A PR firm reached out to me the other day, saying: want to hear about a FinTech firm started on a farm? I said yes and, before I knew it, Stable became my new, favourite FinTech start-up. It meant that I soon hooked up in a conversation with the firm's founder, Rich Counsell.
Here's our chat:
Chris Skinner: I know the backdrop of your story, in fact I was just reading your LinkedIn post of your latest series B funding round, and I noted that your biography seems to say that you were once a City trader and a farmer. Is that right?
Rich Counsell: Yes, I was. When I grew up, I wanted to get as far away from the family farm as I possibly could. I thought about the opposite to farming in Somerset was basically working in the City and I started on a Swaps desk at a company called Tradition. As anybody knows, when you start at the bottom like that, I spent six months making coffee and just built up from there.
CS: So you had a good high level of understanding of how the City and financial markets work, and then I believe you saw the milk market tank in 2016 and thought we need to do something about this.
RC: Yes exactly. I definitely understood at a very high level certainly, having never been involved in the commodity market. I just had that kind of background being always interested in agricultural markets, by that stage. I then realised you can’t escape your interests, from a family perspective, and thought: What if that little bit of time in the City I used with my dad’s farm?
All that time spent in front of computers, why the heck did it seem so complicated? And why can’t someone like my dad, or just about any other farmer in the South West of the UK, do this?
I don’t think I have ever met any of them that hedged. That was all I was thinking about.
This is very similar to a lot of Fintech founders who ask: Why is it like it is? Why is it so complicated? And why is the product not great?
When you purely think about it in terms of basic risks, how accurate is the protection that you are buying is really the kind of measure of the quality of the product in our world.
CS: I don’t quite know the sequence from there. I know you went back to the farm and set up shop in the barn. How do you go from there to raising $60 million in a Series B funding round and creating a base in New York?
RC: Good question. The big realisation early on was just how little agricultural commodities are traded. It’s less than 10% by number, and that really surprised me. I used to walk past CME every day, and they’ve got it all sorted. Then you realise that they have got trading wheat sorted and trading energy commodities sorted, but what happens when you get into not malting barley, avocados or mozzarella?
Agriculture is so fragmented, in terms of its markets, that less than 10% by number is hedged properly. That is three to four trillion dollars that cannot be hedged on a financial market. You always hear from VCs that they always want to back people who are trying to take on a big enough problem, and this is a huge problem. The trouble is, and the reason why it has not been done before, is like how the hell do you price avocados or how the hell do you price durum wheat for pasta manufacturers? You cannot price this because, if it isn’t traded, then you know you are going to price an option that is hard to price.
You basically use Black-Scholes-Meyer as a formula, but Black-Scholes-Meyer needs implied volatility and you only get that from a liquid market.
We had to figure out how to create implied volatility, so that you could price an untraded commodity. I was then out of my depth, and we were lucky that there to find connections with two professors at Harvard and Liverpool University, who offered to help. These universities took me under their wing and did nearly two and a half years of work on the maths. For Stable it was a massive lucky break from some really talented academics, who were just interested in the transfer of risk and the mathematical intricacies of pricing untraded commodities.
CS: I thought you made an interesting comment that these two professors were really surprised nobody had asked them before, because they have always been available and had been there they had been waiting.
RC: I knew I had no way of solving this, and I couldn’t throw millions of my own cash at it. I just thought hang on a sec you can google people who are right at the top of their game. A classic example is Hirbod Assa who, at the time, was running the Maths Department at Liverpool. He was saying that at any one time a couple of hundred students are available. They are all whip smart and wanting practical problems to look at, as opposed to theoretical maths challenges. That stuck in my head and, when you’re an entrepreneur who has not got many resources, it made sense.
In the UK in particular, you’ve just got these phenomenal universities that are really keen to help, and they are as excited about it as us! That was one of my biggest takeaways and what I have been encouraging people to do ever since. Use our intellectual capital, especially in academia, to test ideas.
CS: Did you give them any pay back?
RC: Well from their side we went on and we’ve hired a lot of those original students. So, the original guy Simon Wang, who was doing his PhD. After we met, and he is a really bright PhD student, Simon became our CTO. I think we hired 4 or 5 of the students from Liverpool, and we fund PhDs and all that kind of stuff. We have kept a very strong relationship there because it is brilliant for both of us frankly.
CS: As you were talking about the risk of unlisted agricultural businesses like avocados, it made me think of one of my favourite films “Trading Places” with Eddie Murphy and Dan Ackroyd.
RC: Yes! Pork bellies and frozen orange juice.
CS: Exactly. That was 40 years ago. How come this has not been done before?
RC: Randolph and Mortimer Duke is what they were called, weren’t they? Duke & Duke was their commodity brokerage firm. The thing is that we have to use a lot of data for our service. On average, I would say that we are running around 52 trillion simulations every 48 hours. Until recently, even if you were the equivalent of Duke & Duke, you wouldn’t have been able to afford that level of data science. In other words, there has definitely been a technology shift.
The other thing is cultural. I was genuinely an outsider, which gives you a huge advantage because we had to bring together like a new form of liquidity. We brought in insurance money but, if you and I had spent the last 20 years just working in derivatives, it is quite hard to think outside the derivative box. Then, sometimes, the most interesting new solutions come by combining two or multiple different strands together, and that is certainly what we did with Stable.
For example, insurers never go anywhere near derivatives ,and the derivatives guys don’t ever think about insurance. I just thought there is a really interesting intersect of those two industries basically.
CS: Am I right in thinking you have hundreds of previously unlisted agri businesses on the platform now?
RC: Yes. It’s about 200 of them, but they are 200 markets that have never been able to be hedged out before. That’s amazing and what gets exciting is that we have the platform now.
Here is an imaginary example we could actually hedge. Let’s take something like a Big Mac. Now you can find an index for cardboard and then sesame and then flour and then beef, and combine them into one index, which is your product. You can then hedge out against the cost of those materials rising in cost, as the source of that product. It is not just a small change but a game changer, in terms of what you can do as a company looking to hedge.
That’s exciting and geeky but what’s the alternative, if we were worried about the price of a Big Mac? Right now, we could use live cattle futures for the beef part, but that is literally the only thing where there is a product. Even then, we are not buying whole animals. All we are buying in our imaginary burger chain is lean beef mince. This means that each one of these markets acts differently. There is demand and supply for mince that is different to whole animals.
This shows that it really matters in our world how close you can get to the real risk. That’s totally game changing for our customers anyway.
CS: You made a comment online about the lightbulb moment was when a dairy farmer said that they didn’t hedge because they didn’t know how. You’ve tried to make that simple but is it that simple?
RC: I was just thinking about my dad, who is a farmer, and all the other versions of my dad I had ever met. I was thinking if you can simplify hedging down to where a relatively small farmer could use it and see it as a useful tool, then it was obvious that lots more people would get it.
You assume that someone is the expert, but then you peel back the onion layer by layer by layer and you’re realise that not many people truly get it. It is often scary if you are a farmer to realise what it is like if you mess it up. You just don’t want to look silly.
Obviously, that can happen when you are posting margin and trying to use a dirty hedge or a correlating hedge, because there is nothing in your exact risk to hedge out. It is full of risk, and that isn’t great whether you happen to be a small farmer, or you happen to be working at a multibillion dollar food manufacturer.
CS: And from the liquidity side, the supply side, how did you drum the message out to the institutions?
RC: That was hard because we were a whole bunch of kind of like Quant mathematicians in the early days and we basically knew a couple of people at Lloyds of London. So we had a couple in the super early days, and we used to have these extraordinary painful meetings with traditional actuaries at Lloyds, as you can imagine. We had this group of smart young data scientists on the other side, and some of these meetings were hard work if I am honest.
Eventually we realised that insurance is really different in terms of how they think about risk. It is really different. The big challenge there is to ask whether this is insurance, and this concept of insurable interest, as you cannot be a trader and insure your risk. You have to have the real risk of losing money or losing your house or farm or whatever it might be. That there is the concept of insurable interest and was really important to establish. We do that here because we don’t let people use Stable who want to just speculate. You have to prove that you and I are running a business.
By way of example, a craft brewery in London bought 50 tonnes of malting barley. We can’t hedge 100 tonnes of malting barley until they agreed that it is insurance, and so then it becomes a risk like any other.
The thing is that this used to take years through a traditional insurance process, but we have shortened that process from two years to two minutes through complex and hard work. That is where we were lucky enough to meet Ascot, a specialist insurer who are very forward thinking, in that they are willing to look at new forms of risk and be smart about new ways of measuring it.
CS: I get the impression its not luck, because you are obviously very talented at what you do, and you have assembled a great team including Julia Henderson, a former reinsurance underwriter, who seems to have made quite a big difference for you.
RC: Yes, because this went beyond my level of understanding. I get that Lloyds is a giant syndication market and I get the basics, but it was a whole new area and I had no experience. When I met Julia, it was a game changer, because it enabled us to be a better partner.
Obviously, we were enthusiastic and investors and insurers could see we were smart, but actually sometimes that is a pain in the arse for these guys. You’ve got to do your capital reports; you’ve got to be doing a whole bunch of management and reporting; you’ve got to be playing the game. That was difficult, when you are not an expert in this area, and we basically needed to be a lot better at it.
Then there are always moments in a tiny start-up where you have that game changer moment. You find that person who is genuinely an expert at that one thing you are grappling with. That just transforms the company, and Julia was our first example of that, because we started really growing up from being like a university R&D project to something that was able to be far more commercial.
CS: I talk about the integration of FarmTech and InsurTech and Fintech and different markets, which you are straddling. I also talk a lot about how finance and technology can make the world a better place, the theme of my latest book. In this book, the Dutch Rabobank are linking their insurance services to sensors and nanosensors in the farmers’ fields to monitor pollution, acidity and weather, and the whole nature of how the soil is changing. This is interesting because it takes these ideas to the next level.
RC: Faming is a huge industry. As an entrepreneur, it is also a nightmare to operate in because it is just so fragmented and the example you just gave is part of where we are going. Today, you can use huge amounts of third party data because it is a scale problem, and that is exactly what we do.
We are using data from the USDA in America or the AHDB in the UK to track risk. It is third party data, which means that I don’t need to send someone down to the individual farm and ask them about their risks and how much money they lost last year. It enables a commercial solution to be realised.
I am so excited by that kind of area because there is just so much good that can come out of it, and it already is. You see smart people working on hail cover and wildfire cover, and all the things that might happen on the finance end of that. The exciting thing there is that you can be a catalyst for people to invest in their future, whether that be more sustainable tools or robotic milkers or whatever it might be in farming. You always need to have the financial tools to enable that to happen.
I just sometimes think people don’t think about this enough. Obviously, the shiny new robot is pretty cool and pretty exciting. However, you need to help the actual farmers to afford it and invest in it, and that is what I am more interested in doing behind the scenes.
CS: If you were looking forward at how the agricultural businesses and finance and technology could do more together, what sort of ideas would you have?
RC: Great question. I am super passionate about the benefit or impact to be had at democratisation through technology in these markets. Some of that smart stuff, in terms of the idea of offering Uber-tractors in Africa and is really fascinating, because if you can put those new tools and that productivity into the hands of far more people, it is a game-changer.
To your earlier point, that is extraordinarily exciting from a finance perspective, especially when you are coming out of Covid.
We found a lot of some of the brightest people that you would want at your start-up. Yes, they obviously have to pay their bills, but there is a huge kind of demand to join a company that has a real purpose and that is actually solving big problems.
It is all very well being super clever, and you’ve just left Oxford, and you’ve got your PhD. Yes, you can go and join a bank, but you’re not exactly moving the world further.
I am just so fascinated about how you harness brilliant people, who want to have an impact, and then apply it to real-world issues. To your question, it is really the democratisation of new bits of technology and new areas to de-risk farming, because it is still a really risky occupation and they do need to invest in the future.
CS: You reminded me that the Bill and Melinda Gates Foundation have talked for a long time about micro insurances for African farmers, and the ability for them to insure for just a few cents a day against drought.
RC: It changes everything and that is the first step. To be able to do that at scale, with all of the new technology that is here and coming, it feels like an interesting industry to be part of.
At a micro-level, that is what agriculture and farming has suffered with in the past. When I was younger, in the early 1990s, there was nothing going on in the industry. If you were ambitious and wanted to make things happen, you weren’t exactly going to go into farming. Now, when you look across all the various elements and where the VCs are investing, I’d rather be in food and agriculture right now than anything else
As Warren Buffett would say: you always see who is swimming naked when the tide goes out. Right now, a lot of these tech and fintech companies are solving big problem but I would argue: do you need to get a toothbrush or is own your flat in London in less than 10 minutes?
Helping hundreds of thousands, if not millions, of farmers lift themselves out of poverty is a huge problem that can now be done at scale. That is a cool thing to be part of, and the whole industry can only benefit from attracting bright people who want to have that impact.
CS: You gave me the perfect intro, in that you almost said “when I was a lad”. I can imagine your father seeing what you are doing, and being amazed at what can be achieved. Is he?
RC: Well, he is kind of bemused by the fact that from a simple idea a major business has emerged, but that’s the beauty of entrepreneurism, isn’t it? That was just one idea and a lot of luck and meeting some really bright people. I think it is just staggering how big it has become and how quickly. The scalability in tech and finance is quite hard when you are rooted to one spot.
Farming is the hardest thing to scale. So that is super surprising in my mind.
What we need to do now is figure out a way of making sure that we are not just thinking about the few huge companies because, at the moment, we are bombarded by super large food companies from all over the world. They can swamp us if you are not careful and, as ever, I guess it’s the same in every start up. You’ve just go to remember your purpose, and why you are here
Sure. It is fantastic when these big companies come to us, but we have got to make sure that you know that we are continuing to invest on the producer-side as well as the consumer.
CS: That’s a brilliant way to end and my latest book was going to be called “Purpose Driven Finance”, as you have to stand for something, or you will fall.
RC: I think so especially in this labour market. If you don’t, you end up with middle of the road talent. It has changed exponentially.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...