Growing a Fintech Unicorn: Alex Tonelli's Anthology of Lessons Learned

Whether you’re thinking of launching a startup or in the trenches of your first entrepreneurial venture, any morsel of advice from someone who’s been in your shoes can be like gold. That’s why I sat down with serial entrepreneur . Alex Tonelli He knows a thing or two about the hurdles entrepreneurs face, to say the least. Back in 2009, Alex was a young founder looking for a loan for one of his early ventures, a chain of fitness centres. Despite the fact he had six profitable units in operation, he struggled to secure a small business loan to help his company scale. He experienced months of paperwork, endless bureaucracy, with no promise of actually securing that all-important injection of capital, despite continually jumping through all the necessary hoops. So he focused his efforts on solving that problem for other small businesses in his position. Fast-forward to today. His solution is now a unicorn fintech startup that makes small business financing easy and affordable. In addition to his success in the fintech industry, Alex is a Partner of , where he leads a Venture Lab focused on building mission-driven companies in healthcare and fintech. Endurance Companies During our conversation, he shared the lessons he learned as a young founder navigating the hurdles of building a fintech startup. As well as actionable tips on product, funding and hiring. Alex Tonelli & Funding Circle Q: Did you always want to be an entrepreneur? In retrospect, yes, but I didn’t realise it right away. A: I came from a disadvantaged background and my initial interest was simply to become “successful” and improve my standing. My influences in New York made Wall Street that image of success. My first formal jobs were in finance and investing, though I was always itching to push the envelope. At 25, I put my first “deal” together, bringing together some capital from friends ($172K to be exact) to start our first business (a fitness chain whose model I noticed while an investor). We financed it with 0% interest credit cards and managed it on nights/weekends. At Stanford Business School, I got a better sense of my core values and how to align my work with them. Which is when I realised I wanted to be an entrepreneur. I hated authority and was pushing the envelope in ways you would call, in hindsight, entrepreneurial. For example, I was an independent contractor at nine years old as a referee for hockey games through my teenage years. It was a pretty good little business at $25/game. Q: What was the “A-ha” moment in solving the problem you did with Funding Circle? What was it you saw that no one else saw? Within two years, our fitness business was a successful small business with six profitable units. Despite our success, I couldn’t get a small business loan to open the next centre and worse, the process was miserable. A: Giant stacks of paper filled out dozens of times by hand. Four to six-month time horizons. Fixing that problem was always our north star and competitive advantage. We understood what Main Street businesses needed when it came to lending. Other players took a finance lens; building products that worked on spreadsheets, but not in reality. It’s worth noting that we also saw the capital markets side differently in large part due to my Partner, Sam Hodges, who had been an early VP at SecondMarket (now Nasdaq Private Market) and saw how a private capital market could be built. We always believed there was a chance to build an institutional capital market where others were focused on crowdfunding from individuals. Lots of people call our industry “Peer-to-Peer” which I think is a misguided term since very little of the capital comes from individuals. I call it: “Funding from the right crowd.” Q: What was your initial vision and has it evolved since your early days (if it evolved at all from then to now) While I can’t speak for the initial vision of our UK partners (formed through merger), I believe the substance of the model is fundamentally the same as where we started in the US. A: First, we wanted to make small businesses loans that banks should be making. Second, we wanted to build a better way for all small businesses to get financing. We were successful in the first as today our fintech, Funding Circle is the best source of capital for creditworthy customers who don’t receive small business loans from banks. We solved part of the second as well, in that the experience of getting a small business loan is now far better through fintech. The gap with the original vision, however, is that Funding Circle is still working on out-competing banks at scale. To achieve the latter, we envisioned a fintech product which was far superior to what banks offer. I dreamt of a “checkbox” where you could toggle your loan terms with or without a personal guaranty (I loathe the concept of a personal guaranty, which is ubiquitous in small business loans from banks). While I’m very proud of all we and our successors achieved, it still makes me sad we never got there and I’m still considering building a bank to try to address it. It’s an example of a core startup belief: “Strive for perfection, because when you miss it’s still pretty darn good.” Q: What is your mission in this “vision” landscape? The mission at Funding Circle is to: A: “Build a Better Financial World.” When we merged with , as a priority, I led a mission review to make sure we aligned on this critical front. Really, for us, it was a re-statement of our original mission. Endurance Lending Network Funding Circle On the subject of Missions, I’m a big Jim Collins nerd. I give all employees a copy of when they join. I believe it lays out well how building companies with embedded mission and values yields long-lasting results. Built to Last Q: What did you do to validate your idea? The best validation we did prior to launching our fintech was working closely with a bank on a small business loan process (to fund our fitness business). It confirmed our hypothesis about the problem that needed solving. A: Once we launched, we scraped together an MVP for a very complex fintech product. It felt like it was . But it differentiated us from others because we were in-market – whereas many others weren’t really lending. held together with bubble gum and duct tape Related: 3 Steps to Build a Successful Minimum Viable Product (MVP) Our first fintech product took about a year begging for nickels on Wall St. to scrape together $5M to lend. As well as a legal ‘hack’ that allowed us the regulatory ability to do it. We targeted franchise businesses, which was a wedge people could understand. On this point, though, I think it’s important to say something about the religion of product testing. While I believe it’s important, I also believe it’s overstated. The Lean Startup could lead you to believe that a smart product person can test his/her way to success with any idea. I believe you need to be able to get at least halfway through the process with a unique insight in which you have a high degree of confidence due to your personal experiences or expertise. From there, you need to validate each part of your thesis, but you have far fewer potential failure points. If you’re starting 5% of the way to a decision, it’s not impossible to ‘learn’ your way to a good idea, but I believe the chances of success are a lot lower. In short: “Founder-Market fit is the first step of Product-Market Fit.” Q: Who was your primary stakeholder at the beginning, given the problem you just stated? Oddly, it was the lender in our marketplace, which is interesting because that wasn’t the core customer. As a fintech marketplace, we needed enough capital to lend just to exist. When our capital markets became more solid, we were able to re-focus on the borrowers we were trying to serve. A: Marketplace startups and businesses will often have this pendulum problem. We definitely experienced the pull of the two sides of the market. “A nuclear bomb for many marketplaces is the need to get one side to pay for the other side’s problem.” An example can be seen in the terms for scaling capital partnerships. By agreeing to credit boxes more typically employed by banks (e.g. tax return metrics, years in business, etc.) we moved away from the product insight that allowed us to be attractive to our core customers. We were able to get by and get our fintech product to a certain scale, but I believe it limited our ability to compete at mega-scale. Q: What was your value proposition? We had a value proposition for both small business and investors: A: For small businesses – Small business loans similar to what you’d get at a bank in under 14 days with less pain.For investors – Outsize yield for the risk. A new product that was outside of the efficient portfolio frontier because of the market inefficiency. Q: How did each target stakeholder deal with the problem before you existed? The only options small businesses and startups had before us were horrible, four to six-month timeframe bank processes (that we experienced when funding our fitness company). A: Most of these businesses didn’t even qualify for a small business loan at the end of the process. As a result, many would turn to what I call “poison finance” – loans with interest rates ranging between 30-80% (and sometimes even higher). Q: What was your Product Elevator Pitch Small business lending fintech marketplace for small business loans banks should make. A: Q: From the elevator pitch, what were the assumptions you could not validate with research? A: There’s often a leap of faith that goes into deciding to build something. In particular, because it’s easy to get false positives in your research. That’s why I believe strongly in having authenticity to the problem you’re trying to solve (in starting “halfway there”). It’s a shorter leap! In our case, there were many leaps. “It’s hard to know whether the capital markets will give money for your fintech marketplace until you ask them.” We didn’t know: What CAC would be at scale for businesses If we could, in fact, lend with good performance If our legal structure would scale and evolve For each, we had educated guesses and a margin of safety. For example, on the lending question, I would ask investors to assume triple the loss rates for comparable products and ask if the fintech product was still attractive. Q: When did you know the business would work? I knew the business would work when we got our first $100M term sheet for lending capital. A: I was sharing a small hotel room with our Head of Capital Markets at the time. We had each flown over 200,000 miles trying to hunt down capital to lend and were constantly jetlagged. Our room was so small we had our feet on each other’s beds. I said at the time, “ This will be in the movie one day.”. The demand on the borrower side was something I never questioned because I knew it so well. It was just a matter of whether we could get our fintech product to them or not. Related: From Being Fired to Building a Multi-Million Dollar Fintech Startup Entrepreneurial Advice Q: What advice can you give founders when it comes to Product? I can’t emphasise enough for new entrepreneurs the concept of starting “halfway there.” A: “You ought to be careful when it comes to the products and the problems you dive into. Having authenticity to a problem is paramount.” People can get stuck into this religion of Lean Startup and convince themselves they can learn about any problem. I think that makes sense in the context of a large data set, but entrepreneurs only get a couple of chances at this. A lot of the startup literature is written from a Venture Capitalist’s (VC) perspective. It’s important to note that this is often misaligned with an entrepreneur’s perspective. In other words, a VC is happy to back 30 companies with lower chances of success so long as they have big potential outcomes. It’s an expected value calculation. An entrepreneur ought to be maximizing the chance of success. Personal authenticity to a problem is the best way I know to do this. Having said that, you shouldn’t blindly charge forward without having validated your assumptions. I’ve heard 20 authentic pitches for a “night club app” from a 22-year-old who has a very authentic problem – but didn’t validate the market size or the usefulness of the app to various other stakeholders. Simply put, it’s not that you can’t solve a problem you know less about – but it’s going to be a lot tougher. “Focus on getting your product’s value proposition incredibly clear. If your grandma doesn’t understand it’s probably not clear.” - Jan-Philipp Kruip, Founder & CEO Q: What advice can you give entrepreneurs when it comes to funding? I’ll start by saying, I have a love-hate relationship with venture capital. A: I think all the media attention around venture capital causes people to become obsessed with it. “Many believe that VC firms are “kingmakers”, forgetting the vast majority of funded companies fail. Be wary of making choices because of style over substance. It doesn’t matter who led your round when you’re out of money and they’ve cut you loose.” Someone asked me yesterday: “If you were to describe yourself as a celebrity, who would you choose?” I replied with: “aspirationally a combination of Richard Branson and Warren Buffet.” The Buffet side is all about not losing sight of the substance of what you’re building and a reasonable capital plan. The Branson side is about aiming at ambitious missions. Striking a balance has felt authentic to me, though it’s not always easy. In the early days, our first capital round was $1.5M of equity and then we spent about 12 to 18 months cobbling together about $5M to lend, which is a tiny amount of lending capital in the scheme of things. That was enough money to have us start building what we were building, but we had to be very disciplined. Our first fintech product was very efficient. Our first funders (Tim Bliss and Reece Duca from IGSB) were heavily invested, early board members. “As a first-time founder, you want the people giving you capital to be emotionally invested and part of your team.” That’s how we saw our board members. I think that was a really smart way to build our company. A common pitfall with first-time founders is not having that integrity in the early-stage investment board. You need to let people with expertise in on your vision. Let them guide you and tell you what to do. It’ll prove extremely beneficial to your company in the long run. Related: Expert Interview: The Hidden Details When Funding Your Startup “You want to keep investors who really know your industry up to date weekly. Genuine investors can help you and want to work on your success — they’re not just a check.” – Paul O’Brien, Investor & CEO Q: And what about advice for entrepreneurs when it comes to hiring? I think people raise their first round of capital and go out wanting to hire specialists for their startup. I think that’s a mistake. A: “In the very early stages, you don’t know how your company and strategy is going to evolve.” I’ve always preferred to have very talented generalists who’re early in their careers and unproven. People who’re going to grow into roles. “I’ve typically found that hunger and talent, even without experience, often works out best.” Conversely, in the early stages, hiring somebody with a very specific skillset usually means they’re too narrow to do anything apart from that very specific thing you’ve hired them for. I’m not saying that can’t work – but for me, it’s always yielded a lower probability of success. “Most startups fail because of some sort of HR dynamic. The vision might be good, the market might be good but if your team can’t execute against it then you’re already one foot in the grave.” – Yaron Samid, Serial Entrepreneur & Startup Founder Q: Related to this last part on hiring, how did you find out that generalists give you a better probability of success in the early stages? I’ll give you an example. A: We hired an early Head of Credit, which was a very important position for our fintech. We hired him because of his background and his bio. That was a big mistake and very costly for the business. That person had worked in a larger, institutional context. He wasn’t nimble enough to understand how to build a lending program from scratch without the big infrastructure of a bank feeding the loans. He just couldn’t evolve. By contrast, we hired another colleague with basically no work experience. We hired him as an intern at first. He was based in New York and, even though we told him we couldn’t pay him much, he was so excited to get to the company that he just hopped on a plane to San Francisco the day after we hired him. He started as our assistant basically, then he started doing more and more. Eventually, he started outperforming the Head of Credit while helping out in that department. To be clear, we didn’t make him Head of Credit but he took over a large part of that responsibility. On top of that, he became a key player in other departments of the business and is now a senior leader. We have dozens of stories like this. I don’t want to say that none of the specialists we hired ever worked out because that’s far from true. What I can say is that I’ve had a higher degree of failure with the specialists. In addition, the risk associated with a specialist in terms of budget allocation and limited flexibility is higher – especially in a startup’s early days. I’d recommend picking and choosing moments carefully. The point here is: “Flexible early hires were very helpful to us, and I think that’s a truism for most startups.” Another example: I get a lot of questions on how to build a sales program for startups. The problem is many people want to treat it as a sales organisation, where you have clear targets and incentives, etc. If you know what you’re going to sell as a startup in your first or second year, good for you. That means you’ve done phenomenally well. I’ve rarely seen a startup plan hit its sales projections. How can you design a sales incentive for salespeople without reasonable sales projections? The result is generally either: The person is going to hit the projections because your product is so good (or the projections were under-targeted). Meaning they’ll get total credit for something that had little to do with their performance. Or, more often, they could be great, yet miss projections because you’re yet to find that product-market fit. This leads to everyone being frustrated and lots of time spent trying to manage the situation. Due to the latter, I try not to hire “salespeople” early on. I try to hire people who show the propensity to be good salespeople and are going to go out and help me figure out the product-market fit. Then, instead of sales incentives, I compensate them like I would any other employee-based largely on equity, cash and a promise of more seniority in the company with success. Q: What did you do to find that less-experienced talent with great potential? Our first board member gave us a book called By Jeff Smart & Randy Street, about hiring. A: Who? The book comes from more of a transactional perspective and we didn’t follow the advice to the letter. However, the frameworks have been very influential to my hiring practices even today, 10 years later. The book shows that there are various archetypes of a hiring manager for example: The Art Critic – someone who looks at the person and says: “You’re good!” The Interrogator – Someone who shines a light in your face and asks a million questions. The Sponge – The person who just takes data from a person. The list goes on but of the various types, research has shown the “Airline Pilot” performs best. This archetype is someone who has to check off a whole checklist before “taking off the plane” (hiring the candidate). All this to say: “Being smart about what you want in a position and then making sure you check those items off a list is good working practice.” This complements the idea of the generalist. Yes, you want a generalist, but don’t just go out and say, “you look capable and hungry I want you.” It’s important to understand what those key things are that are going to drive success in the role. Lay those things out in a structured approach. Don’t have your whole team interview the person over and over. That just results in the same interview seven times. What you should do is have your interview process evolve over time with specific questions designed to check things off your list. The Airline Pilot method has been a very effective hiring approach for me. That said, if you get it right 70% of the time then you’re in the hall of fame, so be prepared for it to fail as well. Thank You, Alex… I’d like to thank Alex for taking the time to sit down with me and share his experience building a fintech startup and his insights for entrepreneurs. I couldn’t agree more with his entrepreneurial advice, especially when it comes to hiring. It’s like Warren Buffett says: “When looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.” What are your thoughts on this conversation? Are there any questions you’d like to ask Alex that we didn’t cover here? Also published here .