‘My goal is to be the most helpful investor through the first 24 months of a company’s history’: Rex Salisbury

Welcome to the Tearsheet Podcast. I’m Tearsheet’s editor-in-chief, Zack Miller. I like talking to investors in financial services and fintech. I find that their perspectives, particularly around trends and big picture moves, are helpful in understanding what’s going on.

Today’s guest is Rex Salisbury, entrepreneur, investor, and builder. He recently left Andreessen Horowitz to return to his roots, building networks of fintech founders and helping them with connections and expertise. He recently launched a $20 million fund and has made 9 investments so far.

I spoke to Rex about his background as a community builder and the impact that has on the companies he invests in. We talk about his time at a16z, which saw massive growth in the team and the space. Rex shares why he looks to invest in ‘deep, boring, and broken’ spaces in the financial technology stack and why ‘fintech at the intersection of something’ is a good investment strategy.

Our broad-reaching talk spans mortgage software to fintech community meetups in San Francisco to Big Tech’s interest in financial services. Rex Salisbury is my guest today on the Tearsheet Podcast.

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The following excerpts were edited for clarity.

I'm Rex Salisbury, the founder of Cambrian's Fintech Fund that I founded and am the solo GP for in January of this year. We focus on pre-seed investing in companies with U.S. go to markets.

I kind of accidentally ended up in venture capital just because I was super passionate about this space. I did investment banking, learned a lot, hated it, moved to the West Coast, taught myself to code, and ended up joining one of the cofounders of SoFi on their new company, Sindeo. I was leading back end engineering efforts, building out an automated online mortgage pre approval. So think Rocket Mortgage: push button, get mortgage to kind of the back end for that. This is circa 2015 and fintech in San Francisco is really cool. I'm building software in this really kind of cruddy back corner infrastructure for mortgages. Mortgages in the US is like the largest debt class in the world – there was over $10 trillion. Now, it's about $15 trillion worth of mortgages outstanding in the US. So it's like, oh, this is how the back end for the world's largest asset class operates? This is crazy.

The very first thing that I did was translate our data model. And to me, SMA, which is the standard data interchange format for mortgages – instead of getting your API docs, it's just a static PDF that says, like version 1.8, dated 2003. And it's an XML reference. You're like, that's the guide? This static PDF that's like 10 years old?  It's like, whoa, so that's like how financial technology works. That was my first introduction into the infrastructure underpinning one aspect of financial services. 

I'm in San Francisco at the time. I want to talk to other people who are having very similar experiences, where they're building something in financial services, maybe it's in payments, maybe it's in insurance. I just want to hear about their experiences, because this is like a cool place with cool people doing cool things. And so that was the birth of Cambrian, the community that led me down this path, like accidentally becoming a venture capitalist.

I just started doing small monthly events in downtown San Francisco. Our very first event, I had my team from Sindeo, demoing the mortgage pre approval product we built. We also had the team from Plaid demoing the Plaid API. And then we had a team demo an app they built on top of Plaid. So that was circa 2015. Very first event, but then San Francisco is this highly networked place with a bunch of interesting people doing interesting work. And so Cambrian and the community just continued to grow from there. At that point, we were running monthly events over the course of several years in San Francisco and in New York, doing biannual summits, quarterly jobs fairs, biannual co founder matching. We had over 15,000 newsletter subscribers and 5000 meetup members. I also now run a Slack community that has 1500+ fintech founders in it, which makes it one of the largest gatherings in a digital context of fintech founders that I'm aware of anywhere. 

As you can imagine, that started pulling me into investing and advising and working with early stage companies. I actually quit my day job to go full time on camera in the community and raise a small fund. I was just a couple of weeks into that when the Andreessen Horowitz team that I got to know through Cambrian reached out, saying, Hey, we love everything you've done. Like you're clearly passionate about the space, you understand financial markets for retirement, investment banking, you understand software engineering, specifically within the context of financial services from your time as a software engineer, and you know how to build community, marshal resources, navigate networks, be supportive of entrepreneurs, all that. 

So they pitched me on joining them as the first partner hired externally to help start their fintech vertical. And this might sound kind of crazy, because a16z is now such a huge presence in the ecosystem. They're going to end 2022 at about 500 people – when I joined, they were about a little bit more than 100 folks, and that was already kind of crazy in terms of size, but the fintech practice was really just one person, joined by another general partner who'd been promoted internally, then someone else brought in from another internal team. 

We immediately hired two other partners, and have since grown the investing team alone to over 10 folks. And then I'd also grown out the vertical operating side of the house. I went from community to planning to launch my own fund, to helping start the fintech vertical at a16, to focus primarily on investing. I also helped start our fintech newsletter. After two years, what I really wanted to do was go back to focusing exclusively on the very early stage, because that's where I'm kind of most differentiated and where my networks are most helpful to help companies get off the ground. 

Cambrian Ventures is a $20 million fund. I usually write a $500k initial check. And then as LPs in the fund, I have 20+ of the top founders in the space – founders from SoFi, Betterment, Blend, Plaid, the list goes on. My goal is to provide access to highly relevant networks at the earliest stage of a company's journey. And by writing a small check (‘small’ as in non-lead check), I can be very collaborative with others in the ecosystem. I can help bring together that round. For entrepreneurs, I can also help with subsequent rounds. And then I can also leverage all the networks and relationships I've built through the Cambrian community over the last six or seven years.

I feel like this is definitely the more natural way in which I operate, where I'm kind of in the liminal space between firms and between companies. And as a result of that, when you're in these kinds of liminal areas, you're better able to facilitate connectivity. I’ll give you one example of why that looks like and why I feel kind of more at home now than I did inside of a big firm. When you're at a big firm, you're fighting to lead rounds. And sometimes you're going out on a limb, you're making an investment in a company that most other people think isn't that interesting – you're making a non consensus bet. But the reality and kind of the dirty secret of a lot of multistage large venture firms is that they do a lot of consensus oriented investing. Because even if they try and make a non consensus bet, they move the market, and it becomes consensus. 

What that means is you end up being hyper competitive with everyone in the ecosystem and you aren't able to talk with other players in the ecosystem, whether that's other founders or other investors. And then because you can't necessarily exchange information in the same ways, you're not actually able to be helpful and supportive of portfolio companies. But if you're independent, and you're a non lead investor, you can talk to lots of folks,, and therefore, you can learn lots of things that are relevant and helpful. So to give you one material example for what that looks like from a portfolio company perspective: if you have a multistage firm lead your seed, they're going to take up a lot of the round, they're going to squeeze out a lot of other angels and small scale investors. And they're probably going to squeeze out other seed stage firms. 

Now when you go out to raise your next round, it's not really in their own interest to promote you to other multistage firms. And not only is it not in their interest, even if they do it, it's kind of a weird signalling thing. Because if you go out and you're a16z and say, Hey, other firm, you want to invest in my company? It's like, why are you asking me? But for someone like me, or I'm alongside a multistage firm, like whether it's my former colleagues or another place, I am highly incentivized and well positioned to be able to go out and have a lot of those conversations to help you identify who the other investing partners might to help accelerate your process with them. That just works a lot better than if you just have a multistage firm who has these weird incentive as well as just weird signalling risk associated if they do go and push investments. 

My goal is to be, dollar for dollar, the most compelling and helpful investor through the first 12 to 24 months of a company's history. Another reason why I ended up leaving a16 z, which I loved – the people, the team, I had a great experience – if you're at a multistage firm, you usually make large investments, and you usually end up taking board seats. What that means is, if you're doing three or four investments a year, you end up on a whole bunch of boards, which is great. That's one incredibly important role an investor can play in supporting a company for a decade or more. What that means to you as an investor is that quarterly board meetings stack up pretty quickly. And so after just a few years of investing, you’re ‘boarded up’. You are now less able to spend time supporting your new portfolio companies. And you quickly are kind of out of the market, and you're not able to maintain relationships within the network. 

My goal instead of getting boarded up is to be very involved in the first two years of a company's life, help them both in the round and in the subsequent rounds. Fundraising is one of the biggest things I help out with. But I also help out with other things like finding customers, first hires, advisors. A lot of the founders who are investors in my fund end up co-investing in some of the startups – it's just something that naturally ends up happening. And so my ability to go out and provide this bridge between these two ecosystems is super helpful. 

That's another reason why I often encourage folks to take take money from seed specialists: these folks can be very helpful for a certain period in the company's life, you get to the series B, you've got an executive team, you have some semblance of product market fit and repeatability in your go to market motion. You have a few great board members. You've got a lot more support at that point, so you don't really need the same kind of engagement or involvement.

Investment themes/trends

I think the most exciting thing in fintech is very obvious, but bears repeating. And that is that there is more talent in the ecosystem than ever before. And that's coupled with a market where digital penetration is basically in the single percentage points in almost any vertical that you look at. What that means is, there's better talent than ever before. And the market opportunity is literally as big as it's ever been. 

So to make that material: imagine you're Jon Stein at Betterment, or Ken Lin at Credit Karma. You're starting a company in the middle of the great recession and your company is a fintech company. There is no category like that yet. You've got a couple of questions. You're like, okay, so how do I build this? There isn't a whole bunch of infrastructure you can use. The original neobanks like Simple took over two years to find a banking partner. It’s really hard to figure out how you actually build this. Who do you hire? Like, where do you go to convince other crazy people that you're building something that's interesting, when you're not even sure how you're going to build or what the product market fit is going to be? 

Oh, by the way, how are you going to raise money for this thing? There's like QED and Ribbit but they're both kind of new and smaller at the time, so there isn't a ready pool of capital to go and raise from. It's really hard getting started. Fast forward to today and there are between 30,000 to 100,000 employees just in the US working at fintech companies. That means that you have a bunch of founders who are potentially even repeat founders within the fintech ecosystem, as well as operators who have been serial operators within fintech. So really great talent. 

And then the next question is, okay, well, how do you build it? Well, now your problem is actually which of the 20 banking as a service providers do I want to use? Which of the 40 partner banks do I want to use? Which of the virtual card issuers do I want to stand this up on? So you actually have really great talent, you have a ton of tools, the market is the same size. The talent, it's not just about being able to recruit people, it's also about having insights into what the opportunities are.

So the first most obvious thing is I want really great people with great pedigrees, great experiences, kind of earned secrets into the ecosystem. And then the second thing is, I get more excited when that experience senses something that's deep and boring and broken within the existing financial stack. 

I've done nine investments out of the fund. So far, only two of them are not in stealth. We could talk through just the two investments that aren't in stealth right now. So the first one, I think really amplifies the importance of a really strong founding team. Keep Financial is a bonus management platform for large employers. What does that mean? Let's say this is an illustrative example, not a real customer:  Let's say you're Burger King, and you want to issue 10,000 signing bonuses to frontline workers of $5,000. Keep will help you run a program to do that. Under the hood, it's actually structured as a forgivable loan, which gives you some nice affordances in terms of how you can actually run that program and make sure after you give people the signing bonus, players don't just walk away on the second day. We live in a very tight labor market, so it's incredibly important to think about other tools in your toolkit that you might have to attract talent and retain talent. I love the pitch of the company, because the idea is basically how do you get people to want to work for you. What if you paid them money? And of course you have salary, but a lot of people in frontline service jobs are living at or near the poverty line. Having access to a large lump sum of cash upfront is incredibly compelling, even beyond a regular salary. 

The company is founded by Rob and Cathryn, the founders of Kabbage, which is a small business lender. This isn't a ‘deep, boring, and broken’ thing so much as just a novel application of fintech into a new sector. Another adjacent theme would be ‘fintech at the intersection of something else’. So this would be fintech at the intersection of HR tech, for example. 

The other company is called OatFi. They're doing embedded lending for small businesses. Small business payments is a huge space, trillions of payments, volumes, huge amounts are still done via check. And as everyone knows, small businesses live and die by their cash flow. But if you're trying to access anything less than a $200,000 or maybe even $500,000 line of credit, it's very slow and cumbersome to go to a bank. Instead, you need to have the provision of credit provided in your daily existence, make it very seamless to get. OatFi partners with platforms that allow small businesses to send invoices – horizontal platforms like Bill.com. If those invoice platforms wanted to offer embedded lending to anyone on their platform, they could use someone like OatFi to power that. 

That's a horizontal solution. Imagine you're a vertical solution, like the operating system for hair salon (to use an example that a lot of investors like to use). Well, now let's say you're interacting with some of your suppliers, who are providing the products that you then sell through your hair salon. OatFi can embed into a wholesale platform that has an actual checkout experience and offer B2B Buy Now Pay Later right at checkout – very similar to the consumer experience. The hair salon could delay payment, but also the person selling to the hair salon might already sell on some sort of net terms and could accelerate payment of that invoice. BNPL is just as important for small businesses – arguably even more so in the sense that there's larger dollar volumes moving around. It's just as important for small businesses to have access to control over their cash flow, as well. 

You could also partner with someone like an OatFi if you have a secure charge card and you need someone to provide the advances against it – there's just so many areas where you can embed the provision of credit for businesses, I think it's also a very compelling investment from an investor's viewpoint because compared to consumer buy, now pay later, they're higher volumes, they're more complex flow of funds, there's even higher degrees of repeatability. So you underwrite someone once and you can lend to them again. So there's a lot of stuff from an investment standpoint that actually make this more compelling than the consumer analogue, and then arguably more defensible as well. It's a more complex product to integrate with, and therefore, it's harder to end up positioned against all the other players in the space. So those are two of the examples, one of ‘fintech at the intersection of something else’ and the other kind of being more of a ‘deep, boring, broken’ example.

Bank software as an opportunity

A lot of the software there is very old. Everyone likes to say like, Oh Ha ha, ha, it's all COBOL, which is still true. You would think as we get farther and farther along with digital, the data processing volumes wouldn’t require as much mainframe, but it turns out every time you log in on your smartphone, that usually triggers a call that eventually triggers a call to a core system. So the growth of mobile banking has actually meant that you have more frequent interactions with your core banking software, which means you've actually seen an increase in processing volumes by old COBOL systems, which means there's actually a growing market still to this day. 

The banking stack is just not built for the modern digital era of real time, 24/7 connectivity. And so there's an opportunity to rebuild all the software that banks run on. A few years ago, the idea of selling software into banks was kind of unsexy. It's like, why would you sell software to banks? They're all going to die and go out of business. That's a bad market. And now it's like, oh, banks are real. They're not going anywhere anytime soon. Maybe there'll be very large material aspects of their business that are carved off and done by new challengers. And I definitely very much believe that to be the case. But I think there also be very large markets in which they operate for a very long period of time, and it can make sense to sell into them. 

I think what's interesting about this area of bank software from an investment perspective is it actually has performed very well in the public markets recently. Because guess what, these are three year enterprise contracts with usually 80% gross margins, as opposed to, let's say you're like a Coinbase, which has a bunch of retail consumers who are momentum driven. And so Coinbase has collapsed in terms of its market cap from a peak of about $100 billion to I don't know where they're trading: probably $10 billion or less today.

And then if you look at a similar space Chainalysis, which provides AML software sold into banks to monitor for money laundering that happens on chain. They sell into banks, governments, other agencies – pure software. But who would have thought three or four years ago that that company selling software to banks in the blockchain space would actually be nearly as big as the largest consumer exchange in the US? And it's from a market cap perspective. They're much, much closer than they were six months ago. So that's waking people up to the idea that bank software is both an opportunity, but also usually very high quality, durable revenue with great retention – all this other sort of stuff.

Big tech in finance

First of all, let's define Big Tech. Google, Facebook, and Apple are the most relevant. And pretty much all their movements into finance have been consumer oriented. There's not as much business oriented, although there is some of that. And then let's replay some of the history. So the TLDR is, they have tried to move into finance multiple times. And it has kind of hit them in the ass several different times. They will continue to do it around the edges, especially around consumer payments. So they figured out something: their payments is really just messaging. And what matters is having huge amounts of distribution. 

So, especially for consumer payments, that's one of the big areas to watch for big tech. However, guess who else is like watching Big Tech’s every single move? Every single regulator right now, especially Lina Khan at the FCC. They may have missed their window because of the regulatory engagement. When I was working at Sindeo in 2015 in mortgage, Google launched Google Mortgage. Do you remember Google Mortgage? It was a comparison site like Kayak for mortgages. We were like, shit, we're dead. Google's going to do Kayak for mortgages. And that was one component – they weren't going to do any of the fulfillment. It was just find the quotes and then ship it over to someone else. So we still could have existed but now it's like, Oh crap. That was actually the second time they'd launched Google Mortgage, they had launched it and killed it before. And the second time they launched it, they killed it again. I don't know exactly why they killed it. Google builds and launches and then kills a bunch of things. And that just happens, and there might not be a good reason. 

Facebook has done, I think, a better job, but they probably get the most regulatory attention. So that's probably the main takeaway there. 

Apple has done some pretty cool and interesting things. But their card program has struggled recently. And Goldman, who's behind the card, realized that doing consumer oriented stuff, big banks discover this again and again, as do people in many ecosystems, all the volumes, and that being B2B, consumer has a lot of regulatory stuff. The concerns around it place it in the court of public opinion, and so you get a lot more pushback. Goldman had high charge off rates. So anyways, that's, that has not been a runaway success by any means. And so what does that mean? I don't know exactly. But it's definitely not going to replace everyone's credit card anytime soon. So all of that is to say there's a long history of Big Tech, mostly in consumer, and mostly not working.

Public fintechs

One of my best and favorite ways of following fintech is every time a new large fintech company goes public, I love reading the initiating coverage reports from various analysts, especially Credit Suisse, one of my favorite groups to follow. So Nick and Tim from Credit Suisse wrote an initiating coverage report on Bill.com recently, and that was a really great read. It does a bunch of things. It teaches you about the company, but also about the broader ecosystem, and what a business model can look like in some sort of space. Bill.com, is a very interesting business because they are doing SMB payments. SMB payments are one of the highest margin areas of the payment ecosystem. But they're very difficult to serve, because how do you get distribution to various small businesses that may look more like a consumer than a business? So you have a distribution problem. 

But the flip side of the coin is great margins when you get there. So Bill.com has a network effects driven business, where other people start using your invoicing platform, that naturally starts to draw in other folks. They get to charge really high quality subscription revenue, where they charge you a monthly fee to use the platform. But they are also starting to build out their ability to do take rate. So like the TLDR for Bill.com is a great company that has been growing fast and as it grows, they continue to grow faster over time, which is usually one way you can see network effects. And then you're like, Well, how big is the market? And it's like 1%. market penetration is kind of where they are. Because there's a lot of small businesses, it just takes a long time to flow into a lot of them. And I think the takeaway there is they measure their market as about $25 trillion in payment volumes, and they've got about $250 billion of it flowing through their platform (you can fact check me on that, see if I remember correctly)..

Then if you look at the business model over time: remember, subscription revenue is over 50% of their revenue, but they can start to layer on top rate. So if you were to just put their total revenue over their total kind of volume flowing through the platform, their effective take rate, so to speak, is like 1.7 or 1.8 bips. So like, what you have to believe for Bill to continue to grow is that they can get modest increases in their market penetration, and that they can build out other services that allow them to increase their effective take rate from like, 1.8 pips to 3 bips. Is that doable? I would say, yes, they can get more market penetration. Yes, they can actually build out new products that allow them to get higher levels of monetization per dollar moved through their platform. 

But we talked about OatFi and embedding lending and credit and other services – that is definitely one of those areas. I would say they're a very interesting company to watch. But even more so than them being an interesting company, if you want to learn about companies, I think the best place to go is to try and find initiating coverage reports. By the way, even if they're five years old, they’re still great to read, because it kind of sets your understanding at a point in time and then you can kind of see where they are today, which is valuable in its own right.