
Ask HN: How to start a startup that requires a high amount of initial capital? - break_the_bank
I want to start a payments bank in India but it requires a 13M+ USD initial capital just to get the licensing fee.<p>Wondering if people have any examples of how one might cross this barrier to entry.
======
netcan
There are two ways to answer this question, two new questions basically.

One is "raise over $13m." How? This is not impossible. There is more investor
money looking for home today than ever, I reckon. However, this is not a level
playing field. Who you are and who you know and how well will make a big
difference. This is probably the wrong place for advice about this strategy.

The second possibility is "what is an easier/cheaper idea, that can later
become a payment bank?" This is the HN philosophy, from our founder PG.^" Say
you had $13,000. What could you build that would get you customers, impress
investors or otherwise put you on a less direct _path_ to what you want? Then,
you are pitching " _turn this thing into a bank_ " instead of " _start a bank_
" which is a little easier.

This is _hacker_ news so conventional advice here is take on hard engineering
problems, and easy business problems. If this was a forum for business people,
it'd be the reverse. There, people would rather take the challenge of raising
a large sum but avoid hard engineering challenges. You need to figure out what
_you_ are strongest at. Are you the kind of person that can cold call your way
I to a 7 or 8 figure investment or the kind of person that can build a product
in 2 months that will get you investors or customers that will get you to the
next step.

Finally, what you are asking is _" how do I succeed at this very hard thing."_
There are no formulas that are easy and will work for most people.

Read this, pay attention to the bridgehead:
[http://www.paulgraham.com/ambitious.html](http://www.paulgraham.com/ambitious.html)

~~~
donmatito
very good answer ! (ok_hand emoji, 100 emoji)

------
bbulkow
Yeah, I read all these comments and they miss the obvious answer.

Pitch large vcs and ask for a lot of money.

It goes against the YC grain, but it is the reason there are silicon valley
vcs. It used to be that starting a company meant building chips and buildings
and assembly lines, and some vcs are structured to write 30m series a, 50m
total to build product, and then 50 to scale. A friend of mine is doing this
in the database world right now.

If there is a 15m regulatory barrier, then your pitch is why your team is the
right one to bet on, and you raise 30m. The money is out there, you can take
it

~~~
fsloth
Are there any concrete examples of these larger scale VC:s and the companies
they've funded? The small-fry tech startup is the most familiar story.

~~~
blihp
Pretty much every large tech company you've ever heard of was VC backed
originally. Facebook is a recent example with a couple of the VCs putting in
500 million in a later round (see [http://fortune.com/2011/01/11/timeline-
where-facebook-got-it...](http://fortune.com/2011/01/11/timeline-where-
facebook-got-its-funding/)) Also see more recent examples with fairly capital
intensive companies like Uber and Lyft. The odds of getting tens of millions
of dollars in the very first round is unlikely. But that's also an
unreasonable ask by unproven founders: you'd need to show that you have some
clue what you're doing with smaller amounts in the earlier rounds... Apple got
<$1m from their first investor.

------
sonnyblarney
Partner with a bank.

Or get a hedge fund to buy a bank shell, have it as an asset, and use that
bank. If your startup fails, they still have the asset.

Or you may just need to have access to 13M, it's probably not the fee. So -
you can just borrow 13M and use the 13M as collatoral. If you structure the
deal right, it's 100% risk free. Moreover, you may be able to invest the 13M
in which case you can still return an interest rate.

So you could find a fund with 13M, draw up the paperwork such that they put
that in your company, but it can't be spent, and the 13M is effectively it's
own collateral. Then pay the investors interest, plus some small coupon
payment, or give them some equity for their risk free investment.

So long as the paid up capital isn't used for anything, it's a 'non
transaction', i.e. it has no financial meaning.

That said, the 13M may be designated as collateral or some kind of requirement
for the payments system.

~~~
sh87
> So - you can just borrow 13M and use the 13M as collatoral

wouldn't OP need equivalent collateral to borrow 13M even?

~~~
darawk
No, because he isn't spending the money. He borrows 13M, and then the 13M just
sits in an account, doing nothing, or earning say, the risk-free rate. There's
no risk for the lender, because the money isn't going anywhere.

~~~
Maro
Except if the money gets used for reimbursements/damages that the new startup
bank has to pay if it's mismanaged --- that is one of the reasons the money
needs to be there, I assume.

------
madradavid
I have thought about this myself.

I am from Africa and needless to say, we don't have an abundance of VC funds
for startups.

I have used products live Revolut and Monzo before and loved them, there is an
opportunity being missed in places like Africa and other developing economies
that have a huge growing youthful middle class that hates the way the
established banks operate and is comfortable with technology.

I spent most of my free time last year building a backend that can handle some
core banking functions, I already did research on the licensing and knew I
would never be able to raise that money just with an idea and business plan so
to keep myself going and also have something to show potential VC's I decided
to start small, things like airtime top-up, bill payments etc

Break it down , look at the bits that you can build out and get some initial
customers while you look to raise money, you don't have to go all out and
build a whole bank, start small, licensing for things like e-wallets and money
transfer is not unreasonably expensive, you can then go on to build on top of
that

Good luck.

~~~
break_the_bank
We are in the same boat. Are you from Africa but working in London/Europe? I
am from India but I am working in London.

I have identified millennials to be my main market as well. In India whenever
I visited the bank with my father, the person at the bank would try to sell a
new card. They always want to "sell" you something, we just have to suck less
as a digital bank and the millenials will happily help us get rid of the
traditional banks. I've discussed Monzo with a lot of friends, and they have
loved the idea.

Curious, what part of Africa are you from? What is the cost of the banking
license like there?

------
Blackstone4
Check out Monzo in the UK. They started as a top up payment card with great
technology. This meant they didn't need a banking license. They are now moving
into the current/checking account space with a license.

So do you need a license from the start? Impossible to tell from your comment.

~~~
break_the_bank
The idea is heavily borrowed from Monzo. A Payment Bank in India seemed like
the closest thing to what Monzo did initially. A full banking license requires
5 times more capital than a payment bank.

That is a good question. I'll see if I can still issue cards that links to one
real bank account and if we can bypass being a payment bank.

~~~
csomar
You can re-issue international debit cards and sell them. The vendor will give
you API and you build the interface. If you can convert local indian currency
to USD, then it can work for you. From there, you get traction and then ask
investors for cash.

~~~
break_the_bank
I'll look at this. I didn't think of this, I am a little skeptic about Reserve
Bank of India allowing this. Thanks for the lead.

------
2pointsomone
I know a bunch of people here have said "partner with a bank" or get a
license. That seems like a good option, but obviously you wonder how can a
small startup or even a founder or two do that?

I have learned a couple things about being the little guy trying to partner
with bigger folks:

\- Josh Elman (from Greylock) suggested that when (I think) when LinkedIn (or
Twitter, I forget) was small, they didn't go out to look for partnerships with
big companies, because they knew those wouldn't pan out because no one in a
big company would care. They mostly sought relationships with smaller
companies with some audience, but who were more receptive to talk to team up
to crush the big guys and offer better value. Smaller competitors in crowded
markets like banking are always trying to find ways to become more dominant,
so they are more open than the folks at the top of the market.

\- Just make your offering really really compelling - the "offer you cannot
refuse" kind. This is not easy. This goes against traditional business sense,
because you might have to offer value at less than cost. But if this is what
the existence or growth of your business hinges on, you have to bend over
backwards. Goes to the good old Dale Carnegie stuff; focus on their value in
the conversation over yours. They need to feel like working with you is a
steal of a deal. There are plenty of ways and business models to do this, but
offering human capital, co-branding, offering equity or some rev share,
customer insights, etc. are all fair game.

~~~
break_the_bank
Josh Elmans advice is really great advice. I'll try to contact the smaller
banks that don't have a lot of debit card sales.

Coming up with an "offer you cannot refuse" feels a little tough given its
just the too of us wanting to do this after working for one year after
University.

------
robjan
Start smaller. Most of the disrupter banks started as something else with the
view to eventually obtaining a banking license. That way you can actually
prove that you have a product worth investing in. Usually banking startups
start with a Stored Value Facility license (or the local equivalent) and work
up from there.

~~~
simonebrunozzi
Seconded. Start smaller. The simple concept to remember is: if you need $13M
to start this business, it's a business you can't start right now; it's
instead an opportunity for larger businesses.

We had a similar problem: we started with "let's build the city of the
future", which would have probably required a large capital (of course, we
wouldn't have done it alone, but still...), and ended up focusing on creating
innovation at the financial layer of real estate, which we started with a few
100,000s of $$.

Doing good so far.

~~~
break_the_bank
"The simple concept to remember is: if you need $13M to start this business,
it's a business you can't start right now; it's instead an opportunity for
larger businesses"

True. I should look at the smallest thing that I can do that can provide value
and that can somehow pivot into a bank.

Good luck with your startup :)

------
beat
This isn't the sort of thing to do as a cold startup. The way to do this is
what is sometimes called "intrapreneur", as a "startup" within an existing
large corporation that can bankroll such a large project.

Are you an engineer, or a banker? If you don't have a track record in the
banking industry, you're hosed. No one will give you that kind of money. If
you've actually been there for the founding of a bank before, then maybe.
Moreover, if you're an engineer without banking experience, you probably have
_no idea_ what you're getting yourself into.

------
verelo
Can you finance the license fee? Ie borrow to get it, and if all doesn’t work
out, the corporation goes bankrupt? Or can you lobby the issuing agency to
give you a payment plan?

My only concern with such a large investment is that at the beginning you
don’t know what you don’t know. You think $13m is a big problem, wait till you
have that license and uncover all the reasons why people with $13m in their
pocket have avoided the problem you’re trying to solve (just a maybe, but I’m
sure there are other problems you’ll encounter you should look to resolve
before you try dump so much money on a business).

------
HashThis
The fix has two steps:

1) Bring in co-founders whom raised $100m+ from VCs in companies they were in
before. Also, one of those companies needed to have had an exit where it was
very profitable for those VCs. Getting these co-founders is hard, but it is
your fix. One of them needs to have been the CEO of the former successful
exit.

2) Use $500k in capital to build the pre-launch version. Be hyper-capital
efficient building the tech, for demos to investors. Bring the product working
to investors along with those co-founders as part of the team.

Make sure those co-founders confirm that they think they can raise the capital
in this business model.

------
manishsharan
There is a reason requirements to start a bank are so high. Banking is a
really hard business and you margins are not that great. There is so much
regulation that your licensing fee will look like small potatoes.

Instead you should ask if there is cheaper way to get to where you want to be.
You could start by researching how the PayTM guys did it.

~~~
break_the_bank
The PayTM guys really took off with demonetization and they really rode the
wallet wave.

------
lmilcin
It is critical to minimize the risk. Remember, you are taking somebody's
money. Their main concern will be the payout and this is the likelihood of
future income minus risk of losses. You probably spent some time thinking of
future income (everybody does), now do your homework and work hard how to
mitigate risks. With lower risks you can ask for more money for less stake in
your budding enterprise.

With large amounts of money involved there will be more focus on risks
involved and so it gets critical.

------
garmaine
Lots of crazy answers here.

As an industry insider, what you do is buy a bond from a company that
specializes in these sorts of licensing bonds. It should only cost you a small
fraction of the capitalization requirement each year to maintain.

~~~
break_the_bank
Another unique suggestion that I couldn't possibly think of. I'm really
overwhelmed by the response I got to this thread. I'll look into this.

~~~
garmaine
The capitalization requirement doesn’t exist to make it an exclusive club. It
makes it so the potential regulatory fines have teeth because you can’t just
fold on the first one received.

The bank offers to cover your fines (with your entire business as collateral),
for a fee. You can think of hat fee as the interest rate on a loan, which it
basically is because the money is put into an escrow account with the
government.

In my own market it was $10M usd required to become a payment services
provider (e.g. Venmo). But you could get someone to offer the bond for a few
hundred thousand dollars a year, the price depending on how comfortable they
were with you and your business. That’s within the realm of doable for a
startup.

------
austenallred
Find a smaller problem to solve that would require less capital and prove that
you’re worthy of $13M.

You can likely do what you want by partnering.

------
sandGorgon
we are a lending startup in India - also a YC alumni (RedCarpetUp YC S15).

We are (now) a regulated entity with specific licenses that took us a crazy
amount of time from the Reserve Bank of India.

Two things - first, the business models of payment banks is kind of unproven.
Those of us who are in the fintech space in India kind of agree that the
regulators kind of screwed up here. I'm hoping you have answers to that. TL;DR
- a payment bank cannot lend.

Second, the regulatory structures in India are setup to look at license grants
not as a consequence of capital. Even if you had a 100 million USD (and I know
of specific examples here), there is very less likelihood of you getting a
payment bank license unless you can prove out a gold standard team and board
experience. Just to remind you, bank CEOs in India are appointed by the
Reserve Bank. They are NOT appointed by founders or investors. One of the CEOs
of a very large bank in India just got fired by the regulators for dancing
around stockholding regulations -
[https://economictimes.indiatimes.com/industry/banking/financ...](https://economictimes.indiatimes.com/industry/banking/finance/banking/oh-
yes-you-lost-your-ceo-for-greater-good-why-rbi-said-no-to-a-full-term-for-
rana-kapoor/articleshow/65881229.cms)

I feel there is a very low chance of you getting regulatory clearance for
this. Indeed, we give out a t-shirt that says "Because, its regulatory" to
fresh employees at RedCarpet ! We are tech founders, but we have spent
countless hours sitting outside RBI doors trying to make case for several
regulatory changes. We were one of the first to get license grants for non-
standard lending risk policies to the unbanked in India (that's a billion
people!).

Write to me [http://scr.im/redcarpetup](http://scr.im/redcarpetup) if you want
to come work with us for a while. Maybe you will stay a while and listen to
stories of regulatory pacman in India.

~~~
sjg007
I would do a prepaid visa or something.

~~~
sandGorgon
prepaid instruments in India are regulated. Beyond a certain limit you need to
do a full KYC. Issuing a prepaid/wallet needs a license with fairly high
capital and regulatory requirements (in the same order of magnitude as the
payments bank).

You can issue a card in partnership with a bank or another license holder, but
as i said before - in that case you better have a business model for that,
because you aint gonna make money from MDR or anything.

------
kkwteh
You can raise a lot of money at the beginning if the founders have the right
connections and track record. Opendoor was able to raise a $10M Series A
without a product. [0]

[0]
[https://techcrunch.com/2014/07/07/opendoor/](https://techcrunch.com/2014/07/07/opendoor/)

------
wkoszek
The high-entry barrier business is where VC actually makes sense. Building a
webapp and getting $3M VC money is a little bit of a waste. Building a rocket
or a jet requires $100M and there's no other way around it. You're maybe
somewhere in between. Or start small. Maybe in a different country/province,
if you can.

------
mpwala
Like someone said, partner with a bank. Maybe check with RBL bank, they even
have API for virtual accounts ([https://developer.rblbank.com/content/virtual-
account-api](https://developer.rblbank.com/content/virtual-account-api)).

------
hendry
Do something in the banking ecosystem to get your foot in the door.

What I have noticed in Malaysia are startups effectively handling the {credit
card, loan, insurance} applications & such other Web forms that banks are far
too incompetent to do effectively.

Once you do this well, you will be on the right path.

------
ksec
I have similar question too. The initial Capital investment for Storage and
Trucks along with Ordering and Distribution Software for a Food Distribution
business requires up to $2M+ USD Capital. ( It is consider a large sum in Hong
Kong, which has a slightly smaller TAM than say US or China ) While I can
guarantee we reach $1M USD monthly revenue within the first 12 months, I have
yet to find anyone interested in funding.

If anyone could give any tips or help send me a email.

my username @live.hk

------
toast0
Have you considered starting a payments bank in another country where you can
prove your idea with less capital? Then you can use the capital from that to
get started in India or if there's not enough, you can use the experience to
inspire investments to get the capital.

Also, I hope you're ready for an immense amount of red tape.

~~~
break_the_bank
I have had the idea of looking at other countries before but I haven't put in
time to figure out what countries I should be looking at. Will look into this.

------
weliketocode
From what I've seen, your expertise and network in the field are what will
allow you to raise funds for a capital intensive business.

If you don't already know people and/or have deep expertise in the field, why
would someone give you the money?

------
jason_slack
My thought here has already been said. Start smaller if you can. I'm starting
really small with one specific banking issue and the entry fees are much
smaller. I'm using some hedge fund ideas to get the capital.

------
cvaidya1986
Start a software startup and sell it and use the funds to start this one.
Simple!

------
mathattack
Consumer or Enterprise? If it’s the latter, get a list of customers who will
put in (can be legally non-binding) writing, “If you build X it is worth Y to
me.” Get enough of those and take it to a VC.

------
smt88
A team with multiple big exits could possibly raise the money from VCs or
self-fund.

More likely, something like this would start inside another company or it
would partner with a license holder at first.

------
FahadUddin92
I have looked into this area. The best way to do it is to partner with an
existing bank. You wouldn't need payment processor license which would likely
be very costly.

~~~
FahadUddin92
Must say its a difficult task to convince banks to partner with you.

~~~
FahadUddin92
In Pakistan, Finja did the same. [http://www.finca.pk/news/finca-launches-
pakistans-first-ever...](http://www.finca.pk/news/finca-launches-pakistans-
first-ever-digital-wallet/)

------
msaharia
Have you considered opening a cooperative Bank? You could out-innovate a lot
of slow moving small banks. And I think the initial capital requirements are
lower.

------
timwaagh
well one way to 'hack' your way to bankdom is through founding a company
offering sketchy financial advice then expanding to sketchier insurances and
payday lending, then to banking. takes about 25 years and you get to be public
enemy number one doing this. they 'sadly' went under during the crisis though.

because its so difficult most banks are very old and most new ones are
established by existing players.

------
chvid
You work with an existing bank. Many examples of fintech startups that started
like only getting a banking license much later.

------
izolate
Hey! I'm interested in this goal too. Fancy a talk? Email/twitter is in bio.

------
echan00
You convince an investor to fund you with research (aka expertise)

------
hayksaakian
Can you buy an existing bank that is already licensed?

~~~
galuano1
Still gonna cost more than that $13MM, since that's the asset people are
after.

------
shapiro92
you can rent a licence, there are many banks doing that in EU. I think you
need to do a better research..

~~~
atlasunshrugged
Can you expand on this? Never heard of this but I'm not super involved in
fintech/banking. Something like Solarisbank?

~~~
no1youknowz
Not OP, but here's generally how you would do it [0].

However, in the EU there are a few other banks to try [1], [2].

In the US, you could try [3].

There's also companies which partner with multiple banking services to provide
a cohesive offering [4], [5].

For anyone wanting to do this, here's two issues that I have found.

1) If you don't have banking licenses, the conversation will stop abruptly.
Even if they advertise that they may work with you from their website. It's a
big hurdle.

To overcome that, I know of 1 company that may help [6]. If anyone knows of
any more, please reply.

2) It's rare to talk to VP/Management level operatives, which is where you
want to be. Unless you manage to dig out the CEO/COO email and contact them
directly. Going from the bottom (contact us form) upwards just means you'll
end up speaking to a Z level employee who doesn't know the banking business at
all.

Disclaimer: I've contacted over 100 fintech companies. The whole state of
affairs is pretty bad. It's improving, but won't be there until 2020 at least.

[0]: [https://blog.faisalkhan.com/money-transmitter-license-
applic...](https://blog.faisalkhan.com/money-transmitter-license-
application-d9dd32286871)

[1]: [https://www.fidor.com](https://www.fidor.com)

[2]: [https://www.mambu.com](https://www.mambu.com)

[3]: [https://www.crossriverbank.com](https://www.crossriverbank.com)

[4]: [https://www.railsbank.com](https://www.railsbank.com)

[5]: [https://www.unnax.com](https://www.unnax.com)

[6]: [https://www.coinx.com](https://www.coinx.com)

~~~
atlasunshrugged
Wow, you know I am always blown away by how helpful people are and how awesome
responses can be. I really appreciate this and all the resources, I'm reaching
out to Fidor today to learn more

------
m00dy
don't

------
dogreborn
adplexity.com - 5 million USD revenue.

Better launch a new product first, make revenue like the product i posted and
use that money to fund your big business.

------
s73v3r_
I know it's not popular around here, but have you considered getting
traditional business loans from a bank?

------
roschdal
the barrier is there to stop instances like this.

~~~
tomhoward
That's uncharitable.

Here in Australia there is a team building a new bank and having good success
doing so. In order to overcome the institutional barriers like the one the OP
raised, the team consists both of highly experienced corporate "grey hairs"
and talented young hackers/designers.

This way, they have the industry experience and network to ensure the company
is run competently and prudently, whilst also being able to leverage the
energy and creativity of younger hacker-types who can bring new ideas to the
market.

I'd suggest to the OP that this kind of approach may work for them.

------
arthurcolle
You just do it

------
Annatar
You could try crowdfunding, but I can't for the life of me remember the name
of the website. "Kick"-something.

------
fs2
Crowdfunding might be an option if everything else fails. However, it's highly
dependent on your network and social visibility.

------
gt2
Disruption. Begging for forgiveness instead of asking for permission. You can
see it in many major players that got their start by going around regulations.

Once you are onto something, the regulations can be satisfied by backers who
see a business plan, cashflow from the side of the business, or perhaps new
regulations will form around the new company's business model.

~~~
sonnyblarney
No.

There is no way around this kind of regulation, and they definitely are not
going to 'change their minds' once they see someone has broken it. They're
going to put someone in jail.

