Late 2013 I founded a Bitcoin payments company, eCash BV, based in Amsterdam, The Netherlands. Admitting defeat, we dissolved the company early 2015. What went wrong, why and what did we learn? To counter survivorship bias, I wish to share and document lessons learned.
Bitcoin as a Payment System?
From years of experience working in the online payments industry, I knew that transaction fees are merchants’ number one frustration. Bitcoin could potentially disrupt the pay-to-pay paradigm, or at the very least eliminate variable fees.
While US merchants struggle with PayPal and Credit Card fees, ranging from 1–5% per transaction, the European landscape is worse. In Europe, each individual state also has its own popular national payment systems. The Netherlands has iDEAL, Germany has Giropay, and so forth. European merchants who wish to offer their customers popular payment methods usually need to sign up with a Payment Service Provider (PSP) like Adyen or Ogone. These companies charge additionalfixed and variable fees on top of ‘regular’ payment fees. Many also charge a monthly contract fee and a one-time setup fee.
Normal market forces are not at play in Europe, because PSPs are protected from competition by the requirement of a money transmitter license—issued at the discretion of central banks. Obviously, I believed Bitcoin could disrupt this industry. The idea of Bitcoin will change what money currently is, a centralized ledger controlled by the status quo, and what money can be, fuel for an open-source people’s economy.
Lesson learned: for a good start-up idea, look for industries protected by some sort of ‘status quo’ and see if you can disrupt it.
Overcoming Social Resistance
In talks over lunch, one of my enlightened co-working space inhabitants saw no reason for Bitcoin to succeed since “people already use PayPal”. Some people are naturally anti-innovation, because disruptive change makes them feel insecure, especially if the thing being disrupted is their sense of financial security.
It may be a very disconcerting experience when 9 out of 10 people you talk to put you down for your “crazy” ideas that’ll “never work” because they can’t see “why they’ll ever need it”. The way to deal with ‘unfriendlies’ is to simplify your vision in terms of their personal benefit. I now explain Bitcoin as an open ledger technology that increases transparency, reduces fees and has applications in many industries.
Lesson learned: most people fear change that disrupts their (financial) security. However, their fears may point you to new business models.
Dealing with a Domain Squatter
To .com or not to .com? That was the question. I decided that shortness mattered more than to have it end in .com. I noticed that major payments players now use longer domain names, like “braintreepayments.com” or “tidepayments.com”, but I found “ecashpayments.com” simply too long, too cumbersome. In 2013 the .io domain launched and I settled for ecash.io (now defunct).
Except, there was that ecash.com domain. Once the owner got word of the Bitcoin movement, he e-mailed me to perhaps make some deal with us. I understood the .com marketing value, but at the same time I hate domain squatters and their whole outlook on life. So I not willing to offer a 1% stake in our company for the domain name, but really no more than that. Of course, the .com owner, a real estate dealer from Hawaii, believed that if he owned the .com domain, he could own our start-up as well! He wanted to take charge of my company, replace me as CEO and keep ownership of his domain name. Right.
So I simply forgot about the .com name for a while and stuck with the .io. Not much later though, the .com domain went live and the owner had decided to copy our API help page, directing Google traffic away from our domain. He went even further. When early 2014 I presented our now live eCash.io product at the Amsterdam Hackers & Founders meetup, the .com squatter had remotely hired an Amsterdam development team to directly compete with us in our own city! The team showed up at the meetup and starts asking me questions after my talk. From then on I just accepted competition would be nasty and I just ignored them. (Their ecash.com project is still in beta.)
Lesson learned: you may choose a .com, or not, but steer away from domain squatters and never give up control of your company.
Business Model Generation
My co-founder and I spent quite some time thinking through Bitcoin business models. We imagined to focus on either Bitcoin cold storage, selling Bitcoins for EUR, processing merchants payments and many other ideas. Business model generation is an iterative process that helps you identify your key partners, activities, propositions, customers and customer segments, sales channels and so forth.
Luckily, guys at Strategyzer wrote a book about it. You can download the Business Model Canvas from the website below. They also offer a Value Proposition Canvas.
Lesson learned: business models are often unclear at the start.
Building the Back-End
Building the back-end is tedious, but never impossible. Technology was never the problem. I went with the open-source Drupal 7 framework and a Twitter Bootstrap theme.
To interact with Bitcoin, I used Bitcoin Armory’s armoryd, which can run a ‘watching-only’ wallet on the server. This is why we were never hacked, because we never stored any Bitcoin on the server — ever. Bitcomsec helped us secure the site. Here’s how I had configured security in .htaccess
Lesson learned: use watching-only wallets, never store Bitcoin on your own servers. Hire a security expert to review your website.
Getting a Bank Account and Keeping It
When we registered the company with the Chambers of Commerce we described it as an “electronic transaction risk management” company, an higher level description of what we were doing, but without mentioning it involved Bitcoin. We feared the word ‘Bitcoin’ might already raise too many red flags in the banking system.
We applied for a company bank account with ING Bank without any troubles and eventually did explain to them that we were working with Bitcoin technology. The only real trouble we had was when a German customer of our services filed a dispute with our bank, nearly three weeks after a disputed SEPA Euro transaction. ING immediately froze our accounts!
We were able to revolve the situation by refunding a small amount out of our own pocket, but it exposed a major problem to our business: SEPA Euro transactions are credit transfers that can be recalled up to weeks after a disputed transaction. It is not safe to sell Bitcoin in Europe using SEPA transfers.
Lesson learned: SEPA Euro Credit Transfers can be recalled up to 10 business days; after that, a bank can still freeze your account at their discretion.
Ring-fencing & the Dutch Central Bank
Merchants could op to have their Bitcoin paid out in Euro to them, for example on a weekly basis. This meant that in order to service our merchants we would need to keep some of their Euro funds. This can a problem if you mix customers’ funds with company funds, so we looked into ring-fencing the funds on a third party account, a separate foundation to hold customer funds (in Dutch: Stichting Derdengelden).
In order to do so, we also needed a ‘payment service provider’ license exemption. Operating within the Netherlands under a certain maximum monthly turnover, we should be eligible for a license exemption, allowing us to hold unlimited customer funds. We wrote letters to the Dutch Central Bank explaining our business model. Replies came in six weeks, but our requests were declined, because Bitcoin did not fit any of their existing directives.
Like the Wild West, we continued operations without any licenses, because it was impossible to acquire one. Official institutions could not understand what we were doing, but they also did not consider it illegal. For 12 months, we were simply running a lawless operation.
Lesson learned: central banks “wait it out” to see what technologies emerge before they even start thinking of policy directives. This can take years.
Dealing with European Value Added Tax
Dealing with VAT is a highly complex issue. Different European countries have come up with contradictory interpretations whether Bitcoin is money, an asset or a medium. The person most knowledgeable of Bitcoin and VAT is Dr. Aleksandra Bal, who did a PhD on the topic. It will take 2–3 years from now (e.g. 2017–2018) before we will have final consensus and clarity on taxing Bitcoin in the European Union.
Lesson learned: nobody knows how to tax Bitcoin. As a Bitcoin company, you are at some risk of being bankrupted by future tax policy.
Talking to Merchants
From our co-working space in Amsterdam, we had direct access to a dozen online merchants operating from there. Talking to them, we found most were open to accept Bitcoin as a payment option. From their point of view, all that mattered was turnover. If Bitcoin could give them some untapped market, they’d accept it.
We ran a pilot with several companies, but here’s what happened: nobody, not a single user, ever made a purchase using Bitcoin. This made it very clear to us that our business model was flawed — nobody was using Bitcoin. Merchants were willing to accept Bitcoin, but consumers did not use it. We had built a solution to a problem that did not exist.
Lesson learned: test your business model on day 1 to avoid a lot of time wasted.
Why to Avoid Start-Up Accelerators
Start-up accelerators are the 99 Designs for start-ups. The website 99designs.com hosts design contests for mostly low-budget designers who compete for projects by pitching their best work. I once ran a logo contest there and received 600 entries. They were all crap. This is exactly what start-up accelerators do for start-ups: wasting a lot of talented people’s time on three or more rounds of pitches.
For example, the Amsterdam based Start-Up Bootcamp program offers 7,500 EUR + three months of office space in exchange for 15% equity. Ridiculous, right? The way to asses a start-up accelerator is by looking at their alumni. If few of those companies got any mainstream traction, the accelerator is a waste of your time. Besides, if you already have traction, then you don’t need an accelerator at all.
Lesson learned: start-up accelerators are commercial businesses that try to make money off of your start-up without offering sensible benefits.
The Matter of “Do We Need an Investor?”
When it comes to investments, there’s two types of start-up companies. There are innovative companies that generate organic traction and start-ups backed by venture capital. The VC start-ups generally care only for market share, i.e. on-boarding users, and they are willing and capable to burn $100 on sales per user account, even without offering real solutions. These start-ups play land-grab. Expect these type of companies to sell your user data to third parties.
Truly innovative companies, the ones that solve real problems, usually don’t need venture capital until after they have generated traction. In this case, capital facilitates growth. We were trying to be this kind of company.
Lesson learned: most start-up companies do not need venture capital until after they get user traction.
Why We Didn’t Get Traction
We were juggling three different business models: selling Bitcoin for Euro; on-boarding merchants for our payment system; hosting cold-storage Bitcoin wallets for B2B and B2c purposes. We should really have picked one of them and not try to be the one-stop solution for everything. We could have a built a pretty decent cold-storage company and served many Bitcoin companies.
Lesson learned: focus on a single business model at a time.
What Went Wrong
I botched the founding team. I was so eager to start a company and so thrilled to have found a sociable co-founder that I neglected to put the team to the test. In hindsight, I believe my co-founder would have been an excellent, valuable, highly knowledgeable adviser, but definitely not a co-founder.
Six months in, I found myself interviewing candidates to come on board as a third co-founder, but the truth is, I should have pulled the plug instead. As I know now, the best start-up teams have 3 founders, not 2. One of the founders should be a full-time “CEO”. The other team members should be technical, but even more importantly: immensely productive and willing to sacrifice big chunks of their time building stuff that may never work.
Lesson learned: if you don’t have a team, you don’t have a start-up. It may take you a year to put together the right team, but it’s the only way.
What Bitcoin Can and Cannot Do
Oleg Andreev keeps telling me Bitcoin is not a payment system, but open ledger technology that competes with central banks. He’s right, but without an open people’s payment system Bitcoin will miss the date with revolution. If people cannot pay and get paid outside of the corporate-government complex, we remain sheeple.
Companies like InnoPay that consult banks and corporations focus mainly on making it easier to take your money, using always-on payment technology. They call it their innovative Yellow Tag system. They shoot one through your ear.
Lesson learned: Bitcoin is just the first step in a much bigger counter movement to take back control of our productive lives.
Despite crashing my start-up, I acquired several important skills and insights that I would never have otherwise:
- In-depth knowledge of Bitcoin and the principles of decentralized networks.
- An understanding of how the global financial system works, how all money is debt created from nothing, why inflation serves those who control the supply, how most central banks are privately owned, and much about the origins and history of money.
- People — the thing good and bad people have in common is that neither are aware of their motives. Many bad people honestly think they are good and are genuinely offended when you point them out the opposite.