The over-hyped cybersecurity industry needs to evolve and consolidate, which will mean failed startups and business models.
“It’s definitely overfunded, massively so,” said Ravi Viswanathan of VC firm New Enterprise Associates, speaking on a panel at CB Insights’ Future of Fintech Conference earlier this month. “We need a few years for it to settle out but we’re probably going to see a lot of deaths in that space.”
However, Viswanathan noted that on the flip-side this is an industry where acquisitions are common, and so there’s opportunities for good exits for successful companies. Additionally, he believes there are still pockets of opportunity.
“There’s still white spaces you can go after,” he added.
Some of these niches may open up as the industry continues to evolve according to new threats and enterprise needs (such as granting access to remote employees without undermining security).
Cybersecurity as an industry is changing quickly, “moving away from what I would call the era of building walls,” and toward more flexible and proactive approaches where there’s a constant monitoring for breaches and vulnerabilities and responding accordingly, said Lauren Kolodny of Aspect Ventures.
Kolodny and Viswanthan (pictured above) were joined on the panel by Patricia Kemp of Oak HC/FT. Though the discussion was about tech infrastructure in the financial services industry, the panel of three investors focused mainly on where they saw investment opportunities.
Kemp of Oak FC/FT, Kolodny, and Viswanathan agreed that the greater valuation and exit possibilities were in business-to-business rather than in the consumer space.
“B2B SaaS companies are the ones that are going to be stable, the ones that will see bigger valuations,” said Kolodny.
Viswanathan went further and said his firm was excited about software companies who sell into a specific industry vertical rather than horizontally across industries.
“One could say that the ultimate vertical market is financial services,” Viswanathan said, arguing that banks have become more flexible and innovation-focused over the past twenty years, and are far more willing to work with fin tech startups than in the past.
At the same time, panelists agreed that striking deals with big banks can be painfully slow. Finalizing a deal with a bank can take years.
The insurance vertical also has strong potential, according to Kemp. Cloud-based software can help insurers cut costs and there’s still opportunity for them to adopt more of these tools.
Olivia Oran, Wall Street Reporter, Thomson Reuters: Thanks, everyone. So I’m just going to repeat something that I heard on another panel but I thought had a lot of relevance here. So there’s a saying that you can mine for gold or you can sell pickaxes. While it’s mining for gold that seems to get all the attention and glamor, it’s those selling axes who may wind up with the better opportunity. So to draw the parallels of FinTech, it’s companies competing for a slice of business for the banks, whether it’s robo or marketplace lenders that seem to get all the headlines. But it’s actually those upstarts that are powering banks where there may be bigger opportunity. So I’m just curious for you guys what you think about the opportunity from a return perspective in consumer versus infrastructure tech and when do you start to think we’ll start seeing venture size returns for FinTech infrastructure companies. Tricia, do you want to start?
Patricia Kemp, General Partner, Oak HC/FT: Absolutely, so thank you. We have always preferred B2B sales and selling to players within the ecosystem. Because the players within the ecosystem, are making use of new technology, you know, new solutions, new services to help them deliver new solutions to marketplace and help them run their efforts more efficiently. We feel that your ability to sort of get a higher valuation or exit when you’re an intricate part of the infrastructure for ecosystem players and you’re enabling that ecosystem is just more certain than going directly to public and consumer facing. We prefer to offer a B2B2C, over them a mobile platform that they can offer online banking, or wealth management, or insurance claims, or whatever it might be than going directly.
Lauren Kolodny, Principal, Aspect Ventures: We do both consumer and enterprise, and I would say I mean clearly consumer has gotten frothy. And what we’ve been seeing lately is a lot of point solutions which, you know, when you think about venture returns, some of them may get there, but I think there’s going to be some consolidation. I’m actually more interested on the B2B side in FinTech solutions for companies. So I think, you know, infrastructure is another thing which, you know, we’re seeing a lot of vertical players kind of enter the market right now but obviously facing some challenges which we’ll talk about selling into financial services. But I think if you look at the B2B SaaS companies that are providing FinTech or financial solutions, those are the ones that I think are going to have consistently stable and increasing valuations and where we’re spending a lot of our time.
Ravi Viswanathan, General Partner, NEA: Yes. So we’re also a broad-based firm. We do IT, we also do life sciences, but within IT, we do enterprise and consumer. The way I think about it is if you look at where we made a lot of our returns and where the industry really evolved in terms of innovation in the ’80s and ’90s in the enterprise software market, that’s when the infrastructure layer for just enterprise software really got built. The ERP, enterprise resource planning vendors comes into play, supply chain software, application integration vendors come into play, and those vendors and companies really created this ecosystem and built that infrastructure layer. And if you think about another area that’s very interesting is vertical markets. Taking that infrastructure layer and applying to various markets. One could say that the ultimate vertical market is financial services. So I think we’re just at the start of that build out where you have banks, and credit card companies, and the consumer data residing on one end, then obviously a lot of these applications on the other. So for us, we think it’s a very exciting area, and I think we’re just at the start of it, of a long period of that.
OO, Thomson Reuters: So there are a lot of challenges with working with big financial institutions. Banks tend to be very difficult to navigate and there’s a lot of compliance, bureaucracy, fear from them, you know, about security and understandably so. So I’m curious how you see the companies that you work with navigate these institutions while they’re trying to provide infrastructure services and trying to serve the big banks. Maybe Ravi, we could start with you and you could talk a little bit about your experience working with Plaid.
RV, NEA: Sure. One thing I would say is, you know, in our portfolio, we have lots of situations where companies were working with really big entrenched companies and incumbents, it’s financial services, it’s healthcare, it’s energy. So the banks, what we preach to our companies which our companies have learned is you have to be patient. It takes a long time navigating through. The closer and the sooner you can get a champion to help you walk through that maze, the better it is. I’d also say that you have to be ready because a lot of times our startups, we think they’re ready but if you really get into, for example a bank and you deal with, as you said, Olivia, risk, compliance, scale. The stuff can’t go down, right? And so you get one shot. I’d say with Plaid, it’s a multi-year effort… company that effectively provides this application integration layer between these banks and consumer data and the next-gen, thousands and thousands of apps and services that we’re all benefiting from that’s actually been the highlight of this conference.
So a lot of it is working with the banks and they work with all the banks, but it’s different ways. So some they’re very deeply integrated into, and I think it’s incumbent on our companies, Plaid being one of them, show the banks that the value prop for the bank, more importantly for the end consumer is a lot more enhanced, stickiness, lifetime value, much lower latency. If you can show that, if you can show fundamental value, you’ll get there. The timeline may be very different than what you hope, but I think that they’re a crucial part, at least of our ecosystem. I’d say that’s with Plaid but that’s with a lot of our companies in the space.
OO, Thomson Reuters: What tends to be the biggest hurdle, like number one hurdle with working with the banks?
RV, NEA: I think that there is, a lot of it is an inertia. There’s an NIH, you know, “We like to build things ourselves. You don’t understand our security protocols, or compliance, or risk.” And there’s also, you know, we love our companies and we think they’re the best things in the planet. We think they’re going to be market changing multi-billion dollar iconic companies. They don’t see that, right? They’re 30, 40, 50 person companies that have raised tens of millions and that’s nanoscale for the bank. So you do have to convince them that we’re here to stay, and a lot of times it is very much a crawl, walk, run. But there are situations where you get stuck, right, and that’s why you need to work with a few of them.
The other thing I would say is working with these banks, I think this was said in one of the prior panels, it is resource intensive. I think Will talked about getting that IBM OEM deal, that’s like actually not necessarily a positive sometimes, right? So you’ll also have to resource yourself appropriately. So a lot of these startups you can only tackle one or two at a time. And so that’s another risk that you only have a couple of these eggs in the basket and you really need to progress before you can diversify that.
PK, Oak HC/FT: I would just add to that. We have a portfolio company feed side that’s a big data machine learning platform fraud and parties like Cap One, First Data are clients. And what frequently happened is you kind of got in there and you ran in parallel. You know, in their case they ran in parallel to Experian FICO, and you prove your results, and there’s a POC that goes on for 6, 9, 12 months. And over a period, they kind of got themselves in there, they proved to beating them by however many hundreds of basis points. And slowly what happened is business all moves over, but it would run in parallel for a long period.
And, you know, to Ravi’s comment, you would have people on site. You would be handholding, you would make sure, you know, there was no confusion about what data in, what data out. And then lo and behold, you’ve kind of proven it and you’ve replaced an incumbent vendor and three other parts of the bank, it’s been proven. You know, your solution is rising up to the C level. They’re hearing about it, and now you’re being asked to do the same thing in other portions of the bank. So it is a long term process, but you typically get, you know, three, five, seven year contracts out of it and you get high recurring revenue. And you also typically kind of get high re-ocurring professional services because you frequently have people dedicated to it, which I think is, you know, very useful in these particular cases but frequently run in parallel.
LK, Aspect Ventures: It’s interesting. We also do a lot of cyber security investing. So from a more horizontal perspective, I’ve seen several of our earlier stage cyber security companies when they start out want to go after FIs out of the gate because that’s, you know, the gold standard. And so similar to Patricia’s experience, you know, they actually will engage with the Cap Ones of the world in what we often call early design partnerships. So it’s even prior to POC, and, you know, you develop an understanding with your representative in the bank that they’re actually helping you as you develop the product. It can be a little bit risky in the sense that you don’t want to become a professional services company. But it is an interesting way to understand the needs and concerns of the bank early on and get an internal advocate who, you know, wants to see you succeed and is actually investing in helping to get the product ready so that you can serve these kinds of institutions. Just to be clear though, for those companies we also advise them to do these partnerships with other verticals so, you know, that will move more quickly in conjunction.
OO, Thomson Reuters: Ravi, you mentioned inertia. Do you think that that inertia is lifting at all? Is it changing as banks are realizing that they can’t have status quo, you know, they really need to make changes?
RV, NEA: Yeah, for sure. I think it’s a great point. I would say to take an analogy, not from FinTech but a broader enterprise software practice, we throw annual CIO conferences, and we invite 50 of the Fortune 500 CIOs. And I remember, it was about 10, 12 years ago, we were talking about a variety of things, and we were talking about the Cloud. The Cloud is ubiquitous now, but if you remember 10, 12 years ago it wasn’t. It was just the early innings of Cloud vendors were really Salesforce and WebEx maybe and there was a couple of others who were starting. And what was very interesting is there was a certain part of that audience, that CIO audience, who were starting to get very progressive in thinking about the Cloud and putting data and putting a lot of the applications in the Cloud, and that group was the financial institutions. Which is mind boggling to us because historically they were the most hesitant to jump into emerging technology.
Now, if you talk to them, it’s a very different story than 10, 15 years ago, or even 5 years ago. They get the API ecosystem, they get being able to deliver product and services quickly. They also appreciate, and I think CB Insights did this, which is one of my favorite charts, the bank, it’s a website of a bank, and it shows all, effectively the threats to the bank. And if you look at the UI, the consumer interface, how quickly these products and services get teed up, I think they’ve really started to appreciate it. So for us, that coefficient of friction over the last 10 years, especially the last few years has really accelerated. And it’s a lot lower now than it had been.
PK, Oak HC/FT: And you can add to that the pressures on the costs, you know, operating expenses. I mean I don’t know what the exact numbers are, but some of these large banks have 10,000 people in compliance or, you know, 14,000 people managing regulations. So they’re all looking for solutions that are gonna help them cut those costs. In addition, and it’s not just banks, you know, it’s processors, it’s insurance companies, it’s mortgage processors have to deal with a new regulatory environment. So the data has to be transparent, they need to be able to pull data. They need to be able to pull and see transaction histories. They need these services because of cost issues and because of regulatory pressures.
OO, Thomson Reuters: I think there was a comment made in one of the panels yesterday that the European institutions tend to be often be more forward thinking about these different technologies than their U.S. counterparts which are more slow moving. I don’t know if you have any view on that, why that might be the case.
RV, NEA: I think, you know, in one regard, Europe has been kind of a vanguard in a couple of areas, mobile obviously for decades almost. FinTech, there’s pockets, I’d say U.K. I don’t know if I would say that they’re necessarily more faster moving. I mean there’s recent press about the regulators in Europe jumping in, right? So it’s not like we would go there because that coefficient or friction is that much smaller. There’s, you know, inter-country issues you have to deal with as well and regulatory bodies country by country. But having said that, we’ve seen Israel and the U.K. being two international pockets, broadly Europe and AMIA, where some of this innovation is starting to take shape. We think that’s fantastic because that just shows that that innovation in FinTech is not just a valley thing or even a U.S. thing, it’s global. And this whole issue with banks and then the customer data, that’s global as well.
OO, Thomson Reuters: So J.P. Morgan last year spent about $9 billion building technology which is a really mind boggling number. Do you think that banks can innovate simply by overspending FinTech startups, or do you think that the fact that they’re so cumbersome and highly regulated makes it impossible for them to truly innovate and be competitive?
LK, Aspect Ventures: I think it’s much harder. I mean I think that, you know, a lot of these banks are still operating on IBM mainframes and there’s so much regulation. I mean some people have made the comparison between banks and telcos that they’re really becoming almost a regulated utility in that sense. And so I think…I mean they test a lot of things. You know, J.P. Morgan in particular has been investing a lot in testing quite a bit even in blockchain and other categories. But I think that they’re watching FinTech companies closely, you know, partnering with them, thinking about acquiring some of them. So I think that that’s one of the advantages that these early stage companies have. They can move much more quickly, and many of them are partnering… and we can talk about this later, but are partnering with banks or with insurance carriers to kind of offer that kind of back end service while their focus is really on the technology and innovation. So it’s sort of interesting it’s happening on both ends.
RV, NEA: I think where the banks… you know, I agree. I think the efficiency gains you get from an innovative modern approach which generally comes from startups will always win. The one area where it is very threatening to startups is whether it’s banks or incumbents, they can just outspend you to acquire customers because they just have a massive balance sheet, and they don’t necessarily do the math in terms of unit economics. Because some of them they just may feel threatened so they have to keep their consumer base. And that’s where if you get into a war in that regard, then, you know, that causes a lot of problems.
OO, Thomson Reuters: So, Lauren, I know you tend to make a lot of your investments on the consumer side where… who are clients of some of these FinTech infrastructure companies. I was wondering if you could just talk a little bit about why startups themselves, not large incumbents, tend to be early adopters of some of this new technology.
LK, Aspect Ventures: Well, I mean, as I was saying, the startups are really looking for both the sort of technical infrastructure and also some of the partnerships to kind of power the services that they’re providing. Their innovation is really, tends to be on the technology, on the front end, on the brand and the service that they’re providing. And I think that these infrastructure startups can partner with a early stage consumer facing or enterprise FinTech company, and they’ll move much more quickly. And so, you know, they can get, I mean their products are being tested much more easily, and what I find with my company is that, you know, they’re able to negotiate pretty good deals on these agreements with the infrastructure providers. Because while like in conjunction they’re going and trying to get that Bank of America deal that’s going to take them three years. They can, you know, within a matter of a month or two or less, you know, offer these services. So I think that’s why, and we see all kinds… I mean in the AML KYC space for sure, Plaid obviously is a huge one. I think all of my FinTech companies use Plaid in the fraud space certainly. So it’s across the board startups using other startups’ software.
OO, Thomson Reuters: Tricia, you’re an investor in a digital currency group which is in the blockchain space. There’s a lot of talk about blockchain transforming banking, clearing settlement, etc., but some critics, you know, say the technology is overhyped, banks are slowly testing it, but it isn’t ready yet for primetime. I’m curious what your view is on timing, what we’re going to see large scale roll out of blockchain.
PK, Oak HC/FT: Well, we all know there’s lots of hype and there’s lots of discussion, and there’s lots of discussion about is something actually blockchain or blockchain inspired. And if you kind of go back to kind of what, you know, the core of blockchain is, you have a distributed ledger, and you have the ability to have a consensus network, people agreeing on the history in the ledger. And then you have the ability to not go back and change the history because you have to change it in lots of places. So there’s lots of buzz and there’s lots of use cases that are being discussed. The ones that are maybe most likely to come to fruition earlier are addressing, you know, the big data issues within financial services companies, and that all largely has to do with standardization.
So one of the keys to blockchain is you have standardized, you know, scripting between transactions, between the whole network, and the data is exchanged, and it all matches it on the same protocol. And one of the big issues within, you know, banks and insurance companies and other financial player ecosystems is they’re all on different standard protocols. So you take certain asset classes, and these are… and again I don’t think any of these use cases has sort of come to fruition to any extent yet. But the areas that people think there might be, that the earliest wins is you take syndicated loans or you take a complex asset class that today takes two weeks to match protocols, to make sure the information’s all correct, you know, time and money to settle. And if there was a standardized way within either, you know, a private blockchain or distributed ledger network to communicate, that could happen more quickly.
Public networks, you know, a private network being a group, but a public network again the whole benefit is okay, the communication can happen quickly. The protocol and the way you’re identifying people and the way you are communicating is standardized. And, you know, the use case of bitcoin and other crypto currencies where it’s kind of a low dollar value, that could potentially happen. And we all know that there’s been lots of ups and downs to that. The cases are where you’re standardizing data and you’re having a standard protocol of information between a network, and where there’s a consensus and agreement on the history and what’s occurred and in complex transactions, there are use cases that many think will kind of gain traction faster than others. Use cases such as equity trading, most people think will never happen because the issue is the time this all takes for the consensus of the agreement. You know, equity trading today is whatever it is, three milliseconds. You know, and blockchain today is something, you know, you hear between 7 to 10 minutes.
So those kind of use cases most likely will not come to fruition. But where you have complex transactions, where you don’t have standardized protocol, where you need, you know, identity re-verification, where you need standardized, you know, transaction flow and standardized communication, many people, there are use cases there that, you know, enhance liquidity, they’re settled more quickly, and lower costs. So those are frequently the use cases where you say, “Okay, there’s something where they’re helping out the bank, or they’re helping out the financial ecosystem player and, you know, this will gain traction.”
OO, Thomson Reuters: Have you been surprised with the speed with which you have banks coming together, forming coalitions, focused on blockchain? They’ve obviously realized it’s important, it’s cutting edge. Has that been a surprise?
PK, Oak HC/FT: Well, as we all know, this is a little bit related to the question about, you know, are banks starting to pay more attention to startup technology, etc. Many banks, you know, Visa, MasterCard, everybody else now have startup labs and innovation labs, and they are trying to be a step ahead to understand what’s going on. And they’ve read all the same buzz the rest of us have read. You know, the essence of blockchain is a data base management system, right? It’s no different in thesis than the original kind of Oracle database management systems and others. So understanding that they need a better database management system and that there are use cases for that, I think they’re all seeing yes, it takes too long to communicate, and it takes too long to verify and settle what’s happened in that transaction. So I’m not surprised that they are looking at that, and again it’s an infrastructure issue. And they’re gains, they’re gains in liquidity and they’re gains in cost.
RV, NEA: Yeah, I’m probably more skeptical on whenever some of these announcements happen. It’s almost, you know, to paint a glass half empty view, it’s almost saying there’s a lot of innovation that’s not coming from us. We have to throw something out there to show people what we have. I think there’s lots of examples where that’s not the case, but there’s many examples where that is the case. I would say that okay, they’ve shown intent which is great. Now the hard part begins, resourcing it, and then, you know, it could take months, quarters, or years. I’d also say that on the blockchain, I’m glad the discussion is blockchain is a protocol away from bitcoin. Because we’ve never really believed in a commerce use case just because with all the things we’re talking about, commerce is getting pretty easy.
So the bar that you have to leap over for it to make sense is less and less, and that’s again the same thing again. When you talk to folks, “Oh, so and so merchant is gonna accept bitcoin,” I think that’s another marketing show. And if you really look at the transaction data, it’s de minimis and they probably think it’s going to be de minimis for a while. But in terms of the blockchain actually as a protocol, I think there could be interesting use cases, to Tricia’s point.
PK, Oak HC/FT: And Ravi is absolutely correct. I don’t think any of these use cases have any traction. I think it’s all discussion and it’s all theoretical. And I think there are, you know, I don’t know them, seven or eight elements that have to be solved. I mean even in the example of the standardized protocol, you know, they need identity verification, they need abilities to, you know, report on the data, they need abilities to query the data, pull out information. You know, there is governance of the data, so there are lots of issues related in and around this. So I think that they are getting headline news of saying, “Yes, we’re doing this.” I don’t know how much has actually occurred.
LK, Aspect Ventures: I think with the banks in particular too, you have to think about the specific use cases a little bit more and what the incentives are. Because, you know, yeah, this technology has the potential to bring down operations costs pretty significantly. But at the same time if you’re looking at it, for example, as a ACH alternative or something, you know, the big banks have an incentive to keep the ACH system the way that it is because it means more cash on their balance sheets for a couple more days. It’s actually a huge industry, a huge part of their industry. So that’s the other thing you have to take into account.
OO, Thomson Reuters: We focus a lot on big banks, but I know there’s a lot of people here in the audience from insurance companies, and there’s a lot of talk about disruption for insurance companies. Just wondering what you think about that industry in particular makes it right for disruption.
PK, Oak HC/FT: So we have two insurance investments, insurance tech investments, Insureon in Chicago which is a platform marketing commercial insurance to small medium-sized businesses. And then we recently announced Trōv which is a platform. They are selling to insurance carriers that is allowing on demand insurance, and it’s launched in Australia with Sun Corp. about a week and a half ago.
So the insurance stack, there’s lots of room for innovation and there’s lots of room from customer acquisition to using data for risk underwriting through claims processing. And a variety of solutions have come to fruition. And, you know, Insureon for example is helping, they’ve got real time links into sort of the top 20 carriers in the United States. They’re helping find products that are served up to the right SMB at the right time, priced correctly, risked correctly, pull the data back in, and then help, whether it’s Hartford, or Families [SP], or Liberty Mutual, you know, price the next piece of insurance. And so they are bringing data Cloud service and ability to acquire the right customer, better those services to those carriers that they otherwise couldn’t do themselves.
LK, Aspect Ventures: We haven’t made any insurance investments yet but it’s very similar to me… you know, we’re in Chime which is a mobile banking solution for millennials. They presented day before yesterday here, and it’s similar in the sense that, you know, many of these insurance companies have a carrier partner that’s powering the experience in the same way that a company like Chime has a bank partner on the back end. But what they’re able to do is reach a different demographic of users as well because they package it in a way that is, you know, with Chime serving millennials and really giving them the bank-like experience that they want. And we’re seeing similar things with insurance. I mean take MileIQ for example, that, you know, is noticed, that there was this opportunity with, you know, the freelance economy growing so quickly to really serve that audience with insurance that was based on usage for driving. So Uber drivers have the insurance provided by Uber, and then they supplement it with, you know, mile-based insurance. And so it sort of, it enables them to repackage and to access these demographics in a way that traditional carriers don’t know how to.
RV, NEA: Yeah. We think… agree with Tricia that the whole stack is up for grabs. And we’ve got a few, we’ve got Science [SP] which is cyber insurance, Metromile which is a usage-based, and then we’ve got some on the healthcare side as well. There’s a ton of inefficiencies. So it’s all just going to another vertical, and there’s massive inefficiencies in things, how they’ve been done and finding ways to chip away at it with just a much more modern approach.
PK, Oak HC/FT: In the two elements in sort of the insurance industry, just to take note of, number one is that there’s not a lack of capital. So frequently when you hear people saying, “Well, there was going to be P2P insurance similar to P2P lending or, you know, an alternative lender.” You know, the insurance carriers have capital. You know, there’s an excess of capital, even more capital than they’ve ever had. So making good use of the capital and allowing, you know, data and Cloud based services to help them deploy that capital, they want to sell more insurance. It’s just sort of an interesting thing to note.
And number two, most people would indicate that there’s going to be an employment issue in insurance coming up. Although, you know, unemployment, you’d think somebody would step up and take the job but that people aren’t going into insurance. They’re losing 500,000 people, you know, to retirement over the next period of 3 to 5 years, and so they are looking for Cloud-based solutions to lower the cost structure and to replace, you know, human labor with a Cloud-based service. So they’re actively out looking what most would say.
OO, Thomson Reuters: So, Lauren, you wrote an interesting piece on LinkedIn recently about how millennials view banks. You said millennials broadly are skeptical of traditional financial institutions. So I’m wondering what advice you’d give big banks to better court millennial customers, or do you think it’s already too late?
LK, Aspect Ventures: I mean I think that they’re obviously trying in terms of… you know, I said a lot of these banks are investing tremendous resources in the technology and marketing to appeal to millennials. I think that as the data shows, and I kind of walk through it in that article, I think it’s harder to rebuild the trust and the skepticism that comes from a generation that came of age during the Great Recession. And so that’s why I do think there are opportunities for companies like Chime, you know, to serve that demographic in a different way, my demographic in a different way. But, you know, I guess what I would say is, the other thing I talked about in that piece, is that with so many fragmented point solutions that have come about in FinTech over the last 5 to 10 years, many of them doing quite well, many of them thinking about expanding their product offerings to become more comprehensive. But still, they’re pretty disaggregated, and I think that there is an opportunity to bring them back together.
And so it’s the question of what does that look like. A bank actually makes a ton of sense to be kind of the centralized platform for that. It’s still where our income comes in. And so, you know, I think that the banks that recognize that millennials will be using products and services that are outside of their core offering but enable them to sort of plug into those, whether it’s, you know, the Wealthfronts and Betterments of the world or, you know, Robinhood and Acorns. But to provide a really comprehensive view of one’s finances and sort of the ability to manage it from a centralized place is an opportunity. And so it’s a question of whether the incumbents will do it or whether there will be new players that do it.
RV, NEA: Yeah, I would totally agree. I think they just need to rethink the customer experience. Because it’s been very monolithic for decades. You know, they’ve learned lessons on what a UI can do, and then really embracing these thousands of apps and basically saying, “You know what? There’s people that are doing it better than we will ever do it.” And embracing that and letting that go and then combining that with the data layer. Because the customer data and the bank data it’s all still… they will still own but integrating it with all these apps and services in a really modern UI. If you start doing that, then over time and probably sooner than we think, I think end users will completely rethink how they view their bank.
I mean you’re seeing it in automotive, you’re seeing it a lot of different ways. If you look at Tesla, the customers there versus, you know, the big three in Detroit. So there are models and paradigms from other industries that they can learn from. And if they do do that then they can be, and then can also build with these products and services. They can also start acquiring them. There’s a lot of ways they can use it, but fundamentally they have to rethink how they view it.
OO, Thomson Reuters: It’s interesting. If you look at a company like SoFi and sort of what they’re doing, you can sort of think about that as, you know, is it the bank of the future, the millennial bank? They are really courting people in interesting ways, very social ways, they, you know, help people find jobs and help people, you know, they have mixers and dinners and things like that. So I don’t know if that’s really the model of the future but it’s certainly, you know, an interesting one.
Just one last question, just touching on fraud. There’s obviously a host of companies working on identity verification, AML, KYC, do you anticipate more companies launching in that space, or do you think it’s already very saturated?
RV, NEA: You know, I think we talked about the statistics on how much capital has gone in. There’s not many sub-segments that are not saturated so it’s kind of an overarching theme. I do think that whether it’s regulatory concerns, some of these hacks, some of these fraud issues, the AML, you know, KYC issues, they’re getting more and more interest from the banks. And we have a fraud company, it’s not for AML KYC, it’s much more e-commerce fraud. But it’s analogous in that it used to be we don’t have that problem, no one says that anymore. So I think that whether or not there’s too many companies, the good news is on the other side which is the go-to-market, there is an opening now that’s pretty significant. Now it’s just incumbent on the startups to make sure that their product market fit which really tests the startup especially in a crowded market. They can align that and take advantage of it. Whereas before you had resistance on the go-to-market side from these banks, and I don’t think that is there anymore, the flip side because it is very heavily funded doesn’t mean it’s going to get any easier. It’s going to be very hard.
PK, Oak HC/FT: I agree with Ravi. And the problem is getting bigger, the problem is not getting smaller. So, you know, there is the opening, there is the product market fit. And, you know, fraud is changing, AML is changing, everything is changing overtime, and the banks and processes are much more open to bringing in an outside party that has, you know, new, more sophisticated technology, more modern that can help them in a greater way. And, you know, even Feeds which is similar to Forwarder which is beating the incumbents by 300 and 400 basis points, is they’re not catching all the fraud. I mean there’s still, you know, X percentage that gets through. So the fraud is changing and morphing, and we all know it’s moving from, you know, card present to virtual, and that’s going to demand greater and greater needs. And there’s more data to pull in so there are openings and the problem is bigger.
LK, Aspect Ventures: I agree. I think that there is a lot of opportunity for innovation on this front, and it’s AML KYC and fraud. They’re slightly different, but they go hand in hand. So AML KYC on its own, you know, I think we’re seeing companies that are thinking differently about that kind of verification. I mean, the incumbent technology is an ideology, you know, Jumio, where they’ve been having their own financial issues. I think that asking someone to identify a street that they lived on or their father from a list of people from publicly available information is pretty limited. Those are from public databases, like a fraudster can find that information, it’s not that hard. So there’s a lot of opportunity using data both on the sort of, you know, social side, on the sort of user behavior analytic side to really track digital behavior, to do verification in a way that I think is different. You know, we’ve seen companies like Socure doing that on more on the social side and Simility kind of on the analytic side. Both of which I think are very interesting.
But I think the big question is, you know, for the AML KYC piece in particular, and even sort of fraud risk scoring, you’re charging a onetime fee when a user is applying for an account. And then it’s not a SaaS model, it’s a fee model. And I think what you need to figure out as these companies need to innovate is, you know, what is the larger offering? What else can that data be used for in an ongoing basis to sort of create more value for clients such that, you know, they can really become big businesses? Because the actual dollar value being spent on AML KYC is not actually that high. It’s just a very hot issue because of increasing regulation.
OO, Thomson Reuters: We’re going to take some questions.
Kerry Wu, Tech Industry Analyst, CB Insights: Yeah. We just have a few questions. So the first is yesterday we heard Mario of Oscar Health talking about the cluelessness of the insurance industry’s tech organizations and why they’re building the full tech stack on their own. So with the legacy systems that financial services firms have, do you think it’s practical for a startup to build the entire infrastructure on their own from the ground up?
RV, NEA: I think no is the short answer. Unless you have hundreds of millions of capital and a very long time frame. I think that you could say that about a lot of industries. Whenever you’re going after a legacy industry that is slow moving, I mean we’ve had success stories for decades in other industries, so I think it’s doable. I think what you have to do is you have to figure out insertion points. I think the transition to the Cloud is a great example. I mean there’s a lot of on-prem legacy systems. Slowly there was this migration to the Cloud. And then once you had that ecosystem, then there was insertion points for application integration vendors and the like. I think you’re gonna see that in FinTech. But, you know, if we saw a company coming in and wanting to build a full stack architecture… . The other way is how you’re going to get folks on it. I mean, if you’re going to build that, the customer consumer data is still gonna be with the bank. So, you know, I think there’s definitely ways to innovate and disrupt. I think we also have to be practical in terms of what’s doable, and again that goes to the product market fit as well.
LK, Aspect Ventures: I completely agree. I mean I think as a startup you have to figure out what are you doing that’s different. I mean what is your value proposition and do that and try to, you know, get the other infrastructure that you need through vendors and partnerships. You know, I’ll give you an example, we have a company called SelfScore that is essentially a FICO alternative. I mean they look at alternative data to issue credit cards, and their first application interestingly is foreign born college and grad students who are thin file but actually quite creditworthy as a population. And so I mean we had early conversations with them about, you know, the strategy for serving this market and it became clear. Look, what they do that’s really interesting is in the data, and their ability to access, market to, and build technology for that demographic.
It’s not so much about being a credit card issuer. You know, so they have a bank partner and a processor partner, and that enables them to focus on the thing that they’re best at. And I think, you know, across industries, that’s important for startups to really focus on, you know, one or two things tops. And overtime you can build your own processor. You know, bigger startups have talked about buying banks to get a bank charter. So there are ways of doing these things down the road but trying to kind of, you know, boil the ocean at the beginning, to me seems pretty crazy.
PK, Oak HC/FT: Yeah. And we would be in agreement with everything Ravi and Lauren just said. And the only thing I would add is whenever we have sort of, you know, heard from folks that they’re going to replace the whole stack, whether it’s banking or whether it’s insurance, etc. versus, you know, point of entry and solving one thing is, you know, typically you come to a conclusion there’s sort of three problems. There’s number one, you know, the technology, you’ve got to build the full stack, and whether it’s tens or hundreds of millions of dollars, and technology is changing as you’re doing this. So there’s number one, kind of the technology. There’s number two, the data. The data is in the old stack and you gotta get the data into the new stack and how you communicate. And then number three, most people would say the migration issue for any large player today is, you know, a huge hurdle because how would you migrate from one to the other? And that’s frequently the major reasons you hear that it’s sort of, you know, not impossible but very inefficient to try to replace the full stack. That it’s much easier to be point of entry and then overtime let it evolve.
RV, NEA: And a good data point to look at is just the number of APIs over the last 10 years and see how it’s exploded. Look at it in the financial services sector, and I think it’s probably much less in the insurance sector to the person who asked that question. But look in the next few years, I think that’s gonna explode as well.
LK, Aspect Ventures: And the only thing I’d add too is from the regulation side, I mean if you go through partnership, you don’t have to deal with as much of the regulation and compliance. You don’t have to go through the crazy level of, you know, audits and certifications that you do if you’re building this full stack in house. So you’re not only outsourcing, you know, a bank charter or carrier but a lot of the liability, and regulatory, and certifications around that.
KW, CB Insights: So next question is, we’re seeing lots of cyber security offerings in the space but many are undifferentiated and not so compelling. Do you think that the cyber security space is overfunded and what areas do you still see are opportunities within cyber security?
RV, NEA: Well, it’s definitely overfunded massively so I would say. Just go to the RSA show and that will tell you. And if you don’t go, then don’t feel bad because basically San Francisco gets taken over for a week. I think it depends. You know, some of my partners do more bottom of the stack stuff in cyber security and there is… . It’s also I will say though on the flip side, cyber security, if you can make it work, just security in general, it is highly acquisitive space and you can take companies public. So the market embraces successful companies. So that is one reason why it’s overfunded because there’s been models. We have lots of them in our portfolio.
You know, I don’t play as much in that space. The closest I have, which Tricia has as well, is in the fraud space. And again I think there’s pockets where the product market fit is not, there’s still white spaces that you can go after. But, you know, I spend time in Israel and that’s a stronghold for cyber security, and there are lots and lots of these companies. And I think a lot of them, they’ve also gotten overfunded. We need a few years to see that settle out but there’s probably going to be a lot of deaths in that space.
LK, Aspect Ventures: We invest quite a bit in cyber security and I agree. I’ve been no different from FinTech in that sense but it’s definitely overfunded. I think what’s interesting is that you see cyber security moving away from what I would call sort of the era of building walls and looking for vulnerabilities and really moving towards sort of incident response and mitigation. Because the assumption now is, you know, there is a breach. I mean it’s, you know, different from fraud detection, and in this case it’s, you’re actually just trying to find out where the breach is, you know, try to decipher signal and noise and really get on top of mitigation as quickly as possible. So I think that’s where we’ve seen the world moving and where we think that there’s still quite a few opportunities. So yeah.
And the other piece is sort of the next-gen firewalls that look at really distributed networks. Because with so many enterprises now having, you know, remote offices, and public Cloud, and private Cloud, and on-prem, and BYOD, how do you bring it all together? And so those are two of the areas that we’ve spend a lot of time, but I agree, it’s pretty saturated. And RSA, the entire expo center is filled with booths, and you walk down the halls and it sounds like everybody is doing the exact same thing and very, very hard to tell any differentiation.
KW, CB Insights: The last audience question is for Ravi. So you mentioned cyber insurance. Can you tell us a bit more about your investment there and the opportunity you see?
RV, NEA: Yeah. So it’s company called Science. One of my partners is on the board, and really it’s a team out of Informatica that started the company a few years ago. The pain point they found is that boards, this is getting elevated to board level conversations where they really didn’t know the cyber threats and there’s these very high profile outages and hacks that we’ve all seen in the news over the last few years. And a lot of the boards are basically paralyzed and are having these discussions. They really didn’t know how to deal with that threat. And so there’s a whole industry that’s emerged, and this is really insuring for cyber. And there’s a whole ecosystem that they’ve developed with carriers and reinsurers, and it’s really taking off in terms of now you’ve been able to bound the threat, insure against it, monitor it. There’s a whole data layer that’s getting established. It’s still in its infancy in a market but I think it’s a market that’s gonna evolve significantly.
OO, Thomson Reuters: I guess that’s it. Thank you.
KW, CB Insights: Thanks.