The Receivables (Don’t) Exchange

There are only a handful of new and seemingly terrific business ideas that come along every so often. Normally the process for sorting out the pretenders from the genuine articles is pretty efficient. On rare occasions, however, one sneaks through – and raises very larges sums from investors – despite the idea being fundamentally flawed – albeit not obviously so to many.


 One such example in the financial services space is the unfolding Shakespearean tragedy at The Receivables Exchange. When the company raised $17 million from Bain Capital Ventures in early 2010 it caught my attention – and I did quite a bit of work on it at the time. I was puzzled, as it was clear to me (at least) that there were a few significant flaws, but ultimately one flaw that would obviously prove fatal. In short, investors that wish buy invoices on the exchange were / are getting a terrible deal – a really terrible deal.


 Why so terrible? The details are somewhat involved, but the short answer is that no one is standing behind the quality of the asset (i.e. the invoice) being sold on the exchange. There is no SEC (Securities and Exchange Commission) or CFTC (Commodity Futures Trading Commission) equivalent making sure the issuers are being honest (i.e. selling real invoices). The investors can’t possibly diligence them every single issuer themselves – and the Receivables Exchange forbids from trying in any event. The Receivables Exchange offers a lot of jaw boning and shiny brochures claiming their systems and processes are sound, but when you see their agreements (their true colors) they certainly won’t accept any responsibility. And although it may be a sad commentary on our economy, there is certainly no trusting of the issuers themselves – or at least those few bad apples that spoil the bushel for everyone.


 Exchange models only work when there can be very high confidence that the asset being sold for money is as expected. Stock exchanges piggy back on the vigorous regulatory and private market infrastructure that diligence issuing companies. Commodity Exchanges do the same and also set asset specifications to boot. There simply isn’t a quality assurance analogue for commercial invoices – which means far too many fraudsters will sneak through – which in turn means that investors will lose money in the end – and the losses will result from them having been fleeced.


 Recently, the Receivables Exchange announced that it was shuttering most of its small business origination staff – while claiming it was still committed to the business. It seems that $17 million in funding can add a few acts to the play.


 The moral of this story is not that new and big ideas can’t disrupt established industries – but that it’s rare – and hard.


 I can’t believe I’ve been baited into using this cliché, but I have: If it sounds too good to be true, it usually is. But not always – and the best venture capitalists specialize in finding those exceptions.


 Bain Capital Ventures missed on this one. The final act for the Receivables Exchange has already happened – and the curtain will finally fall when all of the $17 million is gone.