A chat with Jake Gibson & Sheel Mohnot, Cofounding Partners of Better Tomorrow Ventures
WTF IS FINTECH? "Fintech is a state of mind"
Sar : First of all, congratulations for closing your first fintech-focused fund together. You guys have gotten praise universally in fintech circles online for closing a sizable first fund in the middle of a pandemic. Both of you have publicly said multiple times how you couldn't have done without the help of lots of people in our tech world. I know enough about you guys to know you really mean it. It’s not like you two are random people without extensive background and prior success in your domain. Can you tell us how your peers and friends have helped you in your journey in closing this fund?
In terms of help from our friends, we do mean that quite literally.
For one, the hundreds of founders that we backed - we wouldn’t be where we are today if they hadn’t allowed us to jump on their coattails. Venture is very much an asset class where the asset chooses you, and we count ourselves incredibly fortunate to have been able to work with so many phenomenal founders. Many of them even stepped up as references for us, helping us sell LPs and also helping us sell other founders who don’t know us as well.
Then there’s the “friends and family” (we mean friends, and family of our friends… not our actual family), some of whom were backers in our last fund (500 Fintech), most of whom came in to the first close of BTV, allowing us to generate some initial fundraising momentum and make our first investments. We quite literally couldn’t have done any of this without them.
And finally, we have many friends in the VC world, a lot of whom have recently raised funds themselves. Everyone was very generous with their Rolodexes, opening up doors for us, and nudging their own LPs to give us a serious look, which paid serious dividends.
Sar : You guys have said “everything is fintech” is your thesis and it’s become a hot meme these days. Can you walk us through what fintech actually means. How has that evolved into the “everything is fintech” story?
Jake & Sheel : Oh man….We feel like there’s a whole book in this one. Or like, we go to a coffee shop and smoke cloves and discuss what is and isn’t fintech until the wee hours of the morning.
Our friend Seth at Greylock did a great job laying it out here: Finance is “Infrastructure to exchange resources with unknown people and businesses.” If you break it down there, every element is solvable with technology - finance is inherently a technology business.
There’s really not that much of a difference between moving money and resources around the world vs moving bits of information. The biggest differences are essentially self-imposed - regulation, security, and privacy. In the past, these were constraints that handicapped financial services from innovating as fast as the rest of the internet-based economy, but that’s changing, and fast.
Now, people who built companies in the last wave of fintech, and had to deal with all of these issues first hand, learnt all of the arcane intricacies and built around them, are starting new companies to help solve those problems for other companies. Effectively modularizing and API-ifying all of the nitty gritty pieces of the stack, like KYC/AML, SOC2 compliance, regulatory clearance for insurance / lending / banking / etc, data aggregation and integration, simplifying payments rails, you name it
We believe this will have a compounding effect similar to the early development of the web /mobile - enabling technology built on top of enabling technology, constantly lowering the barriers to building. This should allow teams to focus the effort on the “tech” rather than the “fin”.
Fintech founders and investors have been talking for a decade now about financial inclusion and access, but we haven’t seen enough yet. Our hope is that by lowering the barriers to building, you give teams the capability to focus more on innovating around the product and revenue model, and less on the underlying plumbing, so you also lower the barriers to access.
Sar : I know you guys strongly believe that there will be a lot of companies that don’t start out as financial services companies but can eventually launch financial products. Once a company has a large engaged customer base and is a system of record (and has transactions, trust and data associated with it), it can launch insurance and lending offerings. When you are working with founders under this thesis, the thesis doesn’t actually play out until much after you have invested. How do you advice teams on staying focused and not let the long term fintech story become a distraction in the medium term?
Jake & Sheel : You know, that used to be the case. Like with the Ubers, Shopifys, and Flexports of the world, they needed to reach a certain scale before it made sense to invest in building a financial services platform from scratch, inside of their existing organizations.
These days, you don’t need to build anything from scratch. The middleware, the compliance tech, the complementary data, nearly everything is now API-able in some way, so the upfront investment is much lower. And it’s going to keep coming down.
This means that companies are starting to think about implementing financial features much earlier than they would have before. We’re investing in companies at pre-seed and seed that already have a fintech strategy built into their business model.
And this is actually where we think it gets powerful. This isn’t “let me build this tech platform with its own economics and its own distribution, and then add fintech later as a nice cherry on top.” It’s “how would my entire business model, user experience, distribution, etc be different if I include financial services as a core component of the product?”
You can give software away for free and make it up on interchange, you can give loans away at cost and make it up with subscription fees, having financial products embedded directly in the product workflow could reduce churn, having payments embedded directly into the product could help with distribution, etc...
We believe this is really where innovation starts to happen in fintech, especially for audiences and demographics that have traditionally been overlooked. Ideas that previously might have looked niche, or unprofitable, take on a very different character now.
Sar : How should forward-thinking non-fintech startup or financial services executives not spending all their time on this think about what’s going on? What’s the pitch to get them excited and go “okay, this is interesting and we need to explore this aggressively!”
Jake & Sheel : If you don’t, someone else will, and they’ll have better margins and a stronger relationship with their customers that will lead to a stickier customer base than you do. If you’re the place that the merchant conducts the bulk of their business, it makes sense that you’d want to.
Sar : In the everything-is-fintech story, there are multiple types of companies in the ecosystem. There’s companies that are enabling software companies to launch financial services. There’s software companies that are launching financial services as secondary products. There’s companies that are productizing table stakes functions that every company with financial products would have to do. There’s financial services companies that have realized externalizing what they do internally to others is a promising opportunity. Which of these categories do you guys feel most proficient in, which categories would you like to explore more, which have you invested the most in so far, which seem hardest to build category winners in?
Jake & Sheel : We like to say we’re generalists within fintech. While there are certainly areas we understand better than others, we invest in it all. At the end of the day, we’re not particularly thesis-driven and while we have opinions on what’s going to work and what’s not, we try not to hold to them too tightly. We look to the founders for that, and just try to back exceptional people with novel solutions to large problems, and a vision for how the world should be.
From your list, we’ve backed founders in every one of those categories, and will continue to do so.
In the current BTV portfolio we have -
Table stakes: Pave.dev
Sar : I like to joke that we trained an entire generation of startup people over the past decade to outsource payments and focus on the core product and business and now we are going “just kidding!”. It was basically a cost center and a means to an end and we were happy to use an API to solve for it. Now, there’s been a massive shift where there’s this narrative of turning payments into a revenue driver. What do you believe has triggered this?
Jake & Sheel : We tend to think many companies/founders tend to focus too much on solving their own problems vs solving the problems of their users/customers. Nobody’s willing to pay for our product? Let’s just add payments and make more money!
So we think it ultimately comes down to what’s the best experience for the end user, and how do you get them engaged, how do you keep them engaged, and how do you make sure you’re capturing enough of the value that you’re creating. In many cases, adding in your own payments functionality can meaningfully improve the product and the user experience, while at the same time helping you monetize. But we imagine in many cases, those resources are better spent trying to figure out what value your product actually adds to the world.
Sar : Are there any common themes you have been seeing in pitches this year?
Jake & Sheel : There are so many! There’s some trend-following going on related to Covid and its impact on our economy. Lots of tools like payroll and benefits for remote teams, benefits for gig workers, financial products for a new generation of creators, enablers for new types of commerce out there.
It seems like for every new fintech company that launches, there are 4-5 others doing nearly the exact same thing. It makes it a tougher market than it was before when those companies are all competing for the same customer set.
Here are some specific ones we’ve seen a lot of lately:
“Plaid for X”
We just went through a wave of Plaid for payroll, Plaid for student loans, Plaid for Insurance. Between those 3 we’ve seen ~20 companies! One interesting thing here is that Plaid launched their own payroll product, and they already have a liabilities product, so we’ll see how that all plays out.
Documentation classification/parsing (converting PDF’s to API’s)
Parsing and analyzing data to underwrite loans and insurance is a manual process, so now we’ve seen >5 companies building this.
Banks for Creators
As the creator economy has blossomed, so have fintechs selling to this space. We’ve seen >5 of these.
Faster checkout options
This isn’t a new space but some of the hype from Fast and Shopify’s success has caused others to go after this space, broadly.
Sar : You guys have been active early stage fintech investors for a while. Are there any beliefs that you held 3-4 years ago that now seem to have been proven wrong? Conversely, what did you get very right in how the fintech world has played out?
Jake & Sheel : We are sure we’re wrong about something every single day, and it’s hard to compare past vs present at the moment, when everything has changed so quickly. And as we mentioned earlier, we don’t tend to hold those beliefs too firmly.
[Sheel] It might be interesting to talk through some specific misses. I’ve had a bunch of misses from my earliest days in investing as an angel (2012-2014). I was actually more curmudgeonly then, unable to imagine how big ideas could get. I actually credit moving to SF to opening me up to a lot of possibilities. I got to see that “crazy ideas” , even ones that had been tried before could get funded and work here, sometimes first-hand.
3 big misses, 2 of which pitched me at my house as an angel!
Robinhood - “There have been several free trading apps before (Zecco, Freetrade), I don’t see what will make it work this time”
What I missed: mobile, timing, execution. Those previous entrants were competing with TD and Interactive Brokers, Robinhood was bringing a whole new class of investors online. The timing was right and the team did a phenomenal job of building the right product for that audience.
Chime - At 500, we had invested in Simple and while they were able to build a huge waitlist and get people onto the app, not enough people were willing to switch their direct deposit account over, and the only way to make a lot of money is to be the primary account.
What I missed: mobile, timing, execution. Chime has done a great job of building products that make consumers want to switch their direct deposit over… and times were different with a generation of people who wanted more digitally. Simple seemed to attract people like me- digitally native but actually being served just fine by the Chase’s of the world. Chime succeeded in bringing a digital first approach to those who weren’t well-served by existing banks already.
Patreon: “This is super easy to build, it’s just a super basic payments functionality; I could build this myself in minutes on Stripe, who would pay for it?”
What I missed: Just because I could build it (the first version of Patreon) myself doesn’t mean others would. This was really stupid in hindsight.
The one thing we have been very right on is that, despite the number of unicorns in the space, fintech still needed time to mature. There hadn’t been a lot of exit activity, relative to the amount of investment activity, so many investors shied away. But we largely chalked that up to these companies being flies on an elephant’s ass relative to the size of the overall financial services market (which is gigantic at last check).
We assumed that would change in time, and that a wave of consolidation and exit activity would materialize as the sector grew up, and as the incumbents woke up to the threat. I don’t think we were expecting it to hit as hard and fast as it has lately, but we had a feeling that it was inevitable. Now we’re seeing M&A among incumbent companies, incumbents buying startups, IPOs, SPACs like crazy, and even the larger fintech companies gobbling up some newer entrants.
It’s a real investment ecosystem now, which is likely why so many new investors are starting to rush in and feel like they need to put some stakes in the ground
Sar : Can we please throw some cold water on what you believe are overhyped trends or conventional wisdom? It is hard to think of a single prominent firm in the US that isn’t hunting for fintech deals. I feel like you can yell fintech infrastructure and get a valuation bump these days. What categories are you instinctively staying away from?
Jake & Sheel : We don’t actively stay away from any categories. We’ve been pounding the table against PFMs for years, but one of our biggest success stories so far is Albert. Similarly, we’ve been bearish on new entrants to the neobanking space, but we just led a seed round for an SMB neobank (unannounced) because we loved their approach and GTM.
Don’t tell our LPs this, but some might say that fintech as a whole is probably overhyped right now. As we alluded to above, suddenly everyone on the planet has become a fintech influencer on Medium or Substack, and every VC firm is searching for deals in fintech. We see investor profiles all the time that list fintech their core investment thesis, while they’ve never actually invested in any fintech companies! Some are really quite egregious.
Sar : You have incubated startups before and you plan on incubating more with the new firm. Can you tell us what were some lessons from your past experiences that have informed your operating philosophy now? Why do incubation at all?
Jake & Sheel : We mostly do it because we can’t help ourselves. We are builders first and foremost, so we like to be operationally involved in our portfolio companies. We both thought a lot about why we wanted to be in this business before committing to each other and our LP’s that we were going to be doing this for the next decade+… and a big part of why we do this is we just love helping early stage companies get off the ground. So a big part of the justification for us being VC’s was that we could actually get our hands dirty too!
We’re not afraid to go early - if you’re looking to leave a fintech company and not sure what you want to do next, we want to meet you. If you have some ideas for a fintech company but need a sounding board, we want to meet you.
We’ve helped so many founders shorten their learning curves, and accelerate through those first few years of rapid experimentation, and we want to keep doing it.
One way we do this is by building out a network of EIRs, just like we had in 500 Fintech, who can help our portfolio companies and potentially jam with us on future ideas. Our past ~7 EIRs all went on to either join the exec teams of some of our portfolio companies, or founded companies that we helped incubate and backed (or in Jake’s case, became Sheel’s partner!)
So we’re always looking for those operators that are between gigs and unsure of what’s next to come join us.
[ Sar here — If you are building something in fintech and are looking to pitch Sheel and Jake, feel free to email me. I’m happy to make an intro! }
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