A few months back, we made the hard decision to stop the funding round and look for early exit opportunities for Fairom. For the last 3 years, Fairom has been on a mission to bring efficiency in the capital markets using distributed ledger technology (DLT).
Fairom has been a CDL graduate and among the top 2% of companies in Founder Institute’s global portfolio. We raised a decent pre-seed round and cloud platforms supported through computing credits which were worth several hundred thousand dollars. Several hedge funds signed up for PoC and in our engagements with some global investment dealers, we estimated several tens of millions of dollars in yearly benefits of DLT. In spite of it all, Fairom didn’t make the cut and we decided to pull back.
Startups that are experimenting to achieve a product-market fit live in an implicit dilemma if they should push on or call it a day. For us, the decision was precipitated by failing to advance in a couple of our key engagements.
In my opinion, there are several factors that made it hard for Fairom to succeed. Some of those were my choices in the business plan and others were external factors that I failed to anticipate in advance. Enterprise solutions are a very different ball game and I thought of putting our learnings here to help other founders and investors who may venture into this territory.
Distributed ledger technology (DLT) requires a network of participants to deliver value. However, it is hard to initiate network effects even for the retail markets where customer acquisition cost is much smaller. It is a very expensive and time-consuming process to build a network of enterprises and the challenge grows exponentially with the size of the organization.
One of the ways to overcome this challenge is to deliver compelling value with a one-sided solution for enterprises in the beginning. Once a sufficient number of organizations are using the platform, then enable the network benefits. Another approach is to target retail markets in the beginning and once the product-market fit has been demonstrated, then include enterprises in the network.
It may seem intuitive to start with two enterprises and then scale the solution to include more. In our experience, that is not an effective strategy and doesn’t work unless these early adopters realize compelling benefits from MVP.
DLT doesn’t deliver value in one-sided solutions and over-the-counter (OTC) derivatives, the financial product class on which Fairom focused, doesn’t have a market with retail users. This combination created significant limitations in Fairom’s experiments to achieve a product-market fit.
Established vs emerging markets:
Fairom was started with an idea to bring efficiency in traditional capital markets (an established market) using emerging technology. Although there will be a counterargument to be made, this doesn’t work well from our experiences. This article by Jerry Neumann and research in “The Innovator’s Dilemma” resonate extremely well with our experiences. Statistically, a startup’s business plan with emerging tech in an emerging market has much higher chances of success. Fairom was in the upper-right quadrant in figure 1 below, with the least odds of success for startups. This is an arena where incumbent companies are likely to succeed by leveraging emerging technologies for sustaining innovations.
Fig. 1: The original diagram is taken from the article “Productive Uncertainty”. Fairom falls in the upper-right quadrant where we tried to reinvent an established market with emerging technology.
When I developed the business plan for Fairom, a conscious choice was made to not get into the crypto market because of the regulatory challenges. In hindsight, it was a mistake as some of the recent unicorns have been minted in the derivatives market for crypto.
A business plan in an underdeveloped, unorganized emerging market has a much better chance of success. Volatility and uncertainty in the emerging markets mean opportunity if entrepreneurs are skilled and lucky enough to navigate through it.
Capital, sales cycle, and product complexity balance:
Fairom had very good momentum in the early days. I was very fortunate to have some mentors turn into sponsors and lead our pre-seed round. However, after raising enough to have a runway of 12–18 months, we decided to stop the funding round to focus on building the product. In hindsight, it wasn’t an optimal strategy and we should have raised more money early on when there was a positive environment.
Generally, enterprise applications and use cases differ very much depending on the organization. So we had to customize the MVP for different engagements to make the value visible to potential clients. Just because we didn’t raise enough money early on, we faced limitations in doing more experiments with use cases, making bold pivots, and also exploring clients in different geographic locations.
We have also learned the trade-off between raising money when one can versus when one needs it. An effective fundraising strategy is generally built around a roadmap of product adoption and value creation. The idea is to raise enough capital, with a buffer, to get to the next milestone in the value proposition and then raise more at a higher valuation. In practice, things never work smoothly as there is particularly high uncertainty in the early stages of the adoption curve. Depending on the complexity of the product and sales cycle at target organizations, one needs to raise more than sufficient capital to conduct enough experiments to achieve a product-market fit.
Another strategy I have come to support for complex solutions is to launch through venture studios that work with large enterprises. Generally, such VCs de-risk the business plan by getting a large enterprise as a first client to the startup.
Use case selection and geographic challenges:
At Fairom, we have been building a DLT platform to manage complex financial transactions. The initial use case we focused on was the niche global market of OTC derivatives, an area where the team had operational expertise. It was a positive thing from the point of view of initial capital raise and limited competition in the market. However, niche markets also limit the number of clients that can be targeted in a single geographic location.
First, there are some important learnings on the use case selection. I have come to a conclusion that a good initial use case should have the following three key properties:
- It should be broad enough to allow a startup to explore a large number of clients and preferably different markets, e.g., retail, SMEs, etc.
- The use case should be narrow enough so that it can be implemented and reshaped for different markets with limited resources
- It should minimize inertia against product adoption. For example, limited integration requirements, small or no cost for client onboarding, etc.
As you can imagine, ideal opportunities never exist and the key is to acknowledge and manage specific risks. Although our initial use case around OTC derivatives did target some of the most manual processes at investment firms and minimized the number of parties needed to initiate trading on the platform, it created challenges around other aspects.
Coming to the second point, complex sales require personal connections to get in front of the key decision-makers in large organizations. With six global investment banks, the Canadian capital market is 2%-3% of the global markets in size. While the US market is around 40%, EMEA around 30%, and Asia around 30%. Doing complex sales in other financial hubs would have required Fairom to spend more capital on sales and develop international relationships. To overcome such challenges, early-stage enterprise startups are better off by locating in geographic locations where they have access to a large number of potential clients. In my opinion, Fairom could have done better if it were located in New York, London, or Singapore.
Apart from these key factors, there are a few more things that I believe we should have been thoughtful about:
- Fairom should have put more effort into establishing thought leadership early on. It just reduces the cognitive activity required by the clients to trust a startup with critical projects.
- For enterprise applications, a company is better off being the first to innovate and leverage it aggressively by focusing on the most innovative clients. When it comes to technology adoption in large enterprises, there are innovation leaders and then there are followers. A ‘leader’ organization will likely work with a startup that is first to innovate, is well-capitalized, and has established thought leadership. Followers will mostly buy a product that has been validated by the leader. So if a startup is late in the entry, it may have already lost key enterprise clients.
- If it is possible, set up strategic partnerships with existing technology providers in the market early on to de-risk the business plan.
Although Fairom wasn’t as successful as we hoped, three years at Fairom possibly have been the most valuable years of my life in terms of acquiring real-world skills. The best part of doing Fairom was to venture into the free lands of possibilities, quickly learning and applying new skills, and developing relationships with some amazing people on the way. I have been exceptionally fortunate to have worked with and supported by our investors, advisors, mentors, colleagues, some potential clients, and friends. A founder once told me that entrepreneurship is a way to push your limits and self-realization. I deeply agree with this thought and wish I had started sooner on an entrepreneurial journey in my life.
Thanks to Jean Desgagne and other Fairom team members for feedback and comments on the post.