Zip must juggle building scale with execution risk

And finally, there’s $35 million that will be poured into what Zip calls its new markets division. This unit announced its first deals on Thursday with the acquisition of a stake in Spotii, a buy now, pay later firm based in the United Arab Emirates, and an investment in Twisto, a payments platform focused on the Czech Republic and Poland, which could be a platform to expand into the European Union.

It’s a seriously large growth agenda that speaks directly to the land grab that is under way in the buy now, pay later sector as a plethora of participants – probably too many – try to get a foothold in as many markets as possible.

But therein lies the eternal conundrum of the early stage venture, which is really what most of these firms are.

What’s the right balance between building scale and not biting off more than you can chew?

Or as Citi put it recently: “While we acknowledge the first/early mover advantage in entering new markets, we are concerned that Zip could be taking on too much.”

‘Doubling down’ on the US

Zip chief executive Larry Diamond is alive to the challenge. “It’s a very good question and we obviously debate it extensively at board level.“

He says what gives him and the board comfort is what he calls the “coalition of founders” – these are the founders of the businesses that Zip has bought, QuadPay being a prime example – who have joined the group and bolstered its capacity to handle growth.

Diamond and his Australian-based executives are keenly aware they can’t run the empire from Australia so have taken the approach that where they can “make the boat go faster” by becoming involved in the management of an overseas business they will. But where the team on the ground is doing a good job, Diamond and his Australian executives step back and let them go.

He argues that the investment in the US, which will mainly go towards customer and merchant acquisition and technology, is all about capturing the clear momentum that QuadPay has built up in recent months, which he says is built around strong efficiency and unit economics. “We just need to double down on the US.”

Diamond also says the new growth business unit isn’t perhaps as grand as it might sound. The idea here is not that Zip itself will try to expand into a range of geographies, but that this division will act as an “investment committee that’s made a few minority investments that could pay over 24 to 48 months”.

Zip will have no day-to-day involvement in the Middle East or European minnows it’s bought into, and for now won’t even provide them with any technology, as they have their own platforms. For now, these equity investments are about assessing the opportunities in these markets, building up global retail relationships and sharing knowledge.

If investors have any concerns about Zip biting off more than it can chew, they weren’t showing them on Thursday. Having raised capital at $5.34, Zip shares jumped 3.2 per cent to $5.75 in early trade. The stock is up more than 60 per cent for the year.

But there’s no doubt there are some real execution risks here for Zip and many of its rivals. Growing a start-up business is hard. Growing a start-up business in an emerging sector is harder still. Growing a start-up business in an emerging sector in multiple foreign markets is a serious challenge.

In their short lives, Zip and its peers have been blessed with mainly tailwinds – the ever-accelerating transition to e-commerce, the accommodative regulatory environment, and enormous government stimulus keeping incomes strong through the pandemic.

We probably won’t know which companies have managed execution risk best until market conditions become more difficult.