For my latest Fireside Chat, Simple.Innovative.Change is crossing the pond to an up and coming tech scene: Berlin, Germany. That is where I had the pleasure of happening upon tri-lingual speaking, American born and raised Founder and Partner Luka Ivicev.
Luka is an immensely fascinating individual who has been starting up from his early days on the streets of New York City selling Jordan’s. He has taken his hustle to the city of Berlin for his latest venture where he is hoping to build a new kind of financial service firm, one that serves small and medium sized businesses that have historically been under served by the big banks.
As I've heard from the startup community before, banks aren't in the business of giving money to those who need it. That's where Luka comes in. He's hoping to provide those services the banks have historically not provided. Check out our conversation below…
CL: Thanks for taking the time to speak with me today. So I would like to take a step back and talk about your background. You bring an interesting set of skills to the table with your past startup at such a young age. Can you tell us a bit about that experience and what you learned from that that is helping you to lead this new startup?
LI: Communication. That’s the first thing that comes to mind. A lot of the problems I faced with my first company was purely around communication. I’ve learned that’s most important, and I’ve realized its value even in my personal relationships.
The overlying theme that I wrote in a recent article was that if you don’t have clear communication in place everything will get screwed up.
For instance, we’ve been getting some press recently. Friends have been warning me to watch out about getting in the press too early as others can steal our idea. But if they steal our idea, chances are that it will be a different idea by the time it comes out. Getting out and telling the world what you’re working on can’t hurt you in anyway.
All innovation is based on incremental change. Even the iPhone when it came out. It’s still an addition and iteration over something else. Ultimately it’s really about execution and communication.
CL: Why go after creating a bank for small and medium size businesses?
LI: From a young age when I was living in New York I started my first business. I was 13,14 selling sneakers on the streets of New York. I was selling Nike’s and Jordan’s for up to $5,000 and $10,000. People were giving us checks and trying to send us money but we couldn’t open up a business bank account.
So I saw how tough it is to have a bank account as a kid. In our first real startup one of my current partners Sir, handled hundreds hundreds of bank accounts for a job, so he understands how difficult it is to maintain, open and use and manage bank accounts for small and medium companies. Our partner, Lav sold his first startup at 21, where he was dealing with all sorts of finances and constantly working with his bank.
Since then we’ve started and worked in a few companies, where we’ve handled the software side of things, as well as the banking and finance part. This helped us realized how slow and outdated the current banking system really is and the potential to really help businesses more directly from their bank.
Our advisors have been in banking and fintech for over 25 years. They’re giveng us incredible insight into how to build a bank from scratch and that’s helping us massively.
The current options don’t provide an overview of your finances. But only how much you are spending. We realized that banking sucks and it’s expensive. And today, just having a transaction history and being able to send money isn't enough. Instead, we need data analytics and tools that empower us to do more with our businesses. Not just sending and receiving capabilities.
At first, we started thinking about insurance ideas for businesses as more of a round table idea. Then we realized through our experiences that banking is the problem, not necessarily insurance which is a plug in to our vision and something we do want to tackle down the road.
CL: What do you think is the biggest challenge you are helping to solve for these size businesses in terms of their banking needs?
LI: I’d say the number one thing is the modernity. A big piece of the problems is that many of the small and medium business out there are not very modern and they don’t realize from an online standpoint that being able to do everything from your phone and laptop in real time is something that is possible and something that can increase their effectiveness.
Recently, a study was done by a British agency that said that SMEs spend up to 11 hours a week doing their banking. Our goal is to empower businesses to increase the speed and efficiency at which these businesses can do their business banking.
That’s just an early problem that’s going to be solved and commoditized in the banking industry in the next 3-5 years. But it's a starting point as it helps us add smart components, like what we're doing to help businesses understand their cashflow, payroll, accounting and receiving loans in seconds so businesses don’t have to strip themselves naked and take time going to banks to negotiate to take out a loan or acquire a financial product. This is all included in our technology.
And we want to create cost efficiencies. For instance, wire transfers can cost 15 euros in fees or a percentage of your total transaction value, which if you think about it on a $200-$300K transfer, that can cost $10-$15K just to transfer the money. We want to decrease how much it cost SMEs to do their banking so they could concentrate more on optimizing their business through data-driven services that we plan to offer.
As mentioned, modernity is a big problem. But it’s something that will be commoditized in the next 2 years, so we’re making bets on real innovation that can create value for decades to come.
CL: How do you create a more cost efficient banking process through technology?
LI: So if you look at banks, 60% of operating cost come down to branches. We have no real estate. For instance if you take Deutsche Bank or an American bank with 100-200K customers they need about 1,000 people in-house.
If you take Number26 (German online-retail bank) they have 150 people in house. With the vast majority being engineers and only about 20-30 are business development and sales (the rest are customer service). Expenses are much cheaper since we don’t have as many fixed cost.
However, banks do have their own systems so we have to partner with them to use their technology and licenses. We are in talks with a few banks that can provide us with that as well as payment providers like Currency Cloud who can provide us with the necessary infrastructure. In turn, this allows us to stay lean and mainly have variable costs that are dependent on scaling the business instead of being burdened with high fixed costs.
If businesses can go directly through us it’s much more cost-efficient. We are automating the process so that there will be less need for manual work. Like signing up in minutes for a business account instead of having to go through a process that can take weeks.
Unfortunately, a lot of the recessions and crisis are just an excuse to fire people. It’s a normal process of the economy, half the jobs at these banks aren’t needed. Times like this are more of a waiting period than anything, because banks can’t do anything with them. There is a lot of waste at these big banks.
It’s not that tech won’t take away some jobs, but technology will ultimately help humans do their job better, which is what we want to do. We want to help businesses do a better job with their business and make smarter data-driven decisions.
CL: What are the advantages to not being founded as a bank?
LI: The advantages is keeping your business lean. You don’t want to throw all your eggs in one basket. Atom Bank in the UK is doing that. There is nothing wrong with it but from a lean perspective, in terms of keeping cost down, there is no need to recreate the wheel. These technologies already exist. It makes more sense to use it to your advantage.
In one to three years down the road, should we build it from ground up? Absolutely if the team, market and opportunities are right, but as we are beginning this business it doesn’t make sense to recreate the wheel. There are so many tools that are great and inexpensive to use to your advantage.
People are saying that the banks are the enemies. That’s not true, we should partner with them as we have a lot to learn from them from a regulatory standpoint. For the next five to seven years from my perspective they are more of a partner than a threat. Obviously we are a big threat in the long term, but there is nothing out there that is too threatening to the big banks over the next two to three years.
We have to work with them and get bank licenses. It’s more of a partnership with these banks than a competition in the beginning.
CL: You’ve discussed the idea of involving other Fintech startups to add more services to Penta, which services are you most interested in being able to provide customers?
LI: So what excites me personally is integrating various data-driven tools like treasury management, payroll, and accounting, which is in the near future at a third or half the price of what it cost today for SMEs. We will be able to do it directly in a quicker and cheaper manner, and not need a third party handling it while automizing the process. That’s really cool.
However, we plan to open an app store to developers so that they can get creative. The best products are the ones that you have no idea what the users and developers are going to do with it. Allowing the development community to create amazing products that they can build great businesses from while allowing our members (businesses) to use these tools to better their business. It's a circle of value creation!
My first startup we had no idea what we were doing. It was part of the reason why everything went to hell. It isn’t just about payroll and accounting.
It’s more about helping businesses to make data driven decisions. If a bakery wants to expand down the street somewhere in Berlin and we can provide them access to a database with a social media presence of competitors, commodity prices, real estate prices, and how many people are passing through each location that’s what will be really valuable. And that’s just the beginning.
It doesn’t matter if it’s a bakery or a tech startup or a school. It doesn’t matter what it is, some of these data points turn into great solutions for these businesses. Providing data driven decisions is what gets me crazy excited. I think that’s incredible.
To be clear, we are targeting cashless businesses, not businesses like bakeries. We won’t have support for deposits. We can offer our services to businesses as long as they are cashless.
CL: As you think about Penta bank, is this something you want to build to serve the EU5, all of Europe or is this something that will look only to serve German headquartered companies?
LI: We are primarily focused on Germany in the beginning. We also have a lot of traction in the UK and France. Everyone on my team speaks French and German, but in the beginning it’s about finding success in one place. Facebook started with Harvard, then once they got it right there, they said let’s go to the other Ivy Leagues, then let’s go to high school, and so on. If you can find success with five people that love your product you can have success with 5,000 or 500 million people.
Sun Tzu’s says in the Art of War: attack what’s empty not what’s full. That's why we’re breaking our initial target group within Germany, and then we're going to expand to all businesses in Germany before expanding to other markets.
CL: How do you think about raising funds from VC firms versus self-funding?
LI: We have been approached in the past couple of weeks and have been receiving emails from different people and organizations. With our first startup we first went after the money then we went after the users.
Now we are first going after the users. We are trying to validate the product and understand the market, then we will pursue the investment. My rule is: if someone offers you the money early in your startup say no. People think when starting a business that the first thing you need is the money. The first thing all startups need is market validation. Once you have that, then let the money come in.
Literally, we haven’t spent a penny on anything. What we are doing, these are easy things. It takes time obviously, but it’s not rocket science to figure out whether someone wants to use your idea or not. That's the most importsnt thing to do as I just mentioned.
As for the future we are evaluating the options. We are considering if we should go through an incubator program to remain lean or raise money when we are ready and just start building it directly from there.
We are assessing both, but something we should follow up on in next few weeks. But, the approach is get it first get it right and then focus on product development.
CL: Can you tell us a bit more about involving beta users as founders in the company?
LI: That’s a great question, we believe that you get what you pay for.
If we have people invested with us we'll get higher quality feedback. If these beta users are just casually there it’s not helpful. We saw half of them weren’t really responding, some were willing to learn more but were not giving feedback, and we eventually figured out those who were actually willing to really give meaningful feedback to guide the process.
That’s what I always emphasize, if you don’t get feedback you will die. We talk to these users about everything: from cost and pricing to various products that they would use. It’s a massive advantage. We are getting verified data and feedback from the customer, which gives us an advantage over anyone else, and gives us an advantage when building the company.
The idea is get people invested in the product to help you build it, even if it means giving up a small percentage of value to the customer.
CL: Can you tell us a bit more about the startup scene in Germany? What other Fintech startups excite you?
LI: The scene in Berlin is huge. There is a lot of co-working spaces like WeWork, Mind Space, and BetaHaus. I remember the first time I came to Berlin with one of my partners. Right away you can tell, everyone here is fighting to live their dream and build something incredible. It’s such a great atmosphere.
I lived in Paris for four years. It’s a beautiful city where you can hang out, and drink wine. But there's no innovation. Here, everyone is moving and discussing something innovative. It’s such an innovative city that is moving so fast. It’s an incredibly huge startup scene here especially in Fintech. I’ve seen it firsthand working in co-working spaces.
I’ve seen what some of these startups are doing. It’s a massive scene only second to London. And it’s just thriving. Part of the reason for it is that it’s one of the cheapest capitals in Europe and it’s cheap to live here and pay salaries. In the next five to ten years it will likely be more expensive, but there are so many resources here that opportunities will continue to scale.
The Minute Rundown with Luka Ivicev
CL: What is it about you that has allowed you to continue to build companies from the ground up from a young age?
LI: I’m just trying to have fun and have a good time. If I’m not doing something that I don’t love for a couple of days or weeks in a row I realize it and I stop doing it immediately. I’m going to die one day and I don’t want to be living someone else’s life.
It’s not about the money or anything. I agree with having a measuring stick for your success along the way, but have a really good time and love what you do.
CL: What is the biggest lesson you would provide anyone thinking about starting up a business?
LI: Just do it. Just start. You don’t have to think too big. Start with one thing even if that means creating a Twitter profile or something small.
Next to that, you need to read as much as you can. I devour books. I read about one to two a week. A book gives you a cheap lesson in someone else’s mind.
And anyone can do it. Starting a business isn’t as tough as people think. As one exmaple, Github was started as a side project.
So I’d suggest having a side project. Write down on a calendar that you will work on a side project or idea every Sunday for half an hour. I think anyone can be an entrepreneur. Just put your head to it.
Just do it.
CL: If you had to select one CEO you would like to model yourself after who would it be, and what can we learn from them?
LI: I still have no clue what CEO I’d like to be. There are so many great people and leaders and companies. But it’s not about one person. It’s about the team. I don’t think I’d like to be any CEO in particular. But I would like to be part of great teams which have changed how the world works. From the Apple team in the late 90s until today, to Google, to Nike as well as Johnson and Johnson, Goldman Sachs, Kimberly Clark, etc.
There are so many great companies out there. But being part of an incredible team is really something that I want try to build with my team right now. That’s my main focus. Team building. Not necessary being another chief executive.
In speaking with Luka, it really resonated with me that early failure can be a huge benefit to future success if taken the right way. Luka had an awesome ride at a young age in raising money and riding the wave of excitement that comes with a startup, but from that he has learned the pitfalls there are to achieving success.
Like any great entrepreneur he has picked himself up, owned his mistakes and is now helping to solve a problem that he understands well. Serving the banking needs of the small and medium sized businesses of the world. Since he's been running small businesses since his days selling shoes on the streets of New York he knows what it means to be under served by the banking system.
It will be exciting to see the developments coming out of Penta in the coming years and I look forward to watching Penta grow amongst the startup scene in Berlin moving forward.
If you would like to learn more about Penta, check out their website here.