After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my post from yesterday [6]for much of the reason why.
As clearly predicted yesterday, the better funded of the payment processors will initiate a pricing blood bath they'd likely kill for...
From PayPal's subsite on Mass Payments [7]:
As you can see, PayPal has already imbued its service with much of the attributes that are being offered by the Bitcoin payment processors. They also have a material advantage as of right now, a massive installed base.
I also cannot emphasize enough how damaging the all too necessary customer service option is to margins. You see, the problem is most service companies don't put enough into customer service and handholding of the customer. From an optimal perspective, this should actually be part of the marketing and sales process, but it's often either non-existent or implemented as an after thought after enough customers start bitching and complaining, or worse yet (and likely most often the case) leaving!
As a company with mature management, it appears as if PayPal is trying to head this off at the pass as it attempts to change consumer behavior and prod them into adopting its new electronic currency payment system...
Now, let's compare PayPal to the newly funded Bitcoin payment processors...
Bitpay
Funding Rounds (3) - $32.50M
-
$30M / Series A [8] May 8, 2014
Investors:TTV Capital [9], Felicis Ventures [10], Founders Fund [11], Horizons Ventures [12], Jerry Yang [13], Richard Branson [14], Index Ventures [15] -
$2M /Seed [16] May 16, 2013
Investors:Founders Fund [11] -
$510k / Seed [17] Jan 7, 2013
Investors:Trace Mayer [18], Ben Davenport [19], Ashton Kutcher [20], Matt Mullenweg [21], Barry Silbert [22], Shakil Khan [23], Roger Ver [24], Jimmy Furland [25]
- See more at: http://www.crunchbase.com/organization/bitpay#sthash.yvlqpNtr.dpuf [26]
An interesting departure from the per transaction/fee model, Bitpay implemented a subscription system which benefits those customers who perform a large quantity of relatively small transactions moreso than those who process large orders.
I calculate Bitpay's most recent $30 million series A round to have been at around 9.2x sales, valuing the company at $160 million. This is a guestimate, of course, since I do not have access to internal numbers.
Next we have Coinbase...
Funding Rounds (3) - $31.70M
-
-
$6.10M / Series A [31]
May 7, 2013
Investors:Ribbit Capital [30], Union Square Ventures [29], Red Swan [32], SV Angel [33], Interplay Ventures [34], FundersClub [35] -
- See more at: http://www.crunchbase.com/organization/coinbase#sthash.CD8IPTp6.dpuf [41]
There's also Circle [42], founded by Mr. Allaire of Coldfusion [43] fame (sold to Adobe Systems).
Funding Rounds (2) - $26M
-
$17M / Series B [44]
Mar 26, 2014
Investors:Bitcoin Opportunity Fund [45], Pantera Capital [46], General Catalyst Partners [47], Accel Partners [48], Breyer Capital [49], Oak Investment Partners [50] -
- See more at: http://www.crunchbase.com/organization/nfc-direct#sthash.dd0DaxHc.dpuf [53]
Circle has not publicly launched yet but promises to bring a new level of simplicity and user-friendliness to the bitcoin payment ecosystem, concentrating more on a banking paradigm then the technical bent that bitcoin is known to represent. This is all you need ot know about the Circle business model as it relates to this discussion of impending margin compression...
Free=Margin Compression!
Let's see how this plays out for customers. The most lucrative segments for this industry is the SME (small and medium business enterprises) who process anywhere between 10 and 1,000 transactions per month. Why? Because there are simply more SMEs than there are big companies in the world. Let's see what the two biggest bitcoin processors look like when stacked up against PayPal's Mass Pay product for the SME market...
Of course, the Bitcoin transactions are likely a loss leader for additional, value added services for many companies in the not too distant future. As a matter of fact, I feel that the payment space will quickly become commoditized by Bitcoin technology - forcing these companies and many more (I'm talking about you Mastercard, Visa and Western Union) to innovate and offer significantly and materially better value for the buck.
Imagine what this competitive landscape will look like when Mastercard, Visa, American Express, Discover and Western Union jump into the fray. Of course, before that a much greater portion of the VC and private equity community will wake up and realize the opportunity in Bitcoin to pour more cash into it than sugar into a Bubble gum machine (emphasis on "Bubble"). The key is to get in early, and get in right. But how does one do that and where will this tale of uber margin compression end?
Well, the research report from which this info is being prepared will be offered to accredited and instituional investors starting next week, at least those who have an interest in UltraCoin.
My next article on this topic will explicitly illustrate how UltraCoin can assist ALL players (that's right, including PayPal, Bitpay, Circle, Coinbase, Mastercard, Visa, American Express, Discover and Western Union) as well as their direct customers, in climbing up both the food chain and the value proposition ladder - thus rapidly repairing the margin compression damage they are about to bring upon thier business models.
