This is Ask a VC, where we quiz venture capitalists on the latest trends in the finance space.
One of the biggest problems in financial technology is that considering the vast amount of theoretical solutions, most startups can’t quite figure out how to scale their products.
That’s the trouble with tech startups acting like banks: They need burdensome service-level agreements and have requirements on how much time the system is available for end-use applications; and they need strong balance sheets to give the companies that would potentially buy their products some confidence.
But that’s where Centana Growth Partners wants to step in, by helping ready-to-scale startups by providing funding for working capital, to fund acquisitions or de-risk a balance sheet — instead of focusing on early stage startups. Centana is currently invested in requirements management software Blueprint, identity startup Jumio, insurtech company One, Inc., an algorithmic agency brokerage that focuses on fixed-income products and futures called Quantitative Brokers and performance management and business intelligence platform Vena Solutions.
Tearsheet caught up with partners Eric Byunn and Ben Cukier about their investment strategy and themes. The following has been edited for length and clarity.
What do you care about in a company?
Cukier: We’re looking for growing companies with established revenue in financial services where the application of capital can help accelerate the growth. A pivot in the venture sense is almost a nonoccurence in our portfolio. There are various sub-sectors we’re excited about — identity, tech that supports reg — most of what we look at is in the b-to-b space.
Byunn: The difference for us versus early stage firms is we are really focused on businesses that have already proven that they have a solution to add value to the financial services industry and a business model that supports it.
Is there too much investment in early stage fintech?
Byunn: It’s great that different firms, different people have different focuses; we would never say there’s too much of something out there. The challenges and issues for a company trying to scale and expand from its initial set of customers is very different from the those of a company trying to build an initial product and find its customers. We do define a unique area for us in being able to help companies focused on scaling and combining that with our expertise experience and network to advance the financial services industry.
Is there anything new under the sun?
Cukier: For a long time, old ideas have come around again with different names. Some things that didn’t work in 1999 come back called something slightly different and are just as unlikely to be successful now as they were the last time they tried. We can see some of the things that probably won’t work this time around that may still be getting funding again.
Cukier: Marketplace lending. There’s been a lot of excitement about the space. It looks very similar to specialty finance, which has actually been a very successful area in the past. So it’s not that marketplace lenders won’t succeed, but the economics of business don’t change dramatically just because you throw on a new interface. You need to understand what the economics of specialty finance is to understand how to look at the lenders.
Where do you stand on blockchain technology?
Byunn: It’s generally earlier stage than we invest. We do find the distributed ledger technology to be a very interesting, burgeoning technology. We as a firm invest in growth stage, established businesses that have figured out how they’re adding value financial services sector. So we are watching blockchain quite closely.
Cukier: As of today we are not investors in any blockchain technology. At some point the companies get to revenue stage which we look at but we find theres a lot of hype — some of it for good reason — but there aren’t a lot of commercial applications that are inspiring us to go pound on doors of some of these companies today.
What would change that for you?
Cukier: Getting a bunch of industry actors to adopt the technology at the same time. The way the industry is getting around this is through consortiums, but you’ve got a number of them out there, not everyone is a member of every one and there are different efforts by different players. Until the industry actually aligns more specific applications with how they’re going to use them it becomes really hard for an outsider — tough for the insiders too — to make a very educated bet on what is going to win. First what we need to see is the industry getting behind a particular standard of app and actually moving to implement it.
What’s something you’ve learned from a failure?
Cukier: When something is scaling. Don’t throw good money after bad but really invest where the business is on plan.