VCs Discover... Banking?
VCs Discover... Banking?
Reviving an old concept for... very little reason.
Proto-Banking For VCs
Venture capital is an interesting game. You get pitched on a hundred ideas that are, kind of by definition, out there and weird. Making money in a competitive environment is always tough, and businesses fail all the time, especially startups. But ventures have to start somewhere, and as a VC, that’s what you’re here for. It’s your job to sort through a pile of ideas thrown at you and make a determination about which ones are good and which ones aren’t.
It’s an incredibly tough game—while everyone knows the big names that have come out of Silicon Valley in the last twenty to thirty years via VC funding, for every Facebook META 0.00%↑ there are at least 100 dead corporate corpses rotting in the sun, long forgotten (tough visual, sorry).
Anyway, as a VC one of your principal jobs is to see the things that no one else sees. To see commercial viability1 where others see a pipe dream or a fantasy. Knowing this gives us a bit of context into the kind of skills that VCs should have, namely that you need to be open-minded, yet not overly optimistic. It’s a very difficult balance to strike.
I would not be a good VC. I’m overly skeptical of high-flying promises and tend to believe that there really isn’t anything new under the sun, just new iterations of things. Anyway, with that in mind, check out a recent idea that received $4.5 million from Initialized Capital and Arc (a Sequoia connected pre-seed fund).
It’s called Tanda. Here’s a breakdown on how its works per TechCrunch:
In a traditional tanda, one person takes the lead in collecting the money and maintaining a ledger system for lending out that money. Chor’s approach is to leverage technology to take over that job.
Business customers advertise Tanda with employees, who scan a QR code and get access to the product for free. Rather than variable dollar amounts, they are fixed increments, and users can start at $100 and borrow up to $2,500.
Tanda then charges fees based on payout position within a circle of people. For example, those who are first or second to take a payout will be assessed a fee of around 10% or 8%. Those in the middle will be free or could get a reward, Chor said. He is also getting interest from employers who want to sponsor the product so the fees are covered.
“One of the secrets about tandas is, historically speaking, they have very low default rates, something like less than 2%,” Chor said. “The reason for that is really the community and camaraderie of adults and social accountability.”
So… it’s a bank. Or a credit union. But the main thing is that the people involved in this financial arrangement… all work at the same company or group of companies?
Tandas are, of course, very useful things in and of themselves. They provide a form of fractional banking in tight-knit communities that otherwise do not have access to government-regulated (and reliable) fractional banking. The economist Hernando de Soto discussed the flow of cash and the vibrant economies that flourish in societies without access to reliable monetary systems in his incredible book The Mystery of Capital (which is an absolutely incredible book you should check out if you haven’t already read it). So, you know, there’s a place for Tandas in the world.
Buuut… we already have robust fractional banking. To the point that the founder makes about historical Tanda default rates, I have two main issues (which, hopefully the VCs who tossed money at them raised as well):
How can you reliably assess default rates for organizations that are by definition closed to outsiders, hyper-local, and typically don’t file any financial information with regulators, and
A group of people working at a restaurant who pool their money together aren’t exactly as ‘sticky’2 as a tight-knit community where people have limited mobility and relations go back generations.
Also—and again, this is why I would make a terrible VC—isn’t this just a bank on a small scale? And is this even a novel iteration on the concept?
Not addressed in the article as well is what happens when a default does occur. The company currently manages a few hundred thousand dollars for a group of restaurants according to the article, which is not exactly an industry known for employee longevity. What happens when the hostess gets a loan for $2,000 from her colleagues and then bails to work at Applebees the following week? I mean, there are obvious legal repercussions, but it’s messy. Really messy.
As the immortal Russ Hanneman from Silicon Valley might say, this is not a tres commas worthy idea.
Final Thoughts…
The SEC is suing Kraken (and boy, did they ever appear to make a lot of money). The OpenAI-slash-Sam Altman ouster was maybe a coup? Home sales have taken a pretty big hit. A big-time bankruptcy judge in Texas has resigned over improper relationship allegations. It’s not just America: Europe is facing a commercial real estate crisis, too. In the first signs of consumer weakness, Lowes reported disappointing earnings.
Programming Note—The Market Beat will likely be off for the remainder of this week. Happy Thanksgiving to everyone!
Although plenty of VCs have made gobsmacking amounts of money despite never doing anything that has ever been commercially viable.
In the banking deposit sense. Deposit stickiness is essentially the idea that it’s a big hassle to change banks, so you’re not going to uproot all your accounts to get three extra basis points somewhere else.