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Dear avid readers,

I am back from paternal leave and wish to thank Ben Robinson for guest-editing the previous edition, and also to all of you who sent your love towards my extended family. 
This week's digest covers March developments: maturing SaaS business models; the challenge of redefining data privacy while avoiding a data-collection hysteria; using technology to redefine the corporate's role within societies; Europe's edge on global fintech and its bigger digital opportunity. I hope you enjoy!

The opportunity for banks to become information brokers, helping consumers to make smarter decisions 

Strategy and Business Models in the Entrepreneurial Age

👓 March has been yet another busy month, but by taking a step back, we can piece things together. We have seen a few great SaaS companies matured towards IPOs, so let's delve into their metrics and business models, because ultimately it is a well-thought-out business model (which connects a technology's potential with real market needs and consumer demand)  that generates success beyond the hype cycle. 

📈 Self-serve SaaS public companies are some of the fastest growing and capital efficient SaaS companies in the public markets. I n a fast growing CAC (customer acquisition cost) environment like we are in today, freemium models (which are customer acquisition models) can be very lucrative as they lower the energy required to start a relationship and push for monetization to a later stage. These models have also higher retention rates and NPS rates, finds Hiten Shah's analysis.

🗳️ Last week, Dropbox, the king of freemium and self-serve go-to-market models as Tomasz Tunguz brands it, IPOed on Nasdaq. Probably a bad timing overall with the entire tech stock market in the red, but Dropbox's model with revenues growing at 35% CAGR, decreasing cost of goods sold and investment going mainly into engineering rather than S&M seems solid (plenty of monetization potential with 500 million users at 2% paid subscriptions penetration). How it grew to such a large customer base is a fascinating case-study (courtesy Goodwater Capital). Surprisingly, the company has managed to improve its margins substantially after moving its infrastructure to its own cloud services from previously using Amazon Web Services (n.b. this scenario doesn't apply to all companies - some achieve margin improvement by doing the opposite) although there is some debate whether it was done too late. Sometimes fast growth creates a false luxury of moving slow.

🎶 Another freemium acquisiton model with monetization at a later stage is Spotify, who performed a direct listing on NYSE yesterday. For understanding Spotify, its growth and market from 2010 onwards, we again recommend Goodwater Capital's thesis.  Ed Shelley looks at the metrics behind the company, highlighting company's actions that decreased churn rate at the expense of average revenue per account, but also its low gross margin (21%) which is lower relative to the median gross margin for SaaS (71%). Ben Thompson's lessons from Spotify mentions its biggest problem: high marginal costs, which shows that it does not yet have the necessary power over its suppliers (the record label companies), like other super-aggregators. Somehow, the company needs to focus investment in attracting even more demand, to increase leverage over supply. And lurking in the third place in the music market is Amazon, who doubled paid music subscriptions in six months using hardware to acquire customers to its service.

🇾 Important to notice how these type of services (and many others) were offered at some point by Yahoo!, which was for a moment the king of internet services. As Dropbox and Spotify thrive, let's remember the glory that Yahoo was. The company seemed to be well ahead of the curve in nearly every internet category (including file storage, music, video streaming etc.) but it failed to capitalise on the opportunities. It was the tech giant that was best-in-class at its core product (mail), but second or worse at all the others, and that took its toll.

This is a lesson that makes the corporate reorganisation that Microsoft's CEO Satya Nadella recently announced even more important. By formally announcing "the end of Windows" as Microsoft's core strategy, Mr. Nadella is bringing the company to a turning point; one in which the company becomes a platform around experiences, artificial intelligence, edge computing. Unrelated, I have been a big fan of Satya Nadella, and I like his vision, especially around financial inclusion.

Tech, Policies and Misdemeanours

👎  But March has also been a terrible month for tech. Facebook's Graph API and data scrapping problem, Uber's self-driving car accident fatally hitting a human and European's Commission plan to tax tech giants with 3% on their revenues or to regulate "online intermediation services", including search engines.

"There are a lot of big problems that the big tech companies need to be better at fixing. We have collectively been too optimistic about what we build and our impact on the world. Believe it or not, a lot of the people at these companies, from the interns to the CEOs, agree." 

- tweeted Alex Stamos, Facebook's Chief Security Officer after the scandal in which an adtech company bought personal data for 50 million Facebook users from a personality quiz-app. Taking a step back, a few days before the Cambridge Analytica scandal broke, both Germany's and UK's data regulators completed their investigations and forced Facebook to sign an 'undertaking' agreeing not to share WhatsApp customer personal data with Facebook for the latter's own purpose, in a move that was to build even more trust with consumers. Facebook and Google were under regulators glare for a long time, but after the CA scandal hit the press, policymakers, politicians, academics, journalists and even the general public all over the world increased their interest in regulatory scrutiny over Facebook and tech in general.

📝 Academics Justin Hendrix and David Gunton list the factors that should be taken into consideration in the global conversation around regulating social and tech platforms: scale and urgency of the problem, diversity and fast pace of change of these platforms, as well as the opacity of their algorithms. Their framework include registration of social platforms with regulators, quarterly disclosure, independent auditing, anti-fraud provisions, private enforcement. Om Malik argues that Facebook won't change because its core DNA is addiction to growth and engagement, while Azeem Azhar argues that Facebook's problems stem from the trifecta of business model, market dominance and internal culture.

⚖️ James Allworth believes that it is simply poor strategy that led to this: Facebook is the world's most valuable advertising business which uses data to provide better targeting. It is a naive vision to become a platform that let to this idea that sharing as much data as possible with the ecosystem will somehow generate enough value to make up for the privacy concerns. Brendan Greeley believes that its problems, in general, come from the fact that ethics don't scale, while Oren Etzioni proposed that computer science's ethics problem requires a Hippocratic oath. Even Emmanuel Macron alluded that, in general, tech giants are 'too big to be governed' and could be dismantled.

But enough with the Facebook bashing!
🤐 Nicolas Colin leaves emotions aside and argues that we cannot focus on Facebook alone as the problem, because that's like not seeing the forest because of the trees. Privacy is not an obsolete idea, like some suggest, but we need to get smarter in introducing new categories of privacy and creating new institutions that can enact and enforce rules to prevent data misuse, instead of succumbing to an anti-data collection hysteria. We need to get better at controlling the flow of personal data, which is analogous now to what the flow of automobiles was to the Fordist economy: highly dangerous, but it creates a tremendous amount of value and now determines our way of life, so we have to live with it.

A powerful reminder of a universal truth: every business is predicated on trust, and as the tech industry is growing up, it needs to embrace the opportunity to shape the right kind of regulation and other referee mechanisms and rebuild trust. Ultimately, the wrong regulations enacted in the name of protecting customers can increase even further the incumbents' moats, however it is the redesigning of products with safety and privacy in mind that can reshape competitive landscape in tech like German cars reshaped the automotive industry in the 1950s, and Europe could be well-placed to reap the benefits, with its entrepreneurial communities. But as we need creative, forward looking regulation, policymakers can look at what the banking industry is doing in terms of data portability, argues Albert Wegner. 

🌱 The goal is not necessarily to create a thriving tech industry, but to use technology to design, nurture and grow the capacity and the socio-economic & environmental conditions for intrinsic organisation – mass agency, purpose, care creativity and innovation, and along with it, the new institutions necessary to release a mass civic tomorrow and a purposeful democracy. We must understand that we're now shifting from a world in which large corporations were the epicenter of human lives to one in which more and more shots will be called by an even stronger party: the multitude (the aggregation of networked individuals). With technology, individuals are not scattered, non-coordinating agents anymore. They’re connected with one another into a networked organisation whose exponential power eventually exceeds that of most corporations, however large and tech-savvy. In these complex adaptive systems, in which outcomes are shaped by interactions among members, companies need to fulfil a purpose that is beneficial to those systems. The view of public companies as standalone machines to be optimised to deliver the highest possible short-term returns to shareholders is increasingly untenable, as per BCG.

✋ Decentralisation enabled by tokenised networks, shifting power from corporates to creator-consumer communities, long-term public markets, redefining common property. A few ideas that can lead to the creation of a new invisible hand for the market economy (one that actually works).

Healthy Entrepreneurial Ecosystems

🇨🇳 I am recurrently dedicating this section to the endeavours and strategic positioning of nation-states aimed at attracting and nurturing the most thriving technology-enabled innovation ecosystems. As we're transitioning to the Entrepreneurial Era, a new power re-alignment is most likely, and I believe it is Europe's turn to shine, unified under new leadership, especially since it has the window of opportunity opened by the possibility that U.S. will lose its battle for digital supremacy against China. In recent years, China’s government has introduced initiatives aimed at increasing both entrepreneurship and innovation, facilitated the entry of foreign experts to work on new projects and recognised the importance of increased competition (point which is loosing sight in the West, with its tendency to protect incumbents from new entrants). 

🌍  Despite its opportunity, its best minds believe that Europe is at risk of being left behind as a tech power, and are asking for the immediate setting up of a pan-European fund of 1 billion euros for fundamental research projects, with a small, agile unit that takes just a couple months to decide on a project. The Startup Europe Partnership community is urging the continent to do more to facilitate later stage funding and help with efforts of scaling businesses across countries: more focus on ecosystems, better capitalised venture capital funds, shift focus to scale-ups. Unfortunately, European Commission's draft strategy on AI is delusional, argues Bruno Maçães, as it is too defensive and leads with the threats of the technology, rather than its infinite opportunity. Truth is probably in the middle, as we've established that it is the creative redesign of products and services with safety and privacy in mind that can reshape competitive dynamics. However, unlike the automotive revolution from the 1950s fuelled by safety-focused cars, Germany is failing at riding the digital businesses wave, as is it riddled with hesitant management and rigid hierarchies, missing tools and unhelpful politics. Hope lies with new French leadership, as Emmanuel Macron launched its country's 1.5 billion euro 5-years A.I. strategy plan. Inspired by the opportunity in healthcare, fintech and mobility, he acknowledges that A.I. has the potential to disrupt all industries in a winner-take-all dynamic. Positioned between two extremes: U.S. obsession with everything tech-related coming from the private sector alone, and China's data-collection and use-cases not necessarily sharing Europe's values, Macron is trustful that France, and therefore Europe, is well equipped to frame A.I. innovation by design within ethical and philosophical boundaries. But as Mariana Mazzucato is advising, Europe must set missions that require different sectors to work together - it is possible to create instruments that reward those businesses willing and able to co-invest alongside investments by the European Commission and member states. It is not about subsidies, but about co-investments along the entire innovation chain. 

📈 Growth lessons from: Asana, Trulia and Peloton.

FinTech snippets

There is one vertical in tech where Europe seems to have an edge: financial services, both in forward looking regulations ( The European Commission has proposed crowdfunding “passports” for the European Union in a draft law as part of efforts to boost growth in the sector), and in health of startups, especially challenger banks. CB Insights delves into the strategies behind six of Europe's most prominent digital-only challenger banks, accounting to c. 2.6 million customers to date. As Ben Robinson, Temenos CSO wrote two years ago, the most lucrative banking model for the digital age is a thin, vertically-integrated open-platform that finds the balanced mix between a banks' strategic own products and services and the ones offered by third-parties. Challenger banks are materialising this vision.

Incumbent banks are either scrambling to replicate the model, or are successfully doing so, like Standard Chartered, who is tapping first into fast growing, highly profitable markets, where the opportunity is as disruptive as lending $2 at a time.

🤝 As Amazon sent shivers on bankers' spine last month with the announcement of checking-account plans, we spoke about the trust that end consumers have with placing their money with Amazon (much higher than with Facebook and Google). But it would be interesting to think about the struggle Amazon would have if ever it would try to build the above-mentioned banking model. Because we foresee Amazon's trust-problem will be with fintech startups, as there seems to be the case that the tech giant has numerous times used its dominant platform position to somehow cheat on its ecosystem participants.

📊 A scrutiny over the online marketplace lending model (P2P lending) finds that the startups in the space still have a scale problem (stuck between chicken and egg), as well as a profitability problem. So, as these platforms seek diversification, they will most probably end up becoming licensed banks, or increase their reliance on incumbent banks. And yet, Funding Circle's future IPO is touted to be a catalyst for the industry to be taken more seriously, despite its no-skin-in-the-game approach.

Until next time, one more essay

👀 Essay on the first ever Spotify:
Invented by lawyer Thaddeus Cahill in 1906 and initially known as the dynamophone, the telharmonium made use of telephone networks to transmit music from a central hub in midtown Manhattan to restaurants, hotels, and homes around the city. 

Would love to hear your thoughts on Twitter, @DanColceriu.

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     My name is Dan Colceriu and I hope this reading was rewarding. Any opinions expressed here do not represent financial or investment advice. Also, they represent my personal view, and not my employer's, which is in no way associated with this email. 
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