Sean Wise: ‘Customers are the real people validating fintech ideas’

As fintech explodes, figuring out what makes a worthwhile idea from one that should be passed on is tough.

On this episode of the Tearsheet podcast, Sean Wise, a university professor, bestselling author, international business speaker, and partner at Ryerson Futures, a seed stage venture capital fund and technology accelerator joined us to discuss the difference. Wise also spent five seasons as a consultant for CBC on venture reality show Dragons’ Den before moving in front of the camera as the host of the Naked Entrepreneur, which airs on the Oprah Winfrey Network.

Wise joined us to talk about his new book, co-written with venture investor Brad Feld, called Startup Opportunities: Know When to Quit Your Day Job. We discuss how fintech entrepreneurs, investors and partners can size up ideas, partner, and grow the next generation of financial services.

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Ideas aren’t good; people are
People come up to [Feld and me] and say, “Hey, you were on Dragons Den and Shark Tank. You’re an investor in Techstars. Is this startup idea any good?”

20 years ago, at the beginning of our careers in venture capital, we looked at analytics and checklists and we actually thought we could tell which ideas would succeed and which ones would fail. But that’s really last century. Now, the people who validate ideas are customers and end users. Combined with access to capital, we’re seeing a lot more opportunities for disruptive technologies to come to market.

Why partnerships can be the future
I spend a lot of time at Ryerson Futures, our university-based venture fund. We have a lot of investments and we typically do a lot of B2B work. In Canada, that means a lot of financial services because it’s a highly regulated industry in this country.

We use our university status to help get first, second, and third customers to our fintech companies — similar to how Tel Aviv University has a Barclays Techstars accelerator. Barclays uses this to see dealflow and innovation flow that can later be disruptive. But they’re also using it as a first customer, as a way to test things. Imagine all the innovations that could kill you offering to partner with you. I bet Blockbuster would have made a different decision if Netflix had come along in the early days and offered to partner.



Work with a purpose: Why millennials leave big finance

When Chrissy Celaya finished her degree in personal financial planning at Texas Tech six years ago, she said ethics drew her to a career in the field.

“I wanted to to help people,” she said. “Finance plays such a big role in everybody’s life, so if you can ensure people can be financially secure for the future, it’s helpful in so many different ways.”

After two years working at USAA and a year-long stint working at a language institute in Spain, Celaya moved to New York to work at Merrill Lynch. But after a year at the industry giant, Celaya, who is now 27, said she didn’t think the culture was a fit.

“I had to sell certain products because they generated money for the organization, and that was a huge turn off for me, so when I started to learn about automated investing, it was a no brainer for me to go back to an organization that had the client’s interests at the forefront,” she said.

Celaya said she switched to Betterment, a startup that offers automated investing tools and employs human advisers. Her move to a smaller firm that aligns with her values is not atypical of millennials, who, according to recent research, pay close attention to a company’s mission.

“Millennials want their work to have a purpose, they want to feel they contribute something to the world and they want to be proud of their employer,” read PricewaterhouseCoopers’ 2016 Global CEO Survey.

The values focus, combined with millennials’ lack of loyalty to a single employer — a recent Deloitte survey found that 38 percent intend to leave their current position within two years — is rattling the financial advisory industry, a field where the average age of an adviser is 50 and continues to climb.

The talent problem in the financial advisory industry
Experts note that legacy firms are having trouble holding onto talent.

“The concern with legacy firms is less of a talent war and it’s much more about talent replenishment,” said Michael Spellacy, senior partner of asset management and leader of global wealth management at PricewaterhouseCoopers. “Attached to that, the innovators in the landscape have upended the financial adviser value proposition — there’s been a shift from active management to passive management with the proliferation of artificial intelligence to help guide the financial advisers.”

Younger, technologically-savvy advisers are less likely to trust the big firms that they perceive don’t have the customer’s interest at heart. For at least one veteran who mentors up-and-comers, it’s an often-cited complaint from younger advisers.

Every single week they contact me,” said Paul Pagnato, who worked 19 years at Merrill Lynch before opening his own firm a year ago. “Having a sense of focus and having a sense of mission meaning in their work environment is absolutely critical.” Merrill Lynch declined to comment for this story.

The culture question
The attraction to startups is driven by more than just open co-working spaces and ping pong tables. Startups can be perceived as more open to the development of new ideas, notes one young industry watcher who has worked in the field for six years.

There are three core issues major players have: one would just be the slow decision cycle of the corporate environment where it’s hard to do innovative or disruptive things, on top of that there’s regulation, and the demographics of these companies can sometimes be off-putting to young talent,” said Grant Easterbrook, 27, founder of Dream Forward Financial, a 401(k) startup.

Previously, Easterbrook said, people working in finance would pivot to other industries if they weren’t satisfied, but with the growth of financial technology companies, they can use their skills while pursuing other goals within the startup sphere.

“Millennials care about impact and social good — a lot of the traditional players make money with hidden fee structures, and even with startups that aren’t doing impact investing in the traditional sense [investing for social causes over returns or profits], there’s more of a feel-good, social-good kind of vibe,” he said.

For Celaya, not having to upsell customers products and services was a big motivator to move to a startup.

“I didn’t like the idea of having to cold call and sell products [the customer didn’t need] and wanted the flexibility to do the planning the way I wanted to do it,” she said.

Incumbents respond
At least one major industry player said it’s changing the way it’s organized to help attract and keep millennials. Newark, New Jersey-based Prudential Financial, which has a large investment management practice, has developed an in-house customer office that’s designed to be an innovation lab for young talent.

“We have garage doors, ping-pong tables and a very open workspace that allows for more collaboration and that has a very different feel to it,” said Chrissy Toskos, vice president of human resources at Prudential who is charge of campus recruiting. “The [young] talent is very tech-savvy with more agile ways of working, and we’re inviting them to be involved and advance in our culture.”

The company said it’s also offering perks like student loan repayment assistance, subsidized healthy food, on-site fitness facilities and volunteer opportunities. When asked if the moves are in response to a flight of millennials, Toskos said they are a natural evolution of the company’s organizational strategy.

“It’s something born out of where we want to go and how we want to be perceived in the market,” she said.

In the startup sphere, at least one founder feels the skill set and mindset required to work in a startup is more aligned with where the industry is going.

“We look for people that are problem-solvers and people that can execute,” said Herbert Moore, 34, co-founder of WiseBanyan, a platform that offers largely automated investing tools, with the support of financial advisers. “In asset management, a lot of the skill sets people are learning in larger firms aren’t quite as relevant to what we’re doing right now because we’ve sought to automate those functions.”

What motivates the best employees, said Moore, is a commitment to a longer-term mission.

“No one’s going to choose a job just for a free lunch — what you see in the best people is a desire to do something meaningful.”

How to grow a fintech company without taking outside capital

what's going on with marketplace lending

During 2015, there was so much venture capital money sloshing around the finance industry. Some of the top startups in the space raised +$100 million rounds (debt and equity). Sometimes, surrounded by the splashy big fundraising news, companies trying to bootstrap their paths to profits get lost in the noise.

Justin Carbonneau, Validea
Justin Carbonneau, Validea

But there are companies out there in the finance world that are doing a good job building businesses for the long term. Validea is one of those firms founded by three professionals that chose to go the self-funded route. Founded in 2003, the company provides investment data and portfolios built and managed using algorithms that mimic the investment strategies of some of the greatest investors in history, like Graham, Buffett, Lynch, and Neff. The company was founded during the dot com era when money was loose and profits didn’t seem to matter.

Instead, when Justin Carbonneau and Jack Forehand teamed up with founder John Reese, the team decided that they would grow Validea with a goal to profitably run their fledgling fintech business. The idea would be to expand the business by using cash flow to build the business, not outside capital.

Control was also an important issue — the firm decided early on that it had a clear goal in mind and it wanted to own its own destiny. “We also didn’t want to give up control of our concept to outside investors who may not have understood the vision we have for the company and may have tried to force us to go in a direction that isn’t consistent with our goals for the business,” Justin Carbonneau, who heads up sales and distribution, remarked. “We think that level of control has been important to both its success and the personal enjoyment we get out of running it.”

Indeed, the firm credits going the self-funded route with helping it navigate the 2008 downturn, a period of time that proved very challenging for companies exposed to the stock market. Bootstrapping a company ensured the team kept costs in check. It also meant there was a high level of resourcefulness on the marketing and sales side. Carbonneau described his early marketing successes, “Early on, we benefited from highlights in major media outlets, such as articles in The Washington Post and on very popular investing sites like MSN Money.” Popular writers and columnists would highlight Validea’s investing system and this type of earned media generated a lot of interest in the firm’s products early on.

Peter Lynch and Validea stock picks

Those big, unexpected wins have changed as the company has grown. The company is much more focused on optimizing its own sales funnel now and that means working to get Validea’s premium products in front of traffic that comes to the site from search engines. Content partnerships can help bring a steady stream of prospects to the site, as well. Carbonneau has inked a partnership with NASDAQ which involves out-licensing part of Validea’s research product to the stock market’s flagship website, which drives more traffic to the firm’s premium products. The firm’s founder, John Reese, is also a contributor to Forbes and Canada’s Globe and Mail, which brings in more readers. “I think this content marketing approach is much more sustainable for the long run versus the former PR-centric growth strategy,” he posited.

While the Validea team recommends their self-funded approach to growing a financial business, it has had its drawbacks, too. Sometimes the focus on short-term profits has steered the team away from focusing on longer-term projects.

Validea Capital Management_-_Invest_Using_the_Proven_Strategies_of_Wall_Street_Legends

For example the founding team runs a separate firm, Validea Capital Management. It took 18 months to launch that asset management business after releasing “We probably could have expanded that much faster if we launched it out of the gate, but we wanted to be cautious both from the perspective of profitability and the perspective of making sure our models were ready to run actual money,” said Carbonneau. It wasn’t until 2014 that the firm launched its first exchange traded fund (ETF), the Validea Market Legends ETF, which was certainly later than some other firms in the space. “So in hindsight, we could have employed a more fast moving, aggressive expansion strategy, but in the end, we are risk averse people and we are willing to give up the upside of a potentially much larger company to ensure that we have a company that is sustainable over the long-term.”

Advice to others contemplating taking VC vs. self funding?

Carbonneau offers the following words of advice for other entrepreneurs considering taking outside capital to fund their fintech firms:

  • It really comes down to each person’s own vision and risk tolerance. Business owners need to ask themselves if control and profitability is more important or if that are willing to give that up in pursuit of a bigger long-term vision.
  • Having a focus on profitability early on gives you flexibility and more leverage if you do decide to raise outside capital.
  • Many times, founders know more about their businesses than outsiders do, so you need to strike a balance between staying focused on what you believe in and future expansion.
  • Sometimes a product can be too early, so it can pay to try to wait for the marketplace to accept your product and self-funding can give you that flexibility.
  • Changing the business model can be key to long term survival – Validea started as a free research product, we pivoted to a subscription based product, then launched the asset management business. The core of what we do was all centered around the fundamental guru-based strategies we run but the various business model evolved over time.
  • Sometimes companies feel compelled to hire, invest, develop, market and more. All of these things cost money, and while they can help grow a business and add-value, they can also hurt a business if the execution is off or if the revenue does not keep up with the cost structure. They increase reward, but also increase risk.

The Startups: Who’s shaking things up (Week ending February 21, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletters.[/alert]

Startups raising/Investors investing

East Coast credit fund puts $250m to work on Patch of Land platform (Finovate)
An East Coast credit fund will invest $250 million across the Patch of Land platform.

Dallas-based StoneEagle raises $76m for payments system (Xconomy)
StoneEagle Services sells virtual “credit cards” for business-to-business payments to the healthcare and automotive industries, among others, digitizing traditional B2B payment processes.

Financial wellness firm, PayActiv raises $9m (Finovate)
Financial wellness specialist, PayActiv raised $9.2 million (lead by SoftBank). Read more.

Modo Payments closes on $2m in funding (Finovate)
Modo is a “shipping container for intermodal payments”. Read more.

Victory Park Capital taps Goldman exec for CIO role (FINalternatives)
Behind many of the $100m+ investment rounds sits Victory Park Capital (VPC), a provider of lending facilities for many of today’s top online lending startups. Former Goldman Sachs managing director Upacala Mapatuna has joined Victory Park as chief investment officer.

Visa reveals major stake in Square (Finextra)
Shares in Jack Dorsey’s Square received a much needed boost on Friday on news that Visa has a 9.99% stake of shares in the payments firm.

The Startups: Who’s shaking things up

$1 Billion Served: Venmo circa 2016 (Venmo)
Big milestone: In the month of January, over $1 billion in mobile payments were made via Venmo (2.5x year over year). Paypal’s P2P mobile/social payment provider has its sights set on B2C payments, too.

Citibank: Google should buy AIG and turn it into a fintech lab (BusinessInsider)
So why exactly does Citi think Google should buy this basket case? Could be really interesting, actually.

New app will help you manage all your credit cards (and plans to manage more of your financial life) (TechCrunch)
Curve, which has some notable investors, combines all your credit cards onto one physical card (similar to Coin). Curve’s been designed to plug into any payments system under the hood (today this is cards, but could be bank accounts or an online payment provider like PayPal) and has big plans for the future.

B of A’s Head of Tech Strategy joins tech startup (AmericanBanker)
Thomas had been B of A’s head of architecture and technology strategy and last week apparently joined Apprenda.

Insurance Disrupted: An insider guide to who’s doing the disrupting and how (Insurance Thought Leadership)
An inside look at the visions, culture and disruptive innovation accelerating the digital tipping point for insurance and the opportunities that creates for companies bold enough to become part of it.

The Startups: Who’s shaking things up (Week ending January 10, 2016)

fintech startups shaking things up

[alert type=yellow ]Every week, Tradestreaming highlights startups in the news, making things happen. The following is just part of this week’s news roundup. You can get these updates delivered direct to your inbox by signing up for the Tradestreaming newsletter.[/alert]

The Startups: Who’s shaking things up

Income&’s Brad Walker on building a better mousetrap for retirement investing using marketplace lending (Tradestreaming)

trov’s Scott Walchek on designing the world’s first on-demand insurance for single items (Tradestreaming)

Startups raising/Investors investing

Student lender CommonBond raises $625m in total funding (CrowdfundInsider)

Alibaba’s Finance Arm Said to Seek at Least $1.5 Billion (Bloomberg)

Street Contxt scores $8m to bring more efficiency to investment research distribution (Business Insider)

Blockchain Startup Gem Closes $7.1m Series A to build a modular platform for blockchain applications (CoinDesk)

Canadian online lending marketplace Lendful raises $15m (Finextra)

Xfers Lands $2.5m To Simplify Bank Transfers For Online Sellers (TechCrunch)

LoanNow Secures $50m Credit Facility (Finovate)

Startup Roundup: Goldman Sachs, American Express placing further fintech bets

fintech companies making news this week

[x_alert type=”success”]Every week, we write about fintech startups raising money, making partnerships, and generally disrupting finance[/x_alert]

This week, finance’s who’s who soiréed at the Economist’s Buttonwood Gathering. The one question that seemed to underly all the discussions and break out sessions:

  • what about banks?
  • What’s the banking sector’s role going forward when fintech is disrupting from above, below, and laterally?

The Startups: Who’s shaking things up

Inside Monese, the mobile banking app for migrants (Tradestreaming)
The app lets people sign up with just a picture of a passport and a selfie in as little as 3 minutes.

LendKey Enhances Lending-as-a-Service for Local Banks & Credit Unions (Finovate)
Tradestreaming Tearsheet: Even in this newsletter there’s lots of talk about the competition hitting banks. New platforms like LendKey don’t disintermediate them as lenders; instead, they help them create digital offerings and compete. It will be interesting to see how many banks adopt platforms like LendKey or instead partner with the larger online lenders.

Indiegogo Launches Generosity To Compete In Personal Crowdfunding (
Tradestreaming Tearsheet: After GoFundMe’s (crowdfunding platform for personal campaigns like paying medical bills or tuition) success and raising massive amounts of capital, Indiegogo wants more of the market and relaunches (and rebrands) its own offering, Generosity.

Digital currency is poised to reinvent how startups are funded, led by Chroma Fund (TechRepublic)
Chroma Fund is a crowdfunding site powered by the blockchain, the same underlying technology that powers Bitcoin. Learn how it’s preparing to disrupt startup investing.

From start-up to incumbent: the innovation cycle (The Finanser)
Tradestreaming Tearsheet: Interesting framework to think about growth in the fintech industry and how that maturation unfurls for startups on their way to becoming larger, incumbent players. Useful for startup founders and those investing/partnering with fintech startups.

RushCard Breakdown Affects Thousands of Prepaid Debit Card Users (NYT)
The troubles, lasting much of the past week, illustrate the potential perils for those without access to the banking system.

Co-Founder of Capital One, Nigel Morris, Joins Zopa Board (Crowdfund Insider)
Morris, currently the Managing Partner at QED Investors, is the co-founder of Capital One. QED has invested in well known Fintech companies, including, Credit Karma, Avant Credit, GreenSky and SoFi.

OnDeck Adds New Small Business Lending Options (Finovate)
“The expanded product suite includes broader loan terms, increasing the maximum loan amount from $250,000 to $500,000 and granting borrowers up to 36 months to repay (from 24 months). Lines of credit will be available up to $100,000 (from $20,000) for a monthly fee of $20 and no “draw fees.” And repeat customers will be eligible for annual rates as low as 5.99%, as well as loyalty pricing benefits.”

Early Read on Square’s S-1 Filing (First Annapolis)
Good initial read of the payment firm’s IPO filing – what questions it answers and which ones remain unanswered.

Startups raising money this week

Goldman Sachs leads investment in cloud-based POS startup Financeit (Finextra)
FinanceIt enables businesses to offer payment plans to their customers and Goldman Sachs wants a piece of the online lending fintech firm.

American Express Invests In Bitcoin Venture, Abra, Which Announces U.S., Philippines Launch (Forbes)
Bitcoin startup Abra will soon launch in the US and Philippines, and is rolling out a merchant services API. It also received investment from American Express and Ratan Tata.

Citrus Payments Raises $25M (Let’s Talk Payments)
PE firm Ascent Capital and early investor Sequoia are investing $25M in Citrus’s C round. Citrus “makes digital payments and online checkout processes simpler, faster, safer and easier for an 800 million strong electronically connected user base”.

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