Inside TransferWise: the $1 billion London startup aiming to become a global giant

TransferWise became London's highest profile startup in January after it was reportedly valued at $1 billion (£650 million) in a funding round led by Silicon Valley venture capital firm Andreessen Horowitz.

The $58 million (£37.8 million) investment made the peer-to-peer international money transfer startup one of London's few "unicorns." It also meant TransferWise became one of only a handful of tech companies in the capital to have attracted serious investment from Silicon Valley.

Business Insider caught up with the company's co-founders, Estonian expats Taavet Hinrikus and Kristo Käärmann, to hear about how things have changed since the mammoth funding round.

What we found is a business with ambitions to become the Google or Facebook of financial services - a global tech giant in the world of banking. To get there, TransferWise is using the kind of loss-leading, venture capital-fueled growth strategy perfected by Uber.

Detractors say this high-stakes bet on continued free and easy funding to reach "scale" is a risky gamble. The business is not profitable, appears to generate little revenue, and spends a lot on marketing.

But TransferWise, its investors, and others in the industry believe the bet will pay off - and make the 4-year-old startup one of Europe's few truly global tech success stories.

'It's like going from secondary school to university'

The short answer to how things have changed since TransferWise raised $58 million in January is that the business has "grown bigger," Käärmann tells me at the company's office near Old Street station in London's so-called "Silicon Roundabout".

"I don't think the funding has changed anything specifically, it's more what we've learned during the year and what we've learned operating in new markets, like the US, which launched in January," he says. "We're seeing awesome traction there."

TransferWise recently announced that it has completed more than $1 billion (£650 million) worth of transactions in the US in less than a year. The company currently operates through a series of partnerships but is applying for its own licenses across each state and hopes to be fully licensed by next year.

Käärmann continues: "We've opened up a host of new markets where we can send money too. We can service 400 routes where people can send money. We've just evolved in to a much more global thing."

Hinrikus adds: "I would go back and look at where TransferWise was a year ago and where we are now. A year ago we were a European company and we could say we were a UK company.

"Now we're truly a global business with even bigger ambitions. We're open in all of Europe, US, Australia, and a bunch of other things in the pipeline. Our headcount, we're now 400 people, we were 40 people 2 years ago."

TransferWise now has 5 offices across the UK, Ukraine, US, and the pair's native Estonia. Hinrikus says of the last year: "We've made a huge step forward - it's like going from primary school to secondary school or secondary school to university."

The origin story

TranferWise, founded in 2011, was born out of personal frustration.

Hinrikus, 34, was Skype's director of strategy until 2008, starting as its first-ever employee. He moved to London in 2006 as part of the role. Käärmann, 35, was a management consultant with Deloitte and PwC. The pair met in London through friends.

Hinrikus told London Loves Business in 2012 that he "regularly transferred money from my savings at home to my new account here. I found that I was losing five per cent of the money each time I moved it." Käärmann, meanwhile, was losing money when paying a mortgage back in Estonia.

Traditional money transfer services such as Western Union and the Money Shop typically charge between 5-8% for transfers, as well as foreign exchange fees and all sorts of other hidden fees. Banks and brokers also tend to set foreign exchange rates that will earn them a profit.

Hinrikus and Käärmann conceived of an online system where people sending money abroad could swap it directly with others sending money in the opposite direction - a peer-to-peer money transfer system. This would enable it to cut out steep transaction fees.

TransferWise charges a flat commission, which in the UK is just 0.5%. Its highest charge is 3% to send money to Ukraine. And TranferWise offers the mid-market currency rate - the level banks buy it at - with no markup. The company prides itself on transparency and fairness.

Over £3 billion ($4.5 billion) has been transferred on the platform since launch and it is now moving £500 million ($765.2 million) a month, which it claims saves its customers around £22 million ($33.6 million) in fees.

It's still a drop in the ocean - the consumer international payments market is worth an estimated £334 billion ($500 billion) a year globally. But it's certainly a start and it has forced many banks and money transfer companies to become more competitive.

Hinrikus and Käärmann say there's no typical TransferWise customer, but notes that it is particularly popular with freelancers who can find themselves working for foreign companies.

TransferWise also has a healthy line in cross-border payments for businesses - Hackney Brewery just around the corner from its offices uses TransferWise to buy kegs from specialist German manufacturers.

'We're seeing the birth of new global financial services companies'

While Hinrikus and Käärmann insist Andreessen Horowitz's investment hasn't changed the company, it's clear that the pair soaked up the Silicon Valley mindset.

Hinrikus says: "I really like how Ben [Horowitz], Marc [Andreessen], and the whole team think. They're very well plugged in to not only what's going on in California, but also globally. Their view of the world is really valuable to know about."

Marc Andreessen is arguably one of the most influential online commentators on technology, frequently tweeting his 186,000 followers about how the future might look. He was the co-creator of early web browser Mosaic and co-founded Netscape in the 1990s.

Andreessen Horowitz, the VC firm he co-founded in 2009, has backed some of the most high-profile global tech companies of recent years: Twitter, Facebook, Airbnb, Oculus, Medium, and BuzzFeed. (Full disclosure: Marc Andreessen was also an early investor in Business Insider.)

TranferWise has access another influential Silicon Valley thinker too: Peter Thiel, the PayPal co-founder and famous techno-libertarian. His fund, Valar Ventures, was an early investor in the company. (Andreessen Horowitz originally wanted to invest in TransferWise at the same time as Valar, but the deal fell through because TransferWise didn't want to relocate to California.)

All of this exposure clearly rubs off on the two founders. Hinrikus says: "I was in California last week and Marc was speaking about us being in a pretty special point in time because we're seeing the birth of 4 new car companies - Google, Apple, Tesla, Uber.

"That makes us here think, ok, we're probably also at a very special point in time where we're seeing the birth of whatever number of new global financial services companies."

TransferWise want to be one of these new world beaters. Käärmann says: "What you see happening in the tech world is that there are these outlier success stories such as Facebook, Google etc. They manage to get traction with a very good product."

"I think that what's going to happen in banking - the best products will get a lot of scale. In TransferWise's case we have to think about what does that product do. We have to be not just the world's best but by a far margin."

Ben Horowitz, the second founding partner of Andreessen Horowitz, sits on TransferWise's board and Käärmann says the company benefits from his insight into how to grow a business.

He says: "The reason we bought Ben in specifically is it's kind of a rare thing among VCs to find someone who's been the CEO of a couple of companies before and built out large teams. We felt that Ben could give operational insight."

Horowitz was one of Netscape's early product managers, ending up as VP of AOL's e-commerce division after it acquired the web browser in 1998. He then co-founded online hosting business Loudcloud and led it to an IPO in 2001, before transforming it into enterprise software business Opsware.

'We're maturing'

TransferWise is currently growing at 15-20% a month, although the rate is slightly slower in Britain, its biggest market. It now has between 3-4% of the UK cross-border payments market, up from 2% in June. (It's hard to give an exact figure as there's no concrete data for the size of the market).

As it grows, TransferWise is beginning to formalise its management structure. Teams have, perhaps surprisingly, been largely autonomous up until now. But the company has recently bought on some senior figures to oversee different parts of the business.

Recent hires include: VP of engineering Harsh Sinha, who was previously director of product at Paypal; head of operations Wade Stokes, formerly the CFO of Estonian Air; design director Duncan Lamb, a veteran of Aether Things, Nokia and Skype; and finance director Matt Briers, formerly head of sales finance at Google.

Käärmann says: "We're maturing the team. To give you an example, we have 70 engineers today and we didn't have a VP of engineering until Horace joined. Our finance team did very, very well before Matt joining. I think we're getting more structured."

As part of this evolution, Hinrikus and Käärmann recently swapped roles. Hinrikus, previously executive chairman, has taken on the role of CEO, while Käärmann has given up the CEO spot to become executive founder.

Hinrikus says: "Since the beginning they were kind of acting posts, both running our sides of the business. We've just made it a little clearer and simpler for everyone."

Both are keen to stress that they're still overseeing the same areas they were before. Käärmann says: "I do product, engineering, banking, compliance, operations, customer service, and Taavet does press…"

Hinrikus picks up: "…marketing, lots of work with customers, front end product, lots of work on the international side, finance, investors. That's been the same pretty much since the beginning."

The division of labour seems to mirror their personalities. Hinrikus is by far the more outgoing of the two, with a child-like enthusiasm and curiosity - when I first arrived he immediately began quizzing me on what it's like to work at BI compared to a traditional newspaper. It seems unsurprising that he's been the face of the company since the start, always keen to bash the banks in the press.

Käärmann, meanwhile, has a more thoughtful, measured air. He's a detail person who constantly stresses the importance of product.

'We're happy to be not profitable for a while to come'

Despite the big headline figure of £3 billion in transaction volumes, the underlying business does not appear to be a cash cow. Hinrikus gives me a flat "No", when I ask if the business is profitable.

The company's latest set of accounts filed with Companies House, which cover the year up to 31 March 2014, are also "Abbreviated Accounts." To qualify for this type of filing, which only requires basic balance sheet disclosure, a company must have two of the following: a turnover of £6.5 million ($10 million) or less; £3.26 million or less on its balance sheet ($5 million); and 50 employees or less. In short, a small company.

TransferWise doesn't comment on its revenues but if the 0.5% commission, its most common rate, were applied to the £3 billion sent over its network since launch, the company would have generated just £15 million ($23 million) of revenue in 4 years. If the 3% rate is applied, which only applies for money sent to Ukraine, it would have made £90 million ($137.7 million).

This is, though, is par for the course - the whole business model is based on razor-thin margins. And given TransferWise's rapid growth rate, these figures are likely well out of date.

European venture capital fund Index Venture was an early stage investor in TransferWise and Jan Hammer, a partner at Index, tells me: "On the revenue side, the company is on an extreme growth trajectory. You know there pricing, it's transparent how much they take.

"To the extent that there volumes are growing at a double digit month over month clip, then the revenue is just a derivative of that. It's very impressive."

As for profit, Hinrikus and Käärmann take the very Silicon Valley view that the most important thing right now is reaching "scale." The money will sort itself out later.

Hinrikus says: "We are building a global business. We're operating in a very big market. We're happy to invest in this for quite a while to come.

"It does take resources - we're a team of 400 people and we'll probably be a team of 800 next year. Hiring new people, opening up in new markets, all of that takes money. Given that there's quite a lot of value in being first to market, we are quite aggressively expanding. "

Hammer says: "In terms of profitability, it's a very well-known phenomenon in online and mobile industries that if you want to get true scale, you invest for growth. TransferWise would be profitable on their existing book of customers - because there's a high repeat rate - if they were not choosing to invest further in customer acquisition and growth."

Doesn't he see any difference between nimble, low-barrier mobile businesses and the regulatory milieu that TransferWise must face in the international money transfer market? "Customer acquisition is customer acquisition whether new world or old world," he says. "Old school banks are still loss making on their customer acquisition - current accounts, Google AdWords."

"The way they achieve profitability is by cross selling other products such as mortgages and that's a very well understood integrated banking model."

Hinrikus says: "Profitability is something that on a market by market basis we're obviously looking at very carefully. As a business as a whole, we're happy to be not profitable for a while to come."

'You can't blame TransferWise for playing the game and winning'

But the question of revenues and profitability raises the issue that everyone talks about when you mention TransferWise - the valuation.

Do investors really think it is worth $1 billion? And if they do, is that crazy?

The company itself, nor any investor, has ever confirmed or denied the $1 billion figure, which was quoted during the latest funding round. When I asked if it's true, Hinrikus said with a smile: "Who are we to say?"

When I relayed one of the theories I'd heard about how exactly the company might be valued, he said rather more bitterly: "People should mind their own business, see what they can do for the world."

Jeremy Millar, partner at boutique technology investment bank Magister Advisors, says TransferWise is just symptomatic of a wild funding market at the moment.

He told me: "Right now we're seeing good companies get great valuations and great companies get exceptional valuations. That said, I would say that TransferWise is a very good company."

Technology investors value companies based on what they could become rather than what they are now. If you look at the mammoth size of the market TransferWise addressing, the valuation seems less eye-watering.

Hammer says: "We think it's one of the leading and most iconic European companies. We're certainly very happy with how they've performed and delivered. It's a star company with a great product."

But, Millar adds: "Just because you can sell 10% of your company for $100 million, doesn't mean you can sell all of it for $1 billion. These minority, growth investments often include lots of 'features' that the investors will get their money back, almost irrespective of the outcome. It still takes a lot of revenue (and even profit) to achieve a $1 billion plus exit, even at today's multiples."

If TransferWise is valued at $1 billion based on what it could become, it follows that investors are assuming it will take a certain chunk of the cross-boarder payment industry - a bet.

But in researching this article, I also spoke to several people in the industry who expressed concern with TransferWise's growth model. Given that its model of rapid expansion appears to burn a lot of cash, what happens if the funding lines disappear?

Philippe Gelis, the CEO of business-to-business international money transfer service Kantox, told me: "The tech sector is overheating but financial markets in general are. A correction will come. It may be in the tech industry alone or in financial markets in general and the tech industry will be impacted.

"In that context, revenues and burn rate become more important and having an healthy growth strategy is key."

TransferWise is seen as crucial not just to the success of London's fintech scene, but London's emerging tech sector as a whole. Many startup founders believe TransferWise has the power to make or break the UK capital.

There are signs that funding could be about to disappear too. Fortune's Dan Primack recently reported a "unanimous" mood of fear among in Silicon Valley investors, and declarations that spiralling valuations are creating a new tech bubble are getting louder and louder. Sequioa Capital's Michael Mortiz recently called out VCs for creating a "subprime unicorn" boom.

Millar says: "If there funding dries up I think [TransferWise] are going to change strategy. And I think the funding will dry up. When it does great companies will still do well but many lesser companies will be in trouble. You saw that in the last bubble - PayPal did fine, Pets.com did not."

TransferWise is "just about as good a business as you'd find in London," Millar says, adding: "TransferWise fundamentally has a reason to exist. To be blunt: foreign exchange brokers and banks have been ripping people off."

Risk-averse worries over "what ifs" could be chalked up as one of the reasons why Europe has failed to produce anywhere near as many global tech success stories as the US - a fear of failure.

Hinrikus and Käärmann are notable in their absence of fear. As well as the Silicon Valley influence, Hinrikus recently told the BBC he believes the experience of living under communism has made Estonians more entrepreneurial. Hinrikus was 10 when Estonia gained independence.

Millar says: "You can't blame TransferWise for playing the game and winning. What they're doing is a product of the market. Very smart investors are willing to give them large amounts of money and they're taking it, as they should. There's a real network effect to their business, so there's a benefit to growing it as fast as they can."

'There's nice features, but everyone will copy them'

But some in the industry have their reservations about the narrative of TransferWise as the unstoppable star in ascendancy.

When I asked about TransferWise, Brett Meyers, CEO of rival money transfer service CurrencyCloud, told me: "Many of the so-called p2p [peer to peer] models we see today aren't truly innovative, but are really just traditional broker models with big marketing budgets, and it's unclear to me and others I've spoken to in the industry how sustainable that is."

Meyers said his criticism of new players hiding behind "big marketing budgets" didn't just apply to TransferWise, but included the company.

Earlier this year when I spoke to Nick Day, CEO of money transfer business SmallWorldFS, he expressed the problem another way: "Most of the technology these new operators have got don't have long term defensible advantages in my opinion. There's nice features, but everyone will copy them. One swipe send on a mobile app - that will be the standard in a month."

The worry is companies like TransferWise are just competing loudly on price rather than reinventing the wheel. And if that's the case, what's to stop someone coming along and charging 0.4% instead of 0.5%?

As TransferWise has grown, it has added more and more currency routes that are one-way only, meaning there can't be another customer doing the same trade in the opposite direction - the heart of its initial model.

TransferWise's website also makes little of this peer-to-peer aspect today, instead highlighting transparancy and low fees.

Käärmann says: "We always work with a local liquidity provider, someone who has the opposite flows or is able to aggregate the opposite flows. We work quite hard to find a partner who has these flows and is willing to exchange them at a reasonable margin so that it doesn't become a cost for our customers.

"There's a lot of little transfers going into the market and then there's a local liquidity provider making the move in the other direction. It's still p2p in a way but there's one or two players on the other side."

The ultimate ambition, Käärmann says, is to have every route it serves function 2 ways, meaning money can be sent as well as just received there. Working with other foreign exchange brokers who can provide fund flows is just a necessary half-way house.

'Scaling it outside of the UK is not that simple'

Then there's the question of marketing - just how reliant is the business on advertising itself? It's hard to say.

From the beginning, the company has been synonymous with PR stunts, doing everything from staging a mass protest in London of people in their underpants to employing France's "Spider Man" to climb the 185-metre tall GDF Suez tower in Paris' financial district.

TransferWise's founders certainly have a gift for PR and marketing, which has helped propel the company's growth.

On the day we met the company announced that former Citigroup CEO Vikram Pandit is an investor in the company, something that actually happened back in January.

Hinrikus said: "We thought when we were announcing it in January we had a big story on its own so there was no need to mention it. We can keep some fireworks for later.

"I think that's the beauty of being a private company, you get to choose when you disclose something. You can play it in a strategic way or in a tactical way."

This gift for marketing has perhaps given the impression that TransferWise's growth in the UK has been easy, something they would contest strongly.

SmallWorldFS's Day said in an interview in June: "The challenge they [TransferWise] have is that scaling it outside of the UK is not that simple, because there are all sorts of anti-money laundering regulations, all sorts of cultural challenges, all sorts of different ways that customers pay. It's not as scalable as one might think from the outside."

SmallWorldFS has faced this problem first hand. The 9-year-old company operates across 32 countries and has transferred over £10 billion ($15.3 billion) globally, three times TransferWise's total.

TransferWise's investors clearly expect its stellar growth to continue and whether these concerns about the business' sustainability prove short-lived remains to be seen. Even Day admitted TransferWise have "got a very good shot" of cracking the market.

'We're investing smartly'

TransferWise plans to open in Canada and Japan within 6 months and is targeting Asia in the first half of 2016. Each new country needs a country manager and every one has its own customer service team that speaks the local language. Then there's the cost of navigating each country's complex laws around money transfers.

So when will we see the next big funding round?

Hinrikus says: "We have a lot of it [the $58 million raised in January] in the bank and there's nothing really to comment on any next raises. It depends on whether we go into insane [growth] mode or not."

Käärmann says: "We can make it last for a long time, lets put it this way. We're investing smartly and making sure ever $1 we invest makes the world better for our customers and our product better. If that keeps happening, we'll have great returns from the investments we're making today."

And could new products be on the horizon? If TransferWise really does want to become a giant in financial services, it will likely have to go beyond simply money transfer. After all, Google and Facebook are now much more than just a search engine and a social network.

Hinrikus says: "If we think about how long Google spent searching - I think they came around in '98? And OK Gmail came in 2004 but it was literally built by one engineer as a 20% time project. It was probably 10 years before Google started diversifying."

Käärmann adds: "This is a question of what do people want, what are the problems that customers want to have solved. Taavet gave a good example of Google - the original problem was people needed to find things on the internet. 6 years passed and then they figured out how to organise peoples' emails. Now they know how to organise people's documents. They're very, very successful but it all started from doing search really, really well."

"I'd like to think that's our approach - do cross-boarder money really, really well and then think about our next problem in moving money that we can eradicate."

Hinrikus adds: "Money transfer is so vast that it will keep us busy for a long time to come."

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