It is no secret that a massive digital transformation is taking place in financial services companies and in view of the growing number of non-financial companies that are also expanding their offerings to include financial products.
Still, Sheel Mohnot, who was formerly General Partner of the fintech fund of 500 startups, and Jake Gibson, co-founder of personal finance startup NerdWallet, were a little surprised at investor interest in their early-stage fintech venture company, Better Tomorrow Ventures or BTV.
The company has just closed its debut fund of $ 75 million in capital commitments, exceeding its initial target of $ 60 million. Even one of his earliest investors, Michael Kim of Cendana Capital, is surprised. "Remarkably, they collected a lot of it during Covid," says Kim.
We spoke to the couple yesterday, who have already invested in 13 startups with the fund's capital and led nine of these deals.
TC: The good news is that you are focused on fintech. The bad news is that fintech reviews are going through the roof. How do you compete?
SM: It's true. Everyone decided that what we've been talking about all along also corresponds to their beliefs after exits like plaid and credit karma took place. Everyone became a fintech investor. And you are right that this has resulted in a surge in ratings. However, to a certain extent, that's fine. This means that one of our companies has already received a pretty massive premium, partly because of this phenomenon.
I also think we are able to win deals at better prices because we are both founders. (Mohnot sold one company, FeeFinders, to Groupon in 2012). And everything we do is fintech. Therefore we understand better what founders build than generalists.
JG: I think (these things) agree that we've been able to pay prices we think make sense and get the property we want. This is not the 4v16 game others play (where VCs put $ 4 million on a pre-money valuation and own 20% of the company). I think all but one or two of our investments are in repeat founders who see the value of working with partners like us.
TC: How much property are you aiming for for that first check – 10%?
JG: Right, 10%, even though we're really shooting for 12%.
TC: And do you turn to (Specialty Vehicles) to hold your share when certain companies gain momentum?
JG: Yeah, I've done quite a few SPVs in the past. I've invested in 90 companies as an angel investor and I think we probably put more than $ 40 million between the two of us in the last five years prior to BTV, including SPVs in addition to angel investments. (Editor's note: some of these earlier offerings include Chipper Cash, Albert, Clear Cover, and Hippo.)
TC: Which companies belong to the BTV portfolio?
SM: None were announced.
TC: Not one ?!
SM: Nobody announces their seed rounds anymore. When I started my company, I wanted as much coverage as possible. I thought that was great for the company. Now founders don't feel that way, very few want to announce this.
TC: But there are advantages to recruiting investors or future investors and getting them on the radar. Why do without it completely?
JG: Competition to a certain extent. You don't want people to know what they are working on because once you see a competitive round of startup, you see a lot of other startups doing the same. I also think the announcement doesn't have that much upside potential anymore. When most founders see their starting round, they are in the process of upgrading their Serie A. The dates you see in Pitchbook are usually six months (behind).
TC: Who are your investors?
SM: We have founders of fintech unicorns. We have a couple of fintech venture funds, fintech-focused general practitioners from later funds, some insurance companies, and Wall Street folks who help us keep track of this side of the market as well.
JG: We are also supported by a kind of who's who of the Fund of Funds who support aspiring managers: Cendana, Industry Ventures, Vintage (investment partner), Invesco.
TC: Did you know many of these investors before the pandemic brought everything to a halt?
JG: Some, but we had to sell a lot of them cold through Zoom. We did an initial deal last December – that capital came from Cendana and individuals. At this point we had started discussions with other institutions, but everyone said it would take a while and the institutions would not come until you raise your second fund. So we didn't have high hopes that we would get many of them on board.
When March and April arrived we thought we'd need to raise a smaller fund. But then things opened up again, people went back to work, and we were able to close down institutions we had conversations with. Then the people came from the woodworks because the technology got hot quickly, but above all the fintech industry, with all the IPO and M&A activities. People said, "We want a fintech exposure now and we want to invest in a fintech fund and you are the only game in town."
TC: What do you have to see to write a check?
JG: Our thesis is that everything is fintech, so we invest across the board: payments, loans, banks, real estate, insurance, B2B, consumers – everything that is supposedly fintech. We believe that many companies that are no longer fintech today will look like fintech later, with more and more tech platforms dedicated to financial services. We invest in the pre-seed and seed phase, but also meet with founders in the idea phase to sometimes dissuade them from setting up a new neobank. (Laughs)
TC: Do you have? Every time I wonder how many neobanks make sense in the world, an investor tells me that if only their startup can reach 0.00001% of the market, they will have a billion dollar company in their hands.
JG: No. Most will never figure out how to become profitable. Many investors like to argue that with Neobanks you lose money on every trade, but you make up for the volume. Yet very few have a path to a positive economy. You need massive amounts to get to profitability and that means you have to spend a ton of venture capital on marketing. Even more, it is about an audience that is already overwhelmed by traditional financial products.
SM: The same applies to companies of the “Plaid for X” type. Following the announcement of Plaid's exit – or what we all thought was Plaid's exit – we looked at five companies, many of which came across the same ideas and voiced them for the same customers.
TC: Will the fact that the DOJ, citing Visa’s monopoly power, sue to block plaid sales to Visa have a dissuasive effect?
JG: We didn't see that. Many people reject this complaint, thinking that in the end it will result from it through SPAC. The company had sales of more than $ 100 million. Given the trading with these companies, Plaid was able to go public and get an amazingly successful result.
It's not just plaid, by the way. There are now 40 SPACs that focus exclusively on fintech. Just think of the results that are bound to happen over the next two years.