All Wedges Are Not Created Equal

Welcome to issue #36 of next big thing.

You likely saw the big M&A news in technology from the past week: Square is acquiring Afterpay for $29 billion. It is the largest ever acquisition in the financial technology (fintech) category, and the largest ever Australian M&A transaction.

Afterpay is a leading player in the BNPL (Buy Now, Pay Later) market. The platform enables merchants to grow their businesses, by offering a friendly option for consumers to purchase products. And it enables consumers to buy products in increments without being charged interest, fees, or incurring debt (merchants are the ones that Afterpay primarily monetizes).

The company has done a fabulous job executing since launching just six years ago, growing to over 16M consumers, nearly 100K merchants, $16B in GMV and $700M in revenue in the past year, growing ~100% year-over-year. You can learn more by checking out the investor presentation put together by Square and Afterpay, which, as Tanay Jaipuria points out, is a “masterclass in communicating the strategic rationale for a big M&A.”

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What struck me as I flipped through the presentation and dove into Afterpay, are two core thoughts: first, how simple their story has been. According to investor Dana Stalder at Matrix, Afterpay began with a key insight: “Millennials don’t like credit.” The product enables those without credit cards to have a credit card-like experience, by being able to pay later, but without the fees, interest, and debt you can rack up on a credit card. Afterpay launched with the BNPL product for consumers and merchants in 2015 in Australia, got to 1 million consumers there and 7200 merchants before launching in New Zealand in 2017, the US in 2018, and the UK in 2019. They’ve focused on one core two-sided product, and nailed it, across several geographies, to the tune of a $29 billion acquisition in six years after launch.

This brings me to the second thought and the title of this post: all wedges are not created equal. The past decade in fintech has seen most new companies tout a product and business model wedge to attract customers, and paint the picture of a vision to expand from that wedge to more products. Robinhood’s wedge was free stock trading. Chime’s wedge was a mobile-first bank account. Square’s wedge was a credit card reader that could turn an iPhone into a mobile cash register.

Afterpay’s wedge of BNPL turned out to be a fantastic wedge. The company focused on BNPL, without cross-selling other products to its merchant and consumer bases as so many other fintech companies have done from their initial starting point. Indeed, the promise of the Square + Afterpay merger is exactly that — synergies on both the merchant and consumer sides of both businesses. Check out Ben Thompson’s piece from this morning in Stratechery for more on why 1+1+1=3 in this acquisition, and the network effects for Square’s business that can make this an even more transformative acquisition.

Why is BNPL a great wedge? It’s a winning value proposition for both merchants and consumers. Merchants get better conversion to purchase, higher average order values, and more consumers that discover them through Afterpay. Consumers get the ability to buy products more affordably and flexibly, with transparency, rewards, and more features. What this leads to is frequent use of the Afterpay product, and exceptional customer economics. Just take a look at the cohort data from the investor presentation; consumers increase their frequency of purchasing with Afterpay every year over time, going from using it a few times to dozens of times per year.

Indeed, BNPL is such a great wedge that other companies which started with a different product added BNPL, particularly after seeing Afterpay’s quick success. Affirm and Klarna are now both key players in the BNPL market, and command $18 billion public and $46 billion private market caps, respectively. PayPal has added BNPL options to its checkout flow, and Apple is also rumored to be working on a BNPL product. BNPL has turned into a many-winner market after being pioneered by Afterpay.

Every successful company has to find product-market fit, and that product-market fit is usually through a wedge, a gateway to more and more opportunity. But if you can pick an amazing wedge, your chances of building the next big thing are even higher. And if that wedge is like BNPL is to Afterpay, you may not even have to expand beyond it to reach the promised land.

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