Amazon’s Alexa smart home device may be popular with consumers, but views among venture capitalists were mixed on whether the voice-operated device is the next big thing in personal financial services.
Alexa uses a voice interface to help people complete tasks such as checking stock prices and the weather, or ordering things online.
Jay Reinemann of Propel Venture Partners — which has Spanish bank BBVA as a limited partner — said that Alexa’s “skills” are fun, but did not yet see a real place for it in financial services. He was speaking on a panel at CB Insights’ Future of Fintech Conference earlier this month.
However, Rohit Bodas of American Express Ventures disagreed and thought there was potential, if the consumer uptake continues to be strong. “If consumers choose to interface with Alexa, yeah, banks will start to do that.”
In discussing the “next frontier” of fintech, panelists touched on everything from the growing role of corporate investors, to blockchain, to the voice-operated Amazon Echo connected home device as a user interface.
Turning to bitcoin and blockchain, the panel was unsure on what the next killer finance app for the technology would be.
To laughs, Will Kohler of Lightspeed Ventures said, “We’re excited for the potential of what we don’t know.”
Turning to how corporate venture will help shape the future of fintech, the panelists said corporate venture capital groups aren’t doing a good job of convincing startup entrepreneurs why they’re worth bringing on as investors.
Part of the problem may be that many CVCs themselves haven’t established a clear sense of what differentiates them as investors.
“Every investor needs to bring something to the table,” said Rohit Bodas of American Express Ventures. “Corporate VCs need to figure out their value-add.”
Will Kohler of Lightspeed Venture Partners (pictured above), the only investor on the panel without corporate ties, went further, arguing young companies shouldn’t look to corporate venture as game-changing partners.
“Early stage, I don’t see a corporate investor necessarily setting a company on a different path they wouldn’t go down themselves,” Kohler said. “I don’t think a corporate relationship will get you there.”
The panelists were responding to a provocative statement made earlier at the conference by Fred Wilson of Union Square Ventures, who had asked rhetorically why entrepreneurs take CVCs money. “They’re doing business with the devil.”
When asked by the moderator, Penny Crosman of American Banker, if it was true that VCs send CVCs the “dogs” from their portfolio, Kohler said VCs wouldn’t get away with that for very long.
“This is a people business,” he said. “If you send around dogs you’ll get dogs.”
Penny Crosman, Editor at Large, American Banker: Thanks so much to the panel. Thanks to all of you for coming this morning. So our topic today is the next frontier of FinTech. Where the really dramatic, lucrative opportunity is going to be in the future. That’s something everybody wants to know. We have three very experienced practitioners who know a lot about this.
I guess to start with, can each of you share a little bit about either your personal or your company’s investment philosophy? What kinds of companies do you invest in? A little bit about what you look for and what you care about, or your values and mission. Jay?
Jay Reinemann, Managing Partner, Propel Venture Partners: Sure. So again, Jay Reinemann with Propel Venture Partners. It’s a bit of a startup venture fund that was formerly known as BBVA Ventures. We left the bank in February and they became our sole LP. There’s three GPs, I’m one of them.
Our high level philosophy is we want to invest in people we like and believe in. We’ve got a “no jerk” policy. We’re a pretty early stage investor, now that we’ve got ourselves outside the bank holding company rules. We’re investing in everything that is financial services enabled by tech and tech for financial services, it’s pretty broad. We’re investing, right now, at about a $150 million U.S. fund. It’s an SBIC fund, so it does come with some extra baggage there. And we’re in the process of opening up a European fund.
We look globally. We look for companies that are solving big problems. We like to be a good partner to them, so we’re trying to be a significant owner. Somewhere between 5 to 19% ownership, co-lead, lead.
PC, American Banker: All right, cool. Rohit?
Rohit Bodas, Partner, American Express Ventures: Sure. Hi, Rohit Bodas, American Express Ventures. We typically look to invest in sort of early to growth stage companies. Series A through C would be the vast majority of our investments.
In terms of objective, the objectives are drive, collaboration and partnership between American Express and our portfolio companies. And at the earlier stages, Series A, it’s more about helping with product development, sometimes helping them navigate the regulatory environment as well, to the more established companies, later stages about commercial agreements.
It is a focus we are… we tend to focus on commerce. So some of the traditional segments of FinTech like insurance markets, that’s not something we focus on. Commerce, both B2C and B2B are super interesting for us. We do invest across the globe and have some investments in Europe, Latin America, and Asia as well.
PC, American Banker: Will?
Will Kohler, Partner, Lightspeed Venture Partners: Will Kohler from Lightspeed. Thanks for having me. So Lightspeed has evolved into a larger, early stage fund. We raised Fund 11 not too long ago. It’s a $700 million early stage fund. So the kind of tagline there is, “It’s hard to consistently generate great returns when your funds keep getting larger and larger.” So you have to just rely on a lot of pattern recognition of what’s worked in the past.
And what’s worked for us, historically, has been enterprise infrastructure. It’s kind of been our calling card. And in the last 10 years, we’ve really worked hard. And one of our partners, Jeremy Liew, has done a great job building our consumer practice.
So within enterprise and consumer, a lot of times those are very distinct practice areas, as we all know. If you think of Snapchat on one hand, and then Nutanix on the other. I think the really exciting part of FinTech broadly defined is, in a lot of ways, the best companies are what we look at sometimes are at the convergence of those two. It’s really harnessing the best of infrastructure, whether it’s data insights, automated workflows. Just some thoughtful way to get this product to be engaging. And at the same time, there’s a lot of consumer go-to market nuances that, if you’re strictly enterprise, you don’t appreciate or understand.
So those are where we’ve seen and continue to look for some of the biggest outcomes. And 80% of what we do is seed A and B, so we’re early-stage folks. We have raised, most recently, a select fund to back our pre-existing early stage investments. But it does enable us to look at some unique growth opportunities as well.
PC, American Banker: So there’s been a little bit of a debate here, I think, about corporate VCs versus independent VCs.
WK, Lightspeed Venture Partners: Just going to jump right into that.
PC, American Banker: Yeah.
JR, Propel Venture Partners: That is…
WK, Lightspeed Venture Partners: So we’re done with FinTech. Let’s just get right in it.
JR, Propel Venture Partners: Did everyone hear that on Tuesday? There was some fun stuff… Fred Wilson.
PC, American Banker: What do you recall Fred Wilson saying?
JR, Propel Venture Partners: Something about the devil. The devil and the corporates who just buy, not invest. What else?
Woman: Dumb money.
JR, Propel Venture Partners: Yeah, dumb money. Fred, amazing investor, he has kind of recanted those kind of comments in the past. But on Tuesday, he was doing a great job. And given this audience, also, is a bold move to do. I hate to say, I do agree with him with so much of it, though. And for myself… I know we share some investments, Rohit and I.
PC, American Banker: You can hold hands, that’s okay.
WK, Lightspeed Venture Partners: Talk each other through this.
JR, Propel Venture Partners: I’ve talked to my therapist. I’ve been on both sides. I started this venture path in a corporate world at Visa. I got super lucky to get into a team that had made a bunch of money for Visa back at the beginning of the late ’99, 2000 and rode that through a little bit. And then joined BBVA back in 2011.
Another classic corporate venture… and I don’t know if many of you guys know about this, but the classic corporate venture profile is that you’re investing off the balance sheet. You have a bunch of people that are responsible for finding, hunting, closing, managing those investments. Oftentimes, you’ve got your personal reputation on the line, you’re doing it because you want to do this, it’s fun. But unfortunately, in most cases, it’s too complicated to get a structure where you actually have a financial incentive to do great deals. It’s a corporate incentive process, and sometimes, getting things like carried interest, when you have the potential of making more than your CEO or the other top paid executives just messes up HR. You just can’t get there.
And that’s the traditional… I mean, that’s what Will has. He’s got a real structure. He’s putting his own money in. And that’s… you’re completely aligned with the other investors, with the entrepreneurs when you have money at risk and you’re going to share in the fun in the end, hopefully.
Corporates are a little bit more confusing sometimes, because they don’t necessarily follow those same rules. Unfortunately, there’s some turnover that happens because of their own doing. Because if they’re a good investor, they go to somewhere where they can get a lot of money, or the corporation says they don’t want to do this anymore.
He’s got some points. I think there’s ways for corporates to solve it, and I think he should have qualified that, so that he wasn’t blanketing all of them. There’s good ones, and then maybe there’s others that are still learning how to get it done.
PC, American Banker: Any thoughts, Rohit?
RB, American Express Ventures: Sure, definitely. Yeah, I agree, there are challenges. There are issues with corporate VCs. And there are so-called “dumb investors.” But I say there are dumb investors on the financial side as well.
I look at our track record and say that, “Okay, 2015 was probably our slowest year.” We walked away from… I can’t recall how many investments. And it seems like the peak, in terms of valuation, was Q3 last year. So yeah, take that dumb money.
In terms of value add, I think every investor, be it a corporate or financial, has to have something that they bring to the table, that’s more than just capital. There are financial VCs that are making introductions, they’re taking active board seats. Corporate VCs have to first figure out what is their value add. And everyone will have a different approach, a different mindset.
Our value add is about… so we invest ahead of the business units. We help nurture these relationships. And we look out for our companies. We look out for our portfolio companies, and an investment by Amex Ventures does not give Amex any preferential rights. But it helps in what would have been a vendor relationship to more of a partnership. And there are definitely benefits to that. Amex has tremendous capabilities in fraud prevention, data analytics, even before the term “big data” was coined, Amex has been crunching away. We probably operate the largest machine learning cluster in the world.
And we’ve been able to help our portfolio companies with data science help and validation of use cases. I think that’s…
JR, Propel Venture Partners: The two co-investments we have, some of those are fairly early-stage. I can’t imagine your back-end corporation would have engaged if you guys didn’t invest. I mean, those are both significant.
WK, Lightspeed Venture Partners: Yeah, I guess as the traditional VC, I’ve lived through this a bit. I was an entrepreneur in the telecom go-go days, and that’s when communications companies had a lot of corporate VCs, or corporate activity and strategic investing activity. Some still do, but a lot of those have gone away.
And I think when there’s a lot of corporate investing in a sector, generally, that’s also a signal that the corporates themselves are in a bit of trouble, or at least see it coming. Because you can’t underestimate that sometimes, this is a lot about learning. It’s not just about, “Hey, we can help you get from this huge milestone to this other.” They’re doing it to learn as well.
And that really comes down to the decision, I think, of the entrepreneur, and the only thing I would add is in my experience, early stage, I don’t see a corporate investor necessarily setting that company on a different path than they should be able to accomplish themselves. I don’t think it’s going to fast forward anything.
I think you need to have that core competency there yourself. You need to understand what your product is, if customers care about it, how you sell it, how you scale it. And I don’t think a corporate relationship in the early days is necessarily going to get you there.
Now, Rohit made a really good point, which is getting a traditional VC may not either. They just may not help you as well. So we’re all kind of held to that standard of helping a company in those early stages get to the next point.
I think the tagline of corporate usually plays, or at least makes more sense to me, in the later stages when there is a potential business opportunity or distribution agreement, or whatever it is, that the company could actually execute on. I mean, it doesn’t help to do a distribution agreement with IBM if you’re a Series A company. It will bury your company. And we’ve all seen this play out. It’s like you show up to the board meeting, the CEO says, “We’ve got an IBM OEM agreement.” You’re like, “Oh, shit.” That’s not good. We don’t know how to sell this ourselves yet.
So I think at the right stage, it’s a very valuable potential additive layer of financing, along with a business relationship in the early stage. I do agree with Fred in that you have to be very careful. And then there’s the market signalling, there’s the focus, there’s a lot of things.
So I think that’s the path we’ve seen work. And I’m actually seeing it in a company I’m involved with now where they’re a corporate partner with Citi and they’re executing very well on it. But that was a two-year execution process to get that distribution in place. That’s just the reality.
PC, American Banker: Sure. Rohit, did you say a minute ago that you think the FinTech market itself peaked last year?
RB, American Express Ventures: In terms of valuations, yeah, I definitely feel that. I mean the sky-high valuations that we were seeing last year definitely either have ended or have… it’s shut down. And I think a number of factors for that. There were a number of investors who sort of rushed into FinTech in the last few years. A lot of corporate money, a lot of financial money as well sort of trying to get into what they looked at and saw as the next big opportunity.
And yeah, that led to skyrocketing valuations. And I think that valuations are probably cooling down, but not the pace of investments. Investors are probably taking sort of what I would say “normal” time to do their diligence. This year is probably going to be the most active year for us in the past three or four years in terms of number of investments that we would close.
But the rounds are definitely seeming to be taking a lot longer than what we were seeing last year.
PC, American Banker: I’ve noticed that venture capitalists don’t like the word “bubble.” But Anand’s group has done graphs that show the trends in FinTech investment, and they go up and down, and they went down in the fourth quarter, back up in the first quarter of this year. If you had to project for the rest of this year, what do you think that trend might look like? Overall investment, venture capital, private equity hedge funds?
WK, Lightspeed Venture Partners: I think a number of deals will continue to pace well. Because I think people are doing… they’re just pushing downstream in the earliest stages. And I would imagine if you talked to people who are running some of the higher velocity incubator angel groups, you’re seeing more FinTech as part of the distribution of types of companies. And the beautiful thing of what we’re all doing is it doesn’t take much to get one up and running. And at least the perception is the value propositions are there across all FinTech. Now, whether that’s real or not, we’ll see. So I just think you’ll see a lot of velocity continue.
Actual aggregate investment dollars, I think, will slow down. Because I just think there were such big outliers in this sector. You look at some of the larger insurance companies raising $50 million to $100 million. That tends to skew the gross dollars, but really on a… I think deals will go up and gross dollars will gown.
JR, Propel Venture Partners: I think Q1 was also fueled by some foreign deals. Some big Chinese, Asian money. Otherwise, I probably would have been flat. I guess we should ask Anand. But I would agree with the panel. I think we’re supposed to disagree. But no, unfortunately, I think from my perspective, there’s a lot of low-hanging fruit still. The incumbents, the incumbent industry is still servicing their customers in the retail channels, the physical channels, and just everything that’s related to digitizing their businesses needs to improve. And this wave of the unbundling is they’re picking off every single piece of it, and it’s going to just continue.
WK, Lightspeed Venture Partners: I do think, though, we’re all getting a little bit of insight. How hard it is to succeed at scale in this ecosystem. And you’re seeing it with… we talked a little bit about some of the lending companies and what they’re experiencing at scale.
And I think that is now… the expectations of the investment community as well as the entrepreneurial community of, “Okay, what problems am I going to have to solve for two to three years from now, versus what’s right in front of me?” I think that’s coming more to the forefront of conversation. And that didn’t happen before. I think people just saw these huge monoliths ready to be disrupted. Let’s go attack them. That’s the beauty of what we do. And now, it’s, “Okay, there’s some real issues down the line.”
JR, Propel Venture Partners: And then, maybe we need to partner with them instead because we need to use the charter…
WK, Lightspeed Venture Partners: At the right time. Because you don’t want to take…
RB, American Express Ventures: After I invest.
JR, Propel Venture Partners: Well, there’s just a lot of those neo-upstart banks that… and BBVA bought one of them, which is an absolutely great company. But I think entrepreneurs realize how hard it is when you don’t have the charter, and getting a bank charter right now is not very easy. And with… I don’t know what’s happening with the Bancorp guys, but I don’t see them as much anymore, and I have a lot of respect for it, because they started a lot of this, and you just don’t see those guys. And now, there’s a handful of other banks that are stepping in, but they’re also very small banks, very… I’m not sure what kind of technology they have. Their regulatory relationship might not be as good. So those guys as the base of you guys building your businesses doesn’t sound so good. There needs to be some other big guys that are going to step in and be the bank for the startups, I think. SVBs should be doing this.
PC, American Banker: Yeah, there are a number of banks that have gone into this. The OCC claims it’s becoming more willing to consider giving FinTechs charters. But they do famously move very slowly. So it may be a while before that actually happens.
But do you guys agree… because there are people in the industry who say, “All these FinTech companies used to all be disruptive challengers. They all wanted to un-bundle the banks,” as you just said. And that there’s some trend toward more collaboration with Chase and OnDeck, with BBVA, and FutureAdvisor, with… here and there, we’re seeing examples of partnerships. But I would also suspect if you looked at the ratio of how much that’s happening, versus how many FinTech companies are out there, which I think is around 10,000, that’s still a fairly low ratio. What do you guys think? Do you see a trend toward more collaboration? Going from disruptors to collaborators? Or do you think there is still a lot of disruptors out there that are still building momentum?
WK, Lightspeed Venture Partners: We have an investment at a company called Blend Labs, and they work with big banks to, frankly, streamline the mortgage origination process. I think it’s a very hard technical and workflow challenge to create a solution that can be integrated into that channel at any type of velocity and then show value to them.
But that’s what makes this company, I think, really cool. But I also think that’s why it’s a very hard proposition to go and try to supplement how those companies work, get integrated, and the sales cycles, as we all know, are very hard…
JR, Propel Venture Partners: Enterprise sales.
WK, Lightspeed Venture Partners: …so it’s a certain type of beast that goes and does that and succeeds. But we absolutely believe there’s huge and immense value there. Because within these large fin services companies, I think there is a lot of desire on their profitable business lines to protect that, and then maybe abstract out some costs in some of the other ones.
On the other side, though, I think just the carrot at the end of the tunnel for becoming a branded play, and if you look at SoFi of the world, it’s just so pronounced because brand in this space just… it’s totally changing. The people who are the ultimate users… we all talk about millennials or whatever. But there’s this notion that this has just not been a frequently engaged product in your life, student loans.
But now that it become part of your life and a brand, and then take it from there and become more of your AUM aggregation, I think it’s just such a powerful carrot that we see most people going down that path versus trying to fight through the channel.
PC, American Banker: Sure. You just brought up mortgage technologies, so let’s get into the meat of this conversation, which is what are the emerging areas that are going to be really lucrative fields of opportunity? So you brought up mortgage. Jay, I know you’ve also referred to the mortgage process as “ugly,” I think. You see opportunity there as well?
JR, Propel Venture Partners: Yeah. There’s just so many areas still that… like I was mentioning earlier that the traditional banks, financial services companies, mortgages are a very complicated process, and for them to build the technology or to buy the technology to do this 100% digitally is still not very easy. So most of that stuff is relegated to the branches.
That should be fixed. This does not need to go to branches, or improve the products that the branch people have to be able to service the customer so it can be done much faster. Every single complicated product that a bank offers is… I’d hate to say, somewhere… probably 90% of it is done still in the branch channel. That’s opportunity.
PC, American Banker: Sure. Just to play Devil’s Advocate, there have been cases of startups that have said, “Okay, we’re going to take a difficult problem the banks have and we’re going to solve it.” And then they bump into all this legacy technology the banks already have that it’s hard to be compatible with lots of banks because they each have different things. Standard Treasury is an example, where they said, “We’re going to give banks open APIs, which they can provide to others, and they can open their technology to others and have almost like an app marketplace model.”
But they found that going to different banks, each one was so different and had its own spaghetti complicated, convoluted IT situation, that it was too hard to try to build one thing that would work for everybody. So they ended up getting bought by Silicon Valley Bank. Now, that may just be a strange outlier example, but do you guys have any thoughts on what it would take for a startup to really build something successfully, that the incumbents can all just readily buy into?
RB, American Express Ventures: I think the problem of having legacy infrastructure or having to maintain that, that’s not going away anytime soon and that is a tough problem. And that’s why it’ll be so lucrative for someone who can figure it out. You mentioned Standard Treasury, but there are numerous other companies that have done a fantastic job of enabling API functionality and allowing banks to export data and build applications on top of it. Plaid is a company that comes to mind that just executed and done an amazing job.
So yeah, it is a tough problem. And as a startup, that’s what makes it more interesting.
WK, Lightspeed Venture Partners: In our portfolio, this isn’t FinTech investments, but they’re enterprise investments that are selling to the FinTech vertical. And they’ve been very successful. One of our companies is called MuleSoft. It’s getting applications to talk to each other. And they’ve been very successful in financial services.
I just think if you’re going to sell in there, you can’t try to take on too big a problem at the beginning, and try to get all these disparate systems to look at the way you look at the world. So I think there are shared issues, particularly in infrastructure, that a lot of these banks have.
I think… I mean, debt collection, it’s going to be a huge problem. All the banks are going to suffer from debt collection issues, a lot of them. So can you figure out a way versus collection agencies to help them do that? I just don’t think you want to take on too much. I think a lot of startups have learned that lesson the hard way, selling into that channel. You’ve gotta start somewhere very focused, figure out what the commonality is. And if you can’t figure that out early on, just pull back and try to sell something else.
PC, American Banker: Yeah, that’s a good area. And there are a few companies that try to provide something… an app that gives you better communication with the borrowers, so that before it gets to this horrendous 90-day, 120-day late situation, you’re communicating with them, you’re figuring out what they can pay, you’re negotiating…
WK, Lightspeed Venture Partners: Yeah, it’s 0 to 1. It’s like you’re a customer or we’re trying to extract cents on the dollar. This is not a retaining relationship. There’s got to be a world in-between. I’m sure we all have that little credit blip from that Verizon bill you didn’t pay 14 years ago that shows up. Like, “How did that happen?”
PC, American Banker: Kenneth Lee at Debt Buddy has a company that does just that, credit repair. So they kind of walk the customer… tells them what their problem was, and they figure out how to fix the problem on their credit bureau reports and files.
So let’s talk about other areas. What about emerging consumer technologies? I mean, one thing that’s kind of cool is the Amazon Alexa, the Google Home. That having that device in your home that will help you make appointments, do your grocery list. Potentially, you could do your banking or you could make payments, pay your bills, or pay somebody else through it. Do you guys see that becoming either a payment or a financial services technology?
JR, Propel Venture Partners: Can I ask how many people have Alexas at home? Not many. Surprising. We have one. It’s great at telling jokes. That’s the most common feature used.
PC, American Banker: Does it do it randomly?
JR, Propel Venture Partners: You can ask it. “Alexa, tell me a joke.” And she’s got great ones. We use that for weather. It plays great music, it’s a great speaker. But I guess I don’t see it. I was looking… Alexa has “skills” and that there’s a marketplace that’s being built out where Amazon’s opened up this for developers to build on top. I think right now, Capital One is the only one I’ve seen… do you guys, does Amex… you should, guys.
Anyways, it’s very basic. It’s, “What is my balance?” I think maybe you could pay your credit card. I don’t think they have payments yet. If you have the mobile app right now, it’s so easy to do these things. Maybe… I don’t know. For me, it’s not that big a deal. I’ll just stick to her jokes.
RB, American Express Ventures: I look at Alexa as part of this broader category of… we’ll call it “Internet of Things” or whatever. And I do think that it’s going to be very interesting. Where Alexa or your car, or your Fitbit are all devices that can be used as an identity layer. Users will have the option of choosing what device they want to use to interact. It’s not necessarily going to replace your phone. I think the phone will still continue to be the most important device that you would use to interface.
So I think there are potential use cases that make it interesting. But not as a standalone… something nobody is going to support or do banking only on Alexa. They’re going to be everywhere. And you want to be where your consumers are. And if they choose to interface with you through Alexa using voice recognition, etc., yeah, banks will get there. If you want to embed payments in your phone or your watch, on your Fitbit, yeah, you already have those things right now.
JR, Propel Venture Partners: It seems like a feature, not a company.
RB, American Express Ventures: Yeah, exactly.
PC, American Banker: Well, maybe the company’s voice recognition or the category? Because we have voice recognition. Then you could do it on your app, you could do it over the Alexa. You could do it in your car. Which I want to talk about next.
WK, Lightspeed Venture Partners: I think there’s a lot of reports coming out now that the number of mobile apps we actually all engage with is few. And if you actually look at the type of content people actually care about, it’s probably not financial. Snapchat… you just look… what do people really want to do day to day?
So we have a small investment in a company in town called Cheddar, which is the CNBC for millennials. It’s trying to make engaging short-form content live about a lot of these trends, what’s going on. I just think there’s a level of awareness that people don’t have about what goes on in the back end of this. I mean, despite everything about Zenefits, they brought to the table this notion of brokerage commissions. And you could actually provide free, awesome software, make people happy, and then you can monetize it.
Small and medium-sized businesses did not know that existed, and then they’re aware of it. I just think consumers are very similar. They haven’t really gone in-depth on some of these product services that will protect their lives, that will benefit them. But it hasn’t been presented in a way that’s easy to use, frictionless, and affordable.
So I just think it’s a huge awareness of how the systems work. We all look at wealth management and the robo-advisors. It just wasn’t… it takes a long time to build a brand that… that wealth advisor is charging you 2.5% and we can reduce the basis points. And all you effectively do is get market returns one way or the other.
I just think this awareness is the biggest challenge, and where the best companies will really present something that people realize it does impact them, it’s meaningful. We’re not all going to be crazy and say you’re going to engage daily with some of these financial products, but at least make it something that they’re aware of.
I just can’t imagine walking into… asking my device a lot of FinTech-y type things. I don’t know.
PC, American Banker: That’s fair enough. We talked about mortgage, we talked about debt collection, we talked about home banking, I guess you would call it. What would you say… for each of you, what would you say is like a really interesting, emerging area that you’re actively looking at companies in, or want to look at companies in?
WK, Lightspeed Venture Partners: Sure. And this is totally self-serving, we’ve made an investment in a life insurance company called Ladder. I think it’s fascinating on the theme I just talked about of the data on traditional life and how companies have gone to market with it and sold it, it isn’t good. But as a functional value prop for your life in that 15 to 20-year portion where you’re exposed with rising student… like, education costs, home costs, you should be protected, and you should protect other people in your family.
So just simple, to the point, but very complicated in how you build a company around it. I think the payment structure in the United States is ridiculous and I know that’s a really basic comment. But supply chain financing, the fact that payables take 90 to 120 days for good people to pay good suppliers. I’m not talking about default. That’s just like a systematic breakdown of how you buy a good, resell a good, and pay someone for that service.
And that is starting to happen now in the on-demand labor force. People are working, and they’re working multiple jobs, and they want to get paid for labor that they just provided, but they have to wait. You have to wait. And there’s just so many avenues in the system that has been set up over the last 100 years that are structural.
Now, a lot of these are more features. But so many great companies start by just solving a little problem and getting that wedge, and growing it into something bigger.
RB, American Express Ventures: I agree. B2B payments, financing, super interesting. In fact, just yesterday, we announced our investment in a company called Tradeshift that does that. So we’re very excited about that.
PC, American Banker: What do they do?
RB, American Express Ventures: They optimize and they help companies better manage their supplier payments. There’s a lot of inefficiencies out there. And there are many more opportunities on the B2B side. In fact, B2B does not get as much attention as B2C payments, which sort of makes it much more interesting as well.
Other than B2B, what we are focused on… sort of AI messaging, sort of chat-based commerce, and that’s not a new phenomenon. In Asia, it’s been used widely for several years, but definitely something that’s only now that… so I guess coming to the U.S.
AI, very interested in that category. And I don’t look at AI as just a collection of different technologies. But we have seen tremendous advances in machine learning and LP, etc., where you can look at AI as one category. But how do you use AI to provide better customer service? How can you use AI to do better marketing? Numerous opportunities out there, and we’re very excited about some of the companies that we’re talking to.
JR, Propel Venture Partners: I would say in any of our financial services companies, where anyone is trying to do underwriting, if we don’t see they’re leveraging AI or machine learning, there’s a problem at this point. It’s something… we wouldn’t look at it. And we do see a tremendous amount of lending payments, even on the customer service, the marketing side.
We haven’t gotten, just in terms of future tech, we haven’t gotten so geeky as like the drones or anything like that yet.
PC, American Banker: And so what?
JR, Propel Venture Partners: Drones…
PC, American Banker: Drones?
JR, Propel Venture Partners: Waiting for the drone to go get my money. The six times I have to go to a ATM a year or something.
WK, Lightspeed Venture Partners: But for insurance, there’s drone usage.
JR, Propel Venture Partners: For data collection?
WK, Lightspeed Venture Partners: Yeah. It’s really interesting. Because you can collect hard to get data sending a drone up in the air and doing appraisals and assessments. And we have a commercial drone company, and that’s the best part of doing this, is you don’t see that coming. You just know there’s a trend. Then who are the people that care? Mining and insurance companies. Who knew?
PC, American Banker: I just picture a drone hitting me in the head. I want insurance against drones.
WK, Lightspeed Venture Partners: You probably should be insured.
JR, Propel Venture Partners: Drone insurance.
WK, Lightspeed Venture Partners: It’s a different kind of insurance. We have life insurance for us, but…
PC, American Banker: I’m a little old-school about… Let’s see if we have questions from the audience. You probably do.
Kerry Wu, Tech Industry Analyst, CB Insights: A few questions back here. The first is, “Do you think partnerships, acquisitions, or IPOs will be the most popular for FinTech over the next few years?”
JR, Propel Venture Partners: If we’re… obviously, IPO and markets are still tough. So I would expect trades, M&A going to be there. Are the incumbents going to be the one to buy? I’ve got some experience in that, and from a banking perspective, that’s… I think the banks should be buying this. They need this digital talent. Especially if you can get a real visionary founder group, an excellent technologist. Because that’s hard for banks to get those guys right now, it’s nearly impossible.
However, that’s also extremely complicated because of some of the way that is a risk-weighted asset and what it does to capital consumption. So you’ve got to look hard, or you need some serious executive support to get through that, plus the regulatory approvals that you may need. I think some larger banks are even probably being banned from doing that kind of M&A right now.
But I definitely think there should be more incumbent acquisitions.
PC, American Banker: But partnerships is probably the bigger category?
JR, Propel Venture Partners: Probably. Acquisitions seem more necessary.
PC, American Banker: Any other thoughts?
RB, American Express Ventures: Yeah, partnerships. We can certainly have more partnerships. I think that’s… definitely large companies should be partnering with startups and vice-versa. In terms of acquisitions, yeah, I think that probably we should see some uptick in that as funding sources perhaps become more constrained, more companies would be looking for an exit. And not just from, acquired by large banks. I think there are opportunities for startups themselves that allow the larger ones to make some of these smaller acquisitions.
Coming back to how scale is important, and once you own a customer, trying to leverage that customer relationship and expand into new product categories. Some of the good companies have managed to raise massive amounts of money last year, expecting a slowdown. And there is an opportunity wide open for some of these smaller acquisitions within startups as well.
WK, Lightspeed Venture Partners: I guess I would add a fourth, which is kind of an activity wind-down or just not sure what to do next. It’s definitely not going to be IPOs, we know that. I wish. There will definitely be some high-level M&A activity for the really good companies. Partnerships can sometimes sound like, “Okay, we just figured out it’s super expensive to acquire customers, and our origination is what this actually comes down to, and we don’t have…” or it could be, “Wow, these third party costs of capital is drying up because credits are changing, and some of these banks are starting to get some new data that now there actually are defaults in some of these lending platforms,” and that may slow down.
So I just think there’s going to be a lot of people who are trying to figure out what to do next after the initial Series A or seed. And now it’s like, “Okay, go to market, hard.” And there’s just been so much volume that’s gone in, that I think that’ll be the fourth category. And I don’t know if that’s a partnership or an acqui-hire or a, “Let’s just pull back and see.” But I think you’re going to see a lot of that.
JR, Propel Venture Partners: I’ve gotten a surprisingly large number of calls where a team is saying that their board is asking them for looking for strategic options.
WK, Lightspeed Venture Partners: Yeah.
JR, Propel Venture Partners: And everything’s on the table. Very large companies, like some of the unicorns, to very small companies across the board.
WK, Lightspeed Venture Partners: It doesn’t feel so strategic when you say that, does it?
JR, Propel Venture Partners: It’s a code word, you know?
WK, Lightspeed Venture Partners: No, I get it.
PC, American Banker: Any other audience questions?
KW, CB Insights: Great. So the next question is, “You’ve all made investments in blockchain. Are you bullish or bearish on new investments in this space?”
PC, American Banker: I was actually going to ask that.
RB, American Express Ventures: Yeah. We are very bullish. I think we look at blockchain as something potentially game-changing. Again, I think it’s great that the conversation has moved away from the currency to the protocol. That’s how we look at it. But I think there… we haven’t figured out what the killer application of the use case needs to be. How do you take advantage of this distributed nature, which, going back to my telecommunication days, this is similar to point to point communication, to ad-hoc communication just makes a network inherently more robust and more tolerant. But for that, you have to have massive scale to see the OpEx savings.
And many others… there’s definite advantages in blockchain. But the use cases are probably… we haven’t quite figured that out, what is the killer use case.
PC, American Banker: So it’s interesting that you’re bullish on it, but you don’t know what it’s going to be used for.
JR, Propel Venture Partners: I think that’s why the…
RB, American Express Ventures: And there’s potential, there’s potential, right? And you expect smaller entrepreneurs will figure it out.
PC, American Banker: Sure. Well, people have suggested securities clearing, payments, even mortgages potentially…
JR, Propel Venture Partners: I want to hear what Will has to say.
WK, Lightspeed Venture Partners: I haven’t done a blockchain investment. We do have one, and I was going to say something. But I think I’m going to latch onto that we’re bullish about the potential of what we don’t know.
JR, Propel Venture Partners: Is that all your blockchain serious…
WK, Lightspeed Venture Partners: That sounded pretty good.
PC, American Banker: What’s interesting is there was a question recently, is FinTech… is the hype exceeding reality? And I would think blockchain is like a perfect area where you would ask that question.
WK, Lightspeed Venture Partners: There’s so many things that when you look back 10 years later. So some of these things just take time. Now, I don’t know if blockchain is one of those, but it certainly is interesting with really, really smart people to find out or see what some of the derivatives that are coming out of it. And some of the movement by even large institutions of starting to evaluate this notion of the ledger.
So I think now it’s easy to say reality is… hype far outpaced reality, and now, here we are and it’s tough. So some of these things just take a very long time, and the derivatives are what spawn the ultimate prize. Or this spawns the derivative.
So I don’t know where this goes. I just know there are really, really smart people thinking everyday about this, and a lot of capital has gone in. There will be a lot of, unfortunately, not great investments or returns, and jobs lost, which really sucks. But I do think… there’s too much focus for it not to end up somewhere.
Yeah, the hype thing is always hard to… yeah.
JR, Propel Venture Partners: We have an investment in claim-base. I am bullish on blockchain with Bitcoin. I’d prefer open versus closed. So I think I understand why a lot of the financial institutions right now are talking about blockchain because the regulators and the compliance departments and legal departments of the organizations don’t like you talking about Bitcoin because it’s potentially scary.
But I think, unfortunately, it’s the most efficient way of running a blockchain. We know it works with Bitcoin or Ethereum. But when we get to a private blockchain, you have a database, and then I think we have pretty good database technology and security and tokenization. I don’t know if the incremental improvement is worth it.
PC, American Banker: Sure. Glad you disagree on it. One more question from the audience?
KW, CB Insights: Sure. So this last audience question is for Will. “Is there any truth to the notion that traditional VCs only go to corporates with the ‘dogs’ of their portfolio?”
JR, Propel Venture Partners: That would be awesome.
WK, Lightspeed Venture Partners: First… I think I’ll try to answer that. But I think it’s really important that… and I know this is a tagline for traditional… it is the entrepreneurs, it is the CEO and management teams that are making these decisions. It’s not traditional VCs walking around knocking on… I mean, these are really smart people. If I walk up with dogs, and you know what dogs… I mean, that’s just not how the system works. These are entrepreneurs who know what is best for their company, know what they need to do for that next round of capital and who has the best access point for it.
So if they decide, “You know what? I want strategics…” you know, to answer the point of dogs, VCs accuse other VCs of that. “Do you send me your dogs and I send you…” I mean, it’s like… so I can’t answer that, unfortunately. But I do want to stress the point that we are very much just part of the conversation with our management teams of what’s the right course of the next round of capital and what the company needs to succeed, and who is the best person, team, corporation to provide that? And frankly, we’re trying to do the same in early-stage deals.
So I know that’s kind of idealistic, but I just… dogs are… I don’t know. I’ll kind of leave it at that.
JR, Propel Venture Partners: Dogs are your best friend, aren’t they?
WK, Lightspeed Venture Partners: What?
JR, Propel Venture Partners: A man’s best friend.
PC, American Banker: I love dogs. That was very diplomatic. Any other thoughts from either of you?
JR, Propel Venture Partners: Will said it. This is a people business. And if you’re sending dogs around, you’re going to get dogs back.
PC, American Banker: Fair. Well, unfortunately, we’re out of time. Thank you so much for being a great panel. I appreciate it.
JR, Propel Venture Partners: Thank you, Penny.
WK, Lightspeed Venture Partners: Thank you, Penny.
RB, American Express Ventures: Thank you, Penny.
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