RightHand Robotics (RHR) builds a data-driven intelligent picking platform, providing flexible and scalable automation for predictable order fulfillment. The software-driven, hardware-enabled modular solution is capable of adapting to any picking situation bringing reliability to order fulfillment in growing industries such as electronics, apparel, grocery, pharmaceuticals, and more.
Sector: Technology
PropTech Investment Themes and Our Investment in Snapdocs
Real estate is the world’s oldest, largest and arguably most resistant asset class to disruption. Yet the forces at work today are striking, fueled by talented entrepreneurs changing long-held notions among real estate participants.
With our investment in Snapdocs, I wanted to share our broader investment thesis for real estate and specifically our views on the digitization of real estate transactions. If you too love the real estate sector, then I hope you’ll read on.
Our investment thesis
For several years at F-Prime Capital we have been investing against the changing landscape in real estate. We have drawn from our experience in equities and FX, where we recognize how transparency, data and standardization drive greater liquidity, fractionalization and the disruption of intermediaries and see the same trends emerging in real estate.
We are finally seeing these in force in real estate. Data has never been more accessible — more vendors, data variables and APIs — leading to transparency in acquisition and portfolio management. iBuyers like OpenDoor and REITs like Invitation Homes have leveraged this to prove there is more standardization in real estate than previously thought, placing offers on homes in minutes and in bulk, based on data-driven underwriting models. All this comes at a time when consumers are changing their attitudes on home ownership, partly out of necessity and partly out of generational shifts.
F-Prime PropTech Investment Themes
F-Prime’s investment themes in real estate
I wrote about the changing nature of home ownership and how we see the home becoming more semi-liquid and fractionalized (Theme #4). In this post, I wanted to share how we see the real estate purchase process digitizing (Theme #3) and why we led the Series B in Snapdocs, the emerging leader in digital mortgages.
Digitization of the mortgage: the problem
It’s a big market.
First, for context, the mortgage industry is big…really big…with annual transaction volumes of 4.7M first-lien mortgage originations (purchase) and 2.2M second-lien mortgages (refinancing), for a total origination value around $2T annually. While residential real estate transactions are subject to broader macroeconomic factors, especially interest rates, the base spending on transactions including all parties has exceeded $42B annually for the last 20 years.
U.S. Mortgage Originations
Source: MBA; Freddie Mac
It’s painful.
Anyone who has bought a home knows the pain of finding a mortgage, sharing personal financial documentation and reviewing up to 100 pages of documents. For me, the Closing process is the most frustrating part, often involving seven people, dozens of signatures and several hours of time in a lender or closing agent’s office. For first-time home buyers this can be especially emotional, stressful and bewildering.
I love the “Closing Day Tips” from The Balance financial blog….sure, take the entire day off!
The main problem is the large number of participants involved in the process, including real estate agents, loan officers, title companies, notaries, correspondent banks, securitization agents and government backed-agencies like Freddie Mac and Fannie Mae (GSEs). It was never easy, but it was simpler when a borrower’s local bank made the loan and held the loan to maturity. That changed with the introduction of the 30-year mortgage in the 1950s, GSEs and securitizations. Today we still have a single unit — the mortgage — yet dozens of participants are involved. One of Snapdocs’ early insights was that point solutions could not address these problems and that the industry needed better workflow and collaboration tools.
It’s a huge time commitment, but it’s also costly. The typical purchase mortgage has a 2–4% fee drag or $6,000 — $12,000 in fees paid to intermediaries, adding up to the $42B in industry fees across and purchase and refi. This is not counting the ~5% in real estate commissions paid by the seller.
Progress to an all-digital experience
Fortunately, new technology vendors have improved the upfront stages of the mortgage process. Finding a home itself became a more digital process a long time ago with players like Redfin and Zillow. New takes from Compass and Homey have pushed the digital search process, engagement and offer even further into digital realms. We won’t eliminate a buyer’s desire to see a home in person, but we’re already moving it to self-service with digital lockboxes and cameras.
Though not perfect, finding a mortgage has dramatically improved from ten years ago. Today most mortgage searches start online and online mortgage companies like Better, Quicken and Homelight offer faster, digital experiences with mortgage quotes tailored to the individual borrower. Even Financial, one of F-Prime’s portfolio companies, soon will extend its API-first approach from personal loans to mortgages and leapfrog LendingTree and Bankrate with mortgage offers based on deep integrations with lender underwriting models pushed out to borrowers wherever they start their online journeys.
Applying for and originating a loan have also taken big steps forward thanks to players like Roostify and Blend who have built new, all-digital borrower onboarding platforms and loan origination systems. Anyone who has provided a year of bank and brokerage statements to a lender appreciates replacing that with a Plaid-supported automated data pull. These platforms, and other home-grown systems like Quicken’s, need wider deployment, but many lenders have invested in these systems and feel ready to tackle the next challenge — closing.
We believe mortgage closings are next. Closings matter in small and big ways. For one, it’s the culmination of a highly regulated process where mistakes in documents or process cost time and risk regulatory violations. Closings are also the culminating moment in the borrower experience, both legally and emotionally. Lenders work hard to win and retain borrowers, yet for this critical borrower experience, lenders are mostly cut off from the process with little visibility. Instead, nearly all other industry participants come together in a short-fused, pressurized setting, including many new participants inserted at the last moment, such as, title agents and notaries.
As an inherently networked workflow, the industry needs a collaboration platform on which all closing participants can engage as first-class citizens, but with permissions tailored to their roles. Borrowers should be able to review, notarize and sign documents digitally, with the benefit of machine learning models that automate document production, error detection and signature annotation. The industry is just beginning to embrace all-digital closings, with digital mortgages (eNotes) produced at the end. Players like Snapdocs have the opportunity to build foundational industry infrastructure.
While invisible to most of us, the post-closing life of a mortgage — the secondary market — is where things get really interesting. Wholesale lenders and the securitization market have always been the tail that wags the mortgage market, and they have built around the idea of holding the paper mortgage as proof of ownership. So, what happens when there is no paper? Fannie Mae has documented the requirements for its digital mortgages (eNotes), and digital mortgage registrations increased 5x in 2019. Granted that’s only 95,458 actual mortgages, most of which are from Quicken, but having the largest mortgage lender in the country pushing digital mortgages is exactly the way industries change. In addition, one of the world’s largest exchange operators, ICE/NYSE, acquired eMERS in 2018, the industry’s de facto eNote registry, revealing a sophisticated player’s intention to lean into digital mortgages and the downstream securitization market. Adoption is still early, but we see an exciting and open field for new players to make smart strategic decisions that position themselves for an enduring role in the secondary market, including as electronic registries, custodians and sources of data analytics.
TL;DR
The real estate sector is receiving a huge dose of technology. One of our favorite investment themes is the digitization of mortgage. The front-end processes are well underway — borrower application and underwriting — and the closing and secondary markets are on the verge as well. We are excited to be working with Aaron King and the team at Snapdocs where they can build foundational industry infrastructure and improve the closing experience for all of us.
Photo by Scott Webb on Unsplash
6 Investment Trends That Could Emerge From the COVID-19 Pandemic
There is still capital to be deployed in categories that interested investors before the pandemic, which may set the new order in a post-COVID-19 world.
Some epidemiologists have estimated that COVID-19 cases will peak in April, but PitchBook reports that dealmaking was down -26% in March, compared to February’s weekly average. The decline is likely to continue in coming weeks — many of the deals that closed last month were initiated before the pandemic, and there is a lag between when deals are made and when they are announced.
In the earliest days of the COVID-19 pandemic, Rocio Wu explores how the rapidly unfolding situation may affect prevailing investment trends for TechCrunch.
Originally published in TechCrunch. Read the full story here.
Will China’s Coronavirus-Related Trends Shape the Future for American VCs?
Despite early signs of a recovery among some investors and consumers who remained largely optimistic, the COVID-19 outbreak will likely have a significant impact on China’s tech sector as a whole.
For the past month, VC investment pace seems to have slacked off in the U.S., but deal activities in China are picking up following a slowdown prompted by the COVID-19 outbreak.
In the earliest days of the COVID-19 pandemic, Rocio Wu looks to the Chinese market to see if American investors can anticipate the virus’ effect in their own markets.
Originally published in TechCrunch. Read the full story here.
Toast, the Restaurant Industry and an Exceptional Case for Vertical Payments
Two weeks ago Toast announced its $400M raise on a $4.9B valuation, and for the first time, I feel that people outside the restaurant industry realized just what an amazing company Toast has become. It is an exceptional example of vertical payments and well on its way to becoming an industry platform.
At F-Prime Capital, we invested in the first institutional round of capital in 2015, and before and after, we have looked at dozens of other industries for vertical SaaS + payments opportunities. Few combined the magic ingredients that made Toast so successful. We got a lot of things right about the restaurant industry in our original investment thesis and got lucky on others, but overall we have learned so much more about building vertical software businesses.
This post is about why the restaurant sector has been an ideal industry for vertical payments and how Toast executed against it so well. I hope it also helps founders building vertical payments businesses in other industries to distinguish good from great verticals, how timing matters and how to judge how high the ceiling can be. I’ll organize the rest of my thoughts into Market, Team, and Timing.
In the beginning…
As with all breakout successes, the story starts with a great team and great execution. Chris Comparato, Steve Fredette, Tim Barash, Aman Narang and Jonathan Grimm are superb operators and have built an amazing team around them. They were united first by Steve Papa, Founder/CEO of Endeca, where they helped build Endeca to a $1.1B sale to Oracle. Then Steve backed them as their primary investor until 2015 at Toast. Talk about founders giving back and creating new founders.
Rock, paper, scissors. Market, team, timing.
It does not happen without a great team, but never underestimate market and timing. They make the difference between good and great companies.
Market
#1. High velocity sales cycle meets architectural shift to the cloud. Restaurants form and fold all the time. Successful restaurants add new locations. On average, 10,000–20,000 new restaurants start every year. Selling into the restaurant industry gives a startup a lot of shots on goal, often without the need to displace any vendors. In addition, the restaurant industry tended to refresh on-prem point-of-sale (POS) systems every five to seven years. That was both an indictment of on-prem, server-based software, but also a natural result of POS terminals obsoleting as technologies and security improved (e.g., EMV).
That said, Toast launched as all industries were moving to the cloud and this refresh in the restaurant industry was going to be different. Square had already introduced cloud + tablet-based POSs in 2009 to coffee shops and mom-and-pop stores, and nearly all quick-service and full-service restaurants would refresh to a cloud-based solution. Enter Toast with a purpose-built, all-in-one cloud-based solution.
#2 Era of the Payment Facilitators (Payfacs). By 2012 when Toast launched, the payment facilitator (Payfac) model was flourishing and this allowed Toast to redefine the POS business model and literally alter the competitive playing field. By embedding payments into their software stack, they were given two levers for charging customers — SaaS licenses and payments interchange. Restaurants were going to pay someone interchange, but now Toast could give them their core software platform for running the restaurant while also monetizing the payments. Providing an all-in-one solution offered value to both the restaurant and Toast.
A bonus of vertical payments in the restaurant industry is the low-risk profile. Compared to a marketplace like Etsy or Stripe’s broad customer base, restaurants are relatively easy to KYC, chargeback risk is low and transaction monitoring is more predictable.
#3 Geographic density leads to viral growth. Consumer businesses search for viral growth, but few enterprise businesses enjoy the same, though there are notable exceptions (e.g., Atlassian, Slack, Asana). Early on we found that achieving density in a city actually stimulated organic growth and higher sales productivity. Restaurant owners dine at other restaurants. Waiters and waitresses move from restaurant to restaurant. This was a remarkable phenomenon to watch and a beautiful characteristic of the restaurant industry.
Team
#4 I will be a platform when I grow up. With the shift to the cloud, Toast had the chance to re-define the product category from standalone POS terminals to a true software platform with APIs and a world of best of breed partners and applications. Not only did this allow Toast to offer more value to restaurants, but it planted the seeds of its own enhanced role as a platform layer in the industry.
#5 An enterprise team for an enterprise-grade market. I’ve found that quick-service (QSR) full-service restaurants (FSR) have just the right amount of enterprise complexity. Managing one, if not many locations, presents ample complexity, including: menus, cook stations, staffing, customer CRM, inventory, procurement, etc. Coming from Endeca, the Toast team built with an enterprise software mindset and an obsession for customer success. This is one of the main reasons it’s been difficult for Square to move upmarket.
I say ‘the right amount of complexity’ because I have found other attractive verticals, like hotels, are sufficiently big beasts, built around all-encompassing property management systems and are hard to displace without feature parity. Too much complexity and a startup has a hard time penetrating.
#6 Android, not Apple. Many of Toast’s competitors went to market with Apple tablets. They were the rage and looked beautiful. But we all know the cost of that brand. Toast understood that Android-based devices would follow a much faster cost curve while offering an order of magnitude more options for supply and configuration. While that choice seemed obvious to Toast, not all competitors saw it that way, including Revel and Touch Bistro.
Timing
#7 The restaurant sector got hot. It didn’t hurt that venture firms would go on to invest $3.4B in restaurant tech startups starting in 2014. Led by online delivery services like GrubHub and DoorDash, hundreds of startups formed to serve restaurants, both enabled by cloud-based POSs, which permitted easier integrations, and reinforcing the role of POSs as the new platform layer.
#8 Access to cheap capital. What a time we’re living in. Good teams understand the capital markets. Toast recognized that it could raise a lot of capital based on its strong unit economics, impressive go-to-market execution and large market opportunity. When you see an opportunity to be a platform, it is rational to press your advantage and gain market share.
The Future is Bright
As exciting as the first five years have been, the restaurant industry is still in the early innings of its shift to the cloud and vertical payments. Older, incumbent vendors like NCR and Oracle/Micros constitute most of the POS market.
This first phase has so much upside left. Mirroring the phenomenon I described of density leading to viral growth, the restaurant POS will have a winner-take-most outcome. Even incumbent vendors enjoyed that. Peak market shares were ~30% for NCR and 21% for Micros, with Toast on its way to winning its own significant market share.
The second phase involves the POS as a platform — the software central nervous system for the restaurant. Toast already has become a hub for third-party applications like staffing and inventory management. In five years, restaurants will not have two, three or four tablets on the counter for GrubHub, DoorDash, Caviar and others.
At the same time, Toast and others will offer additional services themselves. Toast acquired payroll provider Stratex and launched Toast Capital in December. I’m especially excited to see the suite of FinTech services Toast will offer to restaurant owners and employees. The POS is a fraction of the addressable market at each restaurant. As a public company, Square has continued to grow net revenue 60% Y/Y even as it surpasses $1.5B. The unit economics of QSR and FSR are several times more attractive than the smaller retailers that comprise Square’s customer base.
The restaurant industry has proven to be an ideal market for vertical payments and the ceiling for players like Toast is very high.
10 Rules Entrepreneurs Need to Know Before Adopting AI
It is in the ethos of established tech companies to build generic solutions for customers across industries. But for challengers, the more they can focus on solving core business problems, the more successful they will be.
Although adoption of artificial intelligence (AI) and machine learning (ML) for the enterprise is still in the early days, the technology has matured enough for entrepreneurs to start gathering inspiration and evaluating opportunities for potential applications.
Business leaders are just beginning to adopt artificial intelligence and machine learning into their operations. In this story for Harvard Business School’s Working Knowledge, Rocio Wu offers insights into how entrepreneurs can start riding the wave.
Originally published in HBS Working Knowledge. Read the full story here.
MoEngage
MoEngage is an intelligent customer engagement platform, built for the mobile-first world. With AI-powered automation, optimization capabilities, and in-built analytics, MoEngage enables hyper-personalization at scale across multiple channels like mobile push, email, in-app, web push, On-site messages, and SMS. Fortune 500 brands across 35+ countries use MoEngage to orchestrate their cross-channel campaigns.
Founders Diaries: The stories keep getting better….
We have been enthralled with the response of the Boston start-up community.
We are hosting our next Founders Diaries event on Monday Feb 10 with Jeremy Allaire of Allaire Corp/Brightcove/Circle fame – we would love to see you there! Register to attend here.
How time flies….
It has been 3 years (!) since we launched the Founders Diaries event series, and we have been enthralled with the response of the Boston start-up community. What started as a single inspirational talk by Robin Chase from Zipcar and a data-heavy blog post from our team has become a much larger tradition, and one we have been fortunate to share with 1,000+ attendees to date.
Accomplished start-up leaders like Michael Simon from LogMeIn, Steve Papa from Endeca, Paul Sagan from Akamai, David Cancel from Drift, and a multitude of others have been extraordinarily generous in sharing their trials, tribulations, and victories on the way to building foundational Boston companies. Those gathered have shared in laughs, heart-wrenching stories (Akamai losing a co-founder to tragedy on 9/11, whose memory inspired the team for years to come), ‘wows’ (LogMeIn’s picture-perfect early growth #s in spite of early rejection from investors), and tales of culture reigning supreme (Datto’s Austin McChord wins the award for most creative in-office competitions/races). We are deeply appreciative of not only our speakers but those who come to listen, ask questions, and share their own stories over apps and drinks.
Up Next: Good things come in 3’s…
Our next distinguished speaker, Jeremy Allaire, earns the unique commendation of having started 3 (3!!) successful start-ups, displaying a relentless determination to build products, hire teams, and close customers across decades.
Jeremy started his entrepreneurial journey as Co-Founder/CTO of Allaire Corporation, where he led the company’s product and GTM strategy and helped grow the business to 1M customers, $120M+ revenue, and a sale to Macromedia in late 2000. After serving as CTO of Macromedia, he then moved into online video distribution as Founder/CEO of Brightcove (from inception through the IPO), building a $130M+ revenue company that today powers video on ~25% of the top 10k websites worldwide and receives 250M+ unique visits per month. In his latest act (we won’t dare call it final at this point!), Jeremy co-founded and serves as CEO of Circle, a crypto finance company that makes it possible for people everywhere to create and share value in a way that is affordable, open and empowering.
From web application servers to online video to crypto, Jeremy has identified and harnessed trends in a way that few can.
Empowering the next generation….
When first examining the data on ‘large exits’ ($400M+) in Boston from the past 25 years, what stood out most is how certain companies serve as fertile ground for successive entrepreneurial endeavors, similar to the ‘Paypal mafia’. The initial assessment (including valuable crowdsourced additions) highlighted Akamai (40+ alumni start-ups), Genzyme (28), and Hubspot (28) as launchpoints for entrepreneurial leaders. Jeremy’s companies similarly stand out. Allaire Corp, Brightcove, and Circle have collectively produced 33 alumni start-ups from their employee ranks (counting founders/early start-up CEOs).
A few fun facts about these alumni adventures (listed here – contributions welcome!):
-8 multiple-time entrepreneurs on the list
-6 alumni companies had 2 or more co-founders from the Allaire Corp/Brightcove/Circle mafia (‘no new friends’, as they say)
-JJ Allaire (Jeremy’s brother) co-founded Allaire Corp and has founded three subsequent companies: Onfolio, FitNow, and R-Studio
-Notable outcomes include EqualLogic ($1.4B to Dell; co-founded by Paula Long) and Imprivata (IPO then $544M sale to Thoma Bravo; Patrick Morley led as early President/CEO); both are Allaire Corp alums (Paula in engineering, Patrick on the business side)
-The group also includes a few high-potential, high-growth companies including Mux ($32M raised from YC, Accel), RStudio (millions of users, the default IDE for R, recently became a public benefit corp), Vested (an early-stage company re-imagining employee stock options), and Hummingbird (taking a new approach to RegTech, an area near/dear close to our heart)
-David Orfao served as President/CEO of Allaire Corp through its sale to Macromedia before co-founding General Catalyst, a leading VC firm; General Catalyst has funded at least 7 of the Allaire-related alumni start-ups (here’s to paying it forward!)
Alumni Start-ups: Notable Exits
Alumni Start-ups to Watch
Despite all the entrepreneurial activity and success to date, we are sure to see even more in the future from those in the ‘Allaire’ mafia (we are watching you, Circle alumni, for great things)!
We hope you’ll join us on Monday February 10th to hear Jeremy’s wisdom, and maybe even cross paths with an alumni founder! Please sign up here to attend – see you there and at future gatherings!
– Team F-Prime
Kudos to Nisha Rangarajan for key research and analysis in support of this post.
Sources: LinkedIn, Pitchbook, Crunchbase, and VentureFizz.
Retooling the Lab-Software Stack
Day-to-day software used by scientists remains stuck in the dark ages.
While great strides have been made in biomedical research over the past decade with breakthrough technologies like CRISPR and gene therapy, the day-to-day software used by scientists remains stuck in the dark ages.
On a product-level, legacy lab-software is often difficult to deploy (anyone heard of SaaS?), terrible to integrate (API still means Active Pharmaceutical Ingredient) and shockingly bad from a UI/ UX perspective (think Pong from 1972). On a functional level, it’s often unfit for modern data-types/ data-volumes and lacking in embedded intelligence (i.e. AI/ML). Software may be eating the world in other industries, but it only ever nibbled at the R&D lab.
Thankfully, over the last few years we’ve seen a new breed of start-up emerge looking to overhaul the lab-software stack. These companies are built on modern tech foundations and tend to be product-led with freemium, self-serve versions that delight users not dissuade them. Several F-Prime portfolio companies exemplify these traits: Benchling has thoroughly modernized what a Lab Operating System should look, feel and function like; Owkin is empowering scientists to create predictive models for drug efficacy; and BenchSci (our newest investment) has mapped the world’s biomedical research to improve the efficiency of reagent selection and experiment design.
The DNA of this new breed of start-ups is also fundamentally different. They’re demographically younger (born in the web). They’re educational ‘dual-citizens’ (fluent in Biological Sciences and Computer Science). And they bring a healthy disregard for incumbent vendors in the R&D market (they’re “in the world, but not of it”).
The challenge of commercializing biomedical research is well understood by everyone involved (e.g., high profile clinical failures, experimental irreproducibility and escalating costs of drug development). While better lab software is clearly not THE answer, it is AN answer. It’s an exciting time to be building a company in this vertical and if you’re doing so, we’d love to hear from you.
BenchSci
BenchSci is a software platform that maps disease biology using machine learning models trained on 20+ million scientific publications. Its proprietary ASCEND™ platform helps scientists design better experiments, uncover novel insights, and identify safety and efficacy risks earlier in the discovery process.