotlight - Stripe’s $200M acquisition of Paystack 

  • Fantasy Portfolio - Introducing our second portfolio company, Multis

  • What intrigued us this week - Atomico’s State of European Tech report and app-building case studies

🔦 Deal in the spotlight 

(by Claus-Peter Schmitt and Julius Müller)

Iconic API-first payments infrastructure company Stripe acquired Paystack for $200M in one of the largest exits on the African continent. 

Key facts about Paystack and the deal:

  • Value Proposition: Paystack gives merchants online and offline the opportunity to offer a frictionless payment experience to its customers by providing a simple, full-stack API

  • Founded: 2015 / HQ: Lagos, Nigeria

  • Stripe Acquisition: $200M all-stock transaction

  • Latest Funding Round: Series A in Aug 2018 at an undisclosed valuation | Funding: USD8m

  • Estimated ARR: $14.8m

  • Notable Investors: Stripe, Visa, Tencent, Y Combinator

  • Announcement: Stripe

Paystack wants to solve the problem of a “broken payments system” (according to founder Shola Akinlade) to become a growth engine for merchants all over the African continent. They provide a quick way of integrating various payment systems like card payments, bank transfers, and mobile money operations. Their full-stack API allows customers to ‘securely collect, encrypt, transmit, and store customer card information while offering continuous anti-fraud and chargeback protection services.’ 

🚀 Why you should really care about this deal

  • Paystack is basically the ‘Stripe of Africa’ - Stripe is on a mission to ‘increase the GDP of the internet’ and Paystack was founded to be ‘the growth engine for a new generation of innovative, forward-looking organizations operating in Africa’. Both businesses are hugely popular among developers. The question as to why Paystack decided to become part of the Stripe group can actually be seen more like a “Why not?”. Through their shared history, they grew closer organically and are as aligned on their objectives as they could be. Even though culturally both companies are very close - both have a largely customer-driven innovation process for example - Paystack is expected to remain an independent brand and entity for now. Yet, without having to worry about fundraising anymore, Paystack can focus on the execution of their main priorities of expanding their presence in Africa, building software and services across the continent, and increasing the reliability of their product.

  • Paystack’s vertical expansion. Paystack launched “Paystack Commerce” this June which provides a suite of tools for small businesses to “sell more online” and a “toolkit for African creators to bring ideas to market”. That reminds us a bit of “Anyone, anywhere, can start a business”. Paystack was quick to stop the comparisons with Shopify right there, but the move could still be a symptom of one of the observations we shared in our focus on API-first companies in our last edition. Both last week’s spotlight company Twilio and Stripe have the firepower to acquire or build their own solutions to capture more of the value chain while powering the backend themselves. Publicly-listed Shopify might be too intimidating to take on directly in the core market by now - the African market would seem more accessible. And who knows, maybe the trial goes well enough to emulate the move in other geographies as well.

  • Stripe and Paystack’s shared history: Paystack was the first Nigerian company to come out of Y Combinator (W16 batch, check out their YC application). Stripe had come out of YC just seven years earlier (S09). We are not familiar with Paystack’s pitch back then but it’s not unreasonable to think that they initially branded themselves as “Stripe for Africa”. That was enough of a promise to attract Stripe as a strategic investor (Stripe led their Series A in 2018) and Paystack has operated in close alignment with their more established role model since then. Using a stake in another company to experiment instead of venturing out yourself could prove to be a valuable strategy for other scale-ups as well - would help to avoid costly disasters where the start-up really doesn’t understand the new markets or verticals (looking at you, Uber).

🤔 What you need to believe in 

  • Stripe ability to tackle regulatory challenges: It really is difficult to find any fault with the strategic rationale of Stripe behind this deal - they were intimately familiar with Paystack for years, the acquiree builds a strikingly similar product and they share the same developer-first philosophy. Yet, the deal is clearly a macro bet on the promise of the African continent when it comes to digital transactions. The market potential is obviously staggering; however, every business with heavy exposure to the fragmented financial market in Africa still faces significant regulatory risks, as the FT reports following the deal, citing experts. Payment processing on the African continent might be more likely to be powered by cryptocurrencies that are largely government-agnostic. Stripe, however, shut down experimental crypto support back in 2018. Stripe co-founder John Collins did state back in June though that Stripe “is following crypto for buying things online very closely, [...] but that’s not something that has happened at scale yet”. We believe that crypto could play a major role in facilitating digital payments where legacy infrastructure is both underdeveloped and extremely inefficient - maybe Paystack could test such payments with little risk for their parent company (they are already experimenting anyway, according to some reports). That approach seemed to work well for Stripe to understand the payments market in Nigeria and Ghana - why not try to understand crypto as well before rolling it out in other markets?

💸 Fantasy Portfolio 

(by Julius Müller)

Today we are welcoming the second company to our fantasy portfolio: Multis!

Multis provides “crypto-first business banking” in an attempt to bridge the gap between traditional (“fiat”) currency and the world of cryptocurrency powered by blockchain infrastructure. Should they succeed in building this bridge, we see enormous potential to introduce decentralized finance (“DeFi”) applications into the B2B world.

The investment is also an expression of our bullish sentiment on the disruptive potential of DeFi and the technology that enables it. We will dive a bit deeper into that sphere in one of our upcoming industry deep dives. As a teaser, Consensys provides a good primer into the space. Multis also published their own view here.

Multis joins our first company Abacus.ai which announced a follow-on round shortly after our investment - let’s see whether we truly have the Midas Touch!

ℹ️ Multis at a glance

  • Value proposition: Enabling companies to make the most out of their crypto in a business bank account

  • Founded: 2018 HQ: Paris, France (home to a certain business school with a VC-focused newsletter too)

  • Stage: Seed (2020) / Funding: $2.4M

  • Investors: YCombinator, Coinbase Ventures, Whitestar Capital, Greenfield One, Digital Currency Group

🚀 Why we would invest

  • Market timing: The current crypto craze has the most popular assets hitting record highs and the crypto world has once again received much mainstream media attention. Following this recent peak in interest, numerous companies will look to participate in the market but want to limit their exposure to volatility. Multis bet on the promise of stablecoins, crypto either backed by or pegged to fiat currency, could provide an enticing offer to those companies. This could provide Multis with an inflow of new customers who want to dip their toes into this market. Assuming some of those customers stick around, Multis is in a great position to establish themselves in the increasingly congested field of business bank accounts: We view borderless payments with minimum friction as a strong enough vision and USP to retain customers in the long-term.

  • Market potential: Speaking of business bank accounts for SMBs: VCs have increasingly accepted the pitch that the incumbent options for business bank accounts are inferior and that new solutions are required. This sentiment saw new challengers attract substantial funding: fellow French company Qonto, for example, raise $104M in a 2020 Series C from DST Global & Tencent Holdings and German challenger bank N26 joined its fellow unicorn Transferwise in offering business accounts in recent months. Granted that the solutions rolled out are more polished and approach the issue from different angles and with different target groups, it still bodes well for a crypto-rooted approach to gain a foothold in that market. We bet on a Multis product extension that emulates some of those more familiar features for companies to handle fiat while keeping crypto at their core to facilitate transfers with minimal fees.

  • Usability. Blockchain technology is still confusing a lot of people. That comes as no surprise as most discussions inevitably dive into the workings of this infant technology. Multis tries to provide an abstraction layer on top of the digital assets that make DeFi understandable to the layman. In addition, the mix of crypto and fiat currency within the same wallet and the integration of multiple services within one application makes the introduction of crypto into a business account easier to understand. The backing of YCombinator also indicates that the founders are truly product-obsessed which bodes well for future iterations of Multis - if you dare to look beyond the fine meme selection, Multis’ Twitter feed is also a good source showcasing their product trajectory.

🤔 What you need to believe in 

  • Multis can provide a superior service to customers who are not crypto fans. As is often the case with crypto-based applications, the first adopters are those that either work in the industry or have followed it for a longer time. In TechCrunch’s coverage of Multis’ seed round they reflect that: “Multis clients are mostly companies working on blockchain products, generating revenue in cryptocurrencies or paying people using stablecoins”. An investment into Multis is therefore a bet on the company’s ability to expand their customer base beyond those first adopters. This requires a service that is superior to those of competitors on grounds other than crypto - they have started to leverage approval features and we want to see them continuously focus on streamlining transactions while providing a best-in-class user experience and keeping their focus on crypto as the enabler for frictionless transactions.

We are excited to follow Multis’ trajectory in the next months as they expand their product and ship more exciting features. We will keep you posted!

P.S.: Intrigued by some of the terms used in this short memo? Consult a16z’s crypto glossary which does a great job of explaining some of the core terms in brief.

📚 What intrigued us this week

  • The makers behind App Fuel released their first set of case studies about best-practices in app-building. Check it for inspiration and for a highly operational view on product building.

  • Atomico released their State of European Tech report.

Thank you for reading! Don’t hesitate to write to us at julius.muller@hec.edu or claus-peter.schmitt@hec.edu to share feedback, resources, or to submit requests for future deep-dives!