“It is so expensive to get those 10 first bank customers’: JAM FINTOP’s new fund has 66 community bank LPs

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The following excerpts were edited for clarity.

Joe Maxwell, Fintop Capital: I run a venture fund called Fintop Capital, which stands for financial technology operating partners. I and my partners -- we're all recovering entrepreneurs that got hit with the lucky stick to be in fintech. I've been in fintech 30 years as an operator and entrepreneur, for most of that bootstrapped my first company and sold to banks. I had about 1200 banks at my first company and have subsequently been bouncing around what we call fintech. I think it's just a wild time. Quite frankly, we're on the five yard line right now. I think there's a there's a big future in front of us.

Ryan Zacharia, JAM: I'm Director of Research at Jacobs Asset Management and general partner at JAM Special Opportunity Ventures. We are investors in financial services. That includes banks and specialty finance companies. And we're really excited to have partnered with Fintop on this on this vehicle.

Adam Aspes, JAM: I'm a portfolio strategist at JAM. I've had a 24 year career on Wall Street, buy side and sell side. I've been with JAM for five years. And we started JAM Special Opportunity Ventures in the last year, where I'm a general partner. A

You talked about your entrepreneurial journey, Joe. Why? Why go to the other side of the table at this point?

Joe Maxwell, Fintop Capital: That's a great question. First and foremost, I think I hit my limit with operating. I'm in my early 50s. It's really hard to continue to be an entrepreneur. The later you get the older you get. But moreover, I just saw the opportunity for lots of great young entrepreneurs that were entering the market in this fintech space. I mean, if you look at the amount of capital in fintech right now, it's just incredible. I think a lot of that is the large FIs have put their weapons down -- they're not building. That used to be our largest competitor, in the end, it was large institutions building their own technology. So we just saw an opportunity that there was going to be a real move to leasing and buying platforms in the tech space. I just saw a lot of young operators that don't understand the regulatory environment and the headwinds. It's not as easy as it looks to get into this space. And as operators, I think we have a bunch of experience, and we have an accumulated advantage that we can share with these guys. So it was a really good time. We hopped down in 2016, and moved from the entrepreneurial and the operating side to the investment side. And it's just been a wild ride since.

What about the transition to investor? What kind of skill set change or learning Ddd you need to go through to become an investor?

Joe Maxwell, Fintop Capital: That's a great question because a lot of the fund is our own money, but we are getting folks to invest in you as an entrepreneur, which is very different than a portfolio manager because the fear is that you'll end up either being an undisciplined deal junkie, or you'll find a company you love so much that you got to go run. But it's been really good. For me personally, it's been a really good transition. I'm very fortunate. We raised a small fund -- the first fund -- to prove that out that we wouldn't be undisciplined. I actually enjoy it because the thing that really fires me up is the strategic part of the businesses and really spending time building strategy, helping put 90 day sprints, putting governance and infrastructure -- that's where we live in these companies. So thus far, knock on wood, it's been a really, really great transition and exciting for me. I've got new life.

Why invest in financial services?

Adam Aspes, JAM: JAM has a 26 year history investing in US financials. We do it through a hedge fund and private equity funds. And as part of our research process, we meet with about 500 companies a year, and their views on technology have really become central to how we separate winners and losers. Within those 500 companies, a large majority of the companies we meet with are community banks, and our investment thesis has morphed from being very focused on branch maps to now being almost completely focused on tech stack, knowing that's really going to be the determining value. And unfortunately, when we meet with community bank management teams, we often hear about how hard it is to keep up with the innovation coming out of the larger banks and the nimble, well funded fintechs. For a lot of community banks, they just don't have the technology budgets or engineers to either plug into modern technology or to keep up with the competition. And so that really led us down this path to thinking about the future of bankin, and how we could help community banks compete with those large banks and nimble fintechs.

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What what makes a community bank a good investment candidate?

Adam Aspes, JAM: We're still very invested in community banks. We still believe in the touch points in the community. It's just simply they have to invest in technology to keep up. We think there's a great case to be made that they'll be increasingly competitive and relevant, but they have to have the technology -- it's table stakes. And we do fear, many of them will not do that. There'll be a lot of consolidation along the way. But we are really excited about the digital innovation we are seeing from a whole host of community banks.

The community banks that do get it -- what defines them? What are their attributes, the ones that understand the value that technology will play in their future?

Ryan Zacharia, JAM: One of the things as we set about to raise this fund that surprised us is that it it doesn't really seem correlated to size -- the bigger you are does not relate to how sophisticated you are with respect to tech, how willing you are to adopt tech. I think companies that have well defined niches, banking specific areas, professions, or businesses that really understand the needs of their customers, we find, oftentimes, are the most innovative banks. Because they understand the processes that are involved, and how you can use technology to more deeply embed your institution and the services you provide within the workflows of your customers.

One thing that I do think it generally correlates to is the age of management and the innovation mindset.

Let's talk about the JV -- can take us behind the scenes of how was formed, why it was formed?

Joe Maxwell, Fintop Capital: Fintop has two funds. We have about 25, 26 portfolio companies. About 40% of our funds are specifically in the bank/distribution bank sector. I get reached out by JAM -- i know JAM by reputation and I'm like, these are big FI investors and invest in banks. Adam reached out and he says, hey, we've talked to a bunch of funds. They were very honest. They said we were really aggressive towards certain sectors. And I think we're late on technology. And I think, we're getting told by the market, and we're very interested in leaning into this technology game with a bank tech fund.

And so we've bantered back and forth. I said, guys, this makes a lot of sense, because the Volcker Rule was repealed. Small banks could not invest in funds. When we raised our funds, we did not have banks as LPs. They talked about a co investment fund and a strategy set forth. was all ears because I realized that we're very bank friendly and a lot of fintechs are not bank friendly. And it's not that they're overtly unfriendly, it's just that they are building their own chassis. It's an alternative view to fintech. They're not partnering with banks -- they're kind of building neo, are a new classification of banks and Fintop is very leveraged distribution focused. We are B2B. We try to build modernization of rails to the current banking system, because there's fantastic distribution, and it's a regulated environment. And that's very difficult to achieve if you start de novo. It's very expensive.

So when they approached me, they had the same thesis. It made a lot of sense. I said, guys, if you manage the banks, because I don't want to stop what we're doing, we have to stay in our focus because we're fintech investors, and they really understand the banks and we both came together. And, man, this thing was successful overnight. It was amazing to see the quality of banks that JAM brought forth to invest. I was pleased with certain banks and their commitment to a true digital transformation. A lot of banks say that, but then when you get inside the boardrooms, you quickly realize that it's an operations strategy -- not truly a digital strategy. We co invest, do a deal. And the JAM bank fund comes in right next to it. And it allows us to have a lot more runway. We can write bigger checks. We can stay in these deals a lot longer. So thus far, it's working incredibly well.

What's the investment mandate? How big are the checks?

Joe Maxwell, Fintop Capital: That's a great question. We typically are a Series A to B. We generally write three to four checks when we go into these deals. The mandate is to come in at a million dollars in recurring revenue or coming upon that. They have some distribution. So the typical bank deal will have three to five banks as customers, they've got product market fit, they've got some pricing, they haven't built out the executive team fully. Some have some don't -- it's all along the spectrum. But generally, the Fintop special is series A $5 million to $8 million round.

For that first round, we're building out the requirements for governance, the board, the distribution strategy, and we're putting growth capital into these deals. What's incredibly valuable about the bank tech deal -- I've been selling the banks my entire life -- it is so expensive and cost prohibitive to get those first 10 to 20 banks. Because of the infosec, the balance sheet requirements, there's so much that needs to be really leaned into to get that to go from like two banks to 10 banks. And now we have this bank network that we can invite into the room. And we can completely show the goods and these banks are hungry to be in here and look at that. And then as Ryan said, we know the industry-specific banks that verticalized. So if we see a really nice piece of lending technology that is specific to a vertical, we can bring in the banks and kind of pre determine if these are deals but because we know the banks that have this exact focus, it's a really good matchmaking.

Let's talk about that bank network and how it serves both as an investor base, as well as this future install base for the investments that you're making.

Adam Aspes, JAM: We're focused on community banks. Everyone defines community banks differently. We sort of thought about it as $50 billion and down as where we would focus and we have everything in between there (under a billion in asset, and there are banks that are slightly north of #50 billion).

In addition to investment returns, these banks are looking to just be a part of this ecosystem that we're building. So, we're forming multiple committees. We'll have annual conferences and regular webinars, and just building a lot of content so that the banks can keep up with what's going on in bank tech and fintech and keep up with the technology innovation that they need.

We're going to do a lot of demos. One of the biggest complaints we heard from the community banks is right now, the light bulb hasn't gone off, and they're just going to fall too far behind. Now, they need to figure out which fintechs to partner with. And when they make that decision. It's like drinking through a firehose. If they make a bad decision and they partner with the wrong fintech, well, they just wasted a big chunk of their technology budget. And now the board or the CEO isn't going to let them do it again. Now they've fallen behind again. And so we heard these mistakes over and over. They want help on figuring out how to drink through that firehose. And that's a lot of what we bring to the table with Fintop, really narrowing down their choices, and showing them best of breed companies to work with.

We think that this ecosystem that we're building doesn't guarantee returns, but we think it's a better mousetrap, because, as Joe said, the hardest part of the lifecycle to fintech is going from two or three customers to 15 to 20. And we can really help accelerate that growth. In a world where the software companies are trading at six to 10 times revenues, if we can help accelerate those revenues from a million to several million, we're gonna really help investment returns.

Can you give us a feel for some of the trends in the portfolio?

Joe Maxwell, Fintop Capital: Oh, absolutely. We have a couple different theses, and you'll see our portfolio. It's mostly middle back office, really boring, boring stuff. It's a lot of workflow automation. We're not tip of the spear investors. We're not direct to consumer -- it's all B2B. We can highlight a few companies. One company that I'll point is called FI.SPAN. Fantastic entrepreneur. She's out of Vancouver. She's sold Hyperwallet to PayPal. This was her second deal. And she really understood that embedded banking was all about inner operating and connecting treasury management. For businesses, everything starts and stops with the ERP, the bookkeeping system. And if you think about it, banks forever had separate commercial banking. They had mobile banking for it, and they had a separate network. And what she said is, hey, this next generation, we're going to have to connect or embed the ERP or the banking system inside the ERP.

So if you think about it, the old model was companies went to banks. Now the bank is having to come to the company and they better do that quickly. She has built a very robust, quick connect set of APIs, kind of the Stripe for banking, for ERPs.

That's a perfect example of a deal that we went in and we lead the first round and helped build the board and I'm on the board with Lisa and and really helping her to land and expand into the US. She's got incredible global market access for what she does, as well.