When Tungsten Networks did their IPO on the London market in October 2013, I was involved with a project in working capital finance. Tungsten was the big story that got everybody’s attention.

The story was plausible and the entrepreneur telling the story was charismatic. So the IPO was a success. A few wise folks in this business whose opinion I respected cautioned me that it was not as good as it looked on the surface.

At listing, the share price was 225p. At time of writing it is below 60p, a decline of over 70%. Ouch. The market cap is about $120m, way below our $300m cut off to be part of our Daily Fintech Index.

Two years later with a share price down 70% since IPO, there are two possible explanations:

• Either flawed execution

• Or the basic thesis was flawed (strategic error).

(I don’t buy the “short sellers ruined my business” story. AFAIK, this was not naked short selling, which Patrick Byrne rightly complains about.

Strategic error or flawed execution?

The answer matters because working capital finance is such a huge market opportunity and one that matters to the broader economy (a healthy small business sector means a healthy economy). If this was simply about market share battles for a feature within ERP (e-invoicing) it would not be interesting.

The market thesis that got people excited by the Tungsten Networks IPO is that if invoices are sent digitally, it becomes possible to arrange financing for invoices using techniques variously described as Supply Chain Finance, Reverse Factoring or Approved Payables Finance. The logic is simple. If an invoice is approved, the financing APR % can be based on the credit rating of the buyer. This can dramatically reduce the financing cost.

Based on this insight, a hard-charging entrepreneur with a strong track record in the City of London called Edi Truell created an acquisition vehicle financed through a public listing and brought together:

• OB10, a leading e-invoicing company

• FIBI Bank, the UK division of First International Bank of Israel.

The combination of e-invoicing and a regulated bank seemed like a far sighted strategic play and the IPO was a success.

Two years later it looks more difficult. Tungsten Networks could still become a big success story. They do have some of the pieces to be a big winner in a huge market, but it looks like they faced three issues:

• The 95% bar is tougher in practice than in theory. The 95% bar is the idea that to take big costs out of Accounts Payable, you need 95% of invoices to be digital. If you Google Tungsten Networks, you see an ad from a competitor (Taulia) saying

“Time to make 95% adoption a reality”.

I don’t know whether Taulia is achieving that 95% bar. It certainly indicates focus on the issue and confidence that they can deliver.

95% matters not only because the buyer can then take a lot of costs out of Accounts Payable. It also matters because then the buyer can offer lots of invoices up for financing. Whether the seller wants financing is their call and will be price (APR %) dependent. Which brings us onto the next point.

• You don’t need to own the cow in order to get milk. Owning one bank simply gives you a regulated entity. However unless that bank can raise money very cheaply (because it has millions of low cost consumer deposits), you are still reliant on networks for financing. This is where the hyper growth phase of lending marketplaces (with Lending Club, Prosper and now SoFi competing head on) is so significant. The lenders are out there, at scale, and hungry for high quality assets at a reasonable price.

• The American market was not ready because it is still so paper driven. The $225 million invested into AvidXChange indicates that the great American B2B invoice dan may be about to break.

The biggest issue for Tungsten Networks may have simply been timing. With marketplace lending moving mainstream and America starting to move to digital invoices, the time may finally right but it is likely that a different company will seize the day.

By Bernard Lunn