With Mylo-Tactex deal, startups buying incumbents doesn’t seem so far-fetched

Usually, it’s the big companies snapping up startups.

From Goldman Sachs’ purchase of retirement savings platform Honest Dollar last year to BlackRock’s acquisition of FutureAdvisor the year before, that’s how it’s generally gone in the hotly competitive asset management space. But this week, the opposite happened, with Canadian personal finance startup Mylo acquiring Tactex, a 6-year-old asset management company with CA$ 110 million ($82 million) in assets under management and nine portfolio managers.

Mylo, which will formally launch this summer, will let customers round up purchases to put the savings in investments and save according to predefined goals.

“What we’re getting here [with the acquisition] is the ability to create, launch and manage our own investment funds,” said Mylo CEO Philip Barrar. “Tactex is the team that manages the accounts — this is a fully managed investment account and not a robo play.”

Mylo said the acquisition is not about technology; it’s about getting access to human expertise for Mylo’s customers, who will pay CA$1 (80 cents) a month to use the service. It will also cut operational costs. But ultimately what smoothed the buy was the agreement among Tactex and Mylo on the direction of the brand.

For me, it goes down to a deeper mission of financial inclusion,” Barrar said. This vision was reinforced by Tactex CEO Liam Cheung, who said in a statement that Tactex shared Mylo’s social mission.

Despite the ease with which the acquisition took place, Barrar acknowledged that it occurred under special circumstances.

“I think you need to have the right kind of infrastructure and foundation, and that’s what we had,” said Barrar. “I don’t think you’re going to see fintechs firing incumbents, but when you’ve gone through the first hurdles, you may see more of that.” Barrar said Mylo had already been working closely with Tactex for over a year, during which the common goals became clear.

Analysts agree that Mylo’s acquisition depended on enabling factors, including a long-established relationship.

“Traditionally, we’ve seen startups get acquired — it’s seen as a natural trajectory that will happen in the beginning or down the road,” said Laviva Mazhar, a senior analyst with Ferst Capital Partners, a Montreal-based venture capital firm that is an investor in Mylo. “In this case, it was a very natural fit for Mylo and Tactex, as Tactex was working as a supplier for Mylo. They wanted to figure out a way that Mylo would be able to offer those products to anybody.”

Mazhar said the acquisition of incumbent asset managers by startups, while possible, will require shared goals and an understanding of the technical requirements and regulatory implications of an acquisition.

Similar moves could occur in the U.S., according to one expert, particularly if the startups have adequate backing. It’s also an idea for the banking industry: As Tearsheet previously reported, there were almost 6,000 FDIC-insured banking institutions in the U.S. as of the end of 2016, and 1,541 of them had less than $100 million in assets, including a sliver of failing banks that need saving. With average common equity around $12.5 million for a healthy bank of that size, a well-established startup could pay $25 million and get fully licensed to take deposits.

“It’s an obvious trend where some of the well-funded and private-equity backed fintechs could accelerate their growth and capabilities,” said Michael Spellacy, ‎senior partner of asset management and leader of global wealth management at PwC.

While such moves could occur, the saturation of the U.S. market with well-resourced industry heavyweights could act as a deterrent.

“The Betterments and Wealthfronts are RIAs [registered investment advisers] that came to market with that package already intact,” said Denise Valentine, a senior analyst who specializes in wealth management at Aite Group. “They’re up against very large firms with expertise and money. You’re coming up face to face with a BlackRock. The dynamics are different.”

 

 

Why one VC is bullish on ICOs

In the past three months, companies have raised more than $300 million, not through venture investors or banks, but from token sales, also known as initial coin offerings.

Venture capital has become synonymous with innovation and wealth creation over the last half century. Today, corporate VCs (established corporations that with dedicated funds for external startup companies) are on the rise; the number of active corporate VCs per quarter more than doubled between 2012 and 2016, according to CB Insights. Enthusiasts of token sales are optimistic that they can unseat venture capitalists, as an investment vehicle that removes the need for the middle man and provides more liquidity.

The VCs themselves haven’t shown much concern over that idea (it may be too early for that). If anything, some are looking beyond that detail at all the possibility for innovation.

“It’s much like you agreeing to pay in advance a two-year subscription to the Wall Street Journal or New York Times,” said Ryan Gilbert, partner and founder of Propel Venture Partners, the BBVA Ventures spinoff that launched as its own LLC last year, at the Tearsheet Money Conference this week. “The subscriptions we used to know are the coin offerings of today.”

Of course, it’s not clear if the tokens sold constitute securities. The Securities and Exchange Commission hasn’t issued any formal guidance on tokens as securities and regulators tend to take a do-no-harm approach to new business concepts and technologies that haven’t proved harmful.

“Yes, what’s happening today might be controversial,” Gilbert said. “But when regulators learn more about what’s truly happening, they’ll recognize… what’s going to help deliver financial services to everyone at the lowest possible price, how are we going to truly have transparency, is knowing both where a transaction starts and ends and what the true costs are going to be.”

Gilbert’s stance reflects a growing interest in public blockchains by bank executives as well. A Cognizant survey released this week of 1,520 executives from 578 financial services firms shows 86 percent see public blockchains becoming more prominent in the next five years; 80% said the same about private blockchains.

In the original bitcoin blockchain, transactions are recorded on a public ledger anyone can see, although users are pseudonymous, identifiable only by alphanumeric addresses. That doesn’t mesh well with the need for privacy in high-stakes transactions between massive companies, which is why banks — which were initially hostile have sought “permissioned” blockchain-like solutions that allow for more privacy in terms of how data is stored and who can access it.

At least two of Propel’s portfolio companies have raised money through token sales. For example, the blockchain-based digital advertising system Brave “managed to raise $24 million in about 29 seconds,” Gilbert said.

In financial services, the token sale opportunity could perhaps manifest in payments, through a bank transfer service that uses these types of tokens as a means of compensation.

It’s hard for the everyday person to justify paying $17 to wire $100 from the U.S. to Mexico, especially when the cost of that wire probably looks more like 75 cents. But using these kinds of tokens, the supply and demand sides can come together to “dictate the true price of that token for the value exchange… whether that payout point at Guadalajara or Mexico City actually has that cash from the sales of the day to disperse to you as a recipient.”

Other investors are more cautious. Mike Sigal, a partner at 500 Startups, didn’t comment on his investments but noted that one of the hardest things for an early stage company to do is acquire customers and activate the entrepreneur’s community, and that a token sale could be a tool for it to truly get its community engaged, speaking at the Bloomberg Bloomberg Buy-Side Week Focus on Fintech event this week. For Citi Ventures, they’re still a solution in search of a problem. Arvind Purushotham, the group’s co-head, said it looks at blockchain investments with direct applicability to its business. It’s an investor in Chain, but hasn’t made any cryptocurrency investments.

The early-stage fund Future\Perfect Ventures has several portfolio companies now planning ICOs, said Jalak Jobanputra, its founder and managing partner. But it’s a Wild West, and it’s unclear whether these token sales have real technology behind them or if it’s just a quick way to make money and take advantage of momentum, she explained.

“There will be something really lasting out of this but there will be a lot of catches in the process,” she said. Tokens related to the business are one element of it but some companies want to raise just to have a capital raise. You really have to dig in and see what you’re going to own… It would be dangerous for these companies if there was immediate liquidity or lack of liquidity. All of those terms are up in the air right now.”

‘If you don’t fix your diversity problem, I’ve got no time for you’: VC Amy Nauiokas

This is Ask a VC, where we quiz venture capitalists on the latest trends in the finance space.

Like many investors, Amy Nauiokas invests in people, not ideas.

“Companies are more than just an LLC and a pile of cash,” said Nauiokas, founder and president of Anthemis, a financial technology investor. “They’re made up of founders and from there they grow. And when you look at a company’s culture you don’t have to look much past the founders to figure out where they need to go.”

Anthemis invests in early stage technology companies focused across the industry — retail banking and consumer finance, business and corporate banking, payments, wealth management, capital markets, insurance and funds. It’s currently invested in Betterment, Trov, Payoff, SeedInvest and Currency Cloud; her exits include Fidor Bank, which BPCE acquired last year, and Simple, which BBVA acquired in 2014.

Nauiokas, the former CEO and managing director of Barclays Stockbrokers, also founded Archer Gray, a media production, finance and investment company, in 2010. Anthemis launched that year too, though it had begun investing in 2008, as its digital financial services investment and advisory firm. Tearsheet caught up with her to talk about the importance of investing in people instead of products and the need for VCs to work harder for achieve gender equality.

There’s a lot of noise in “fintech.” How does that affect you as an investor?
If someone claims to be the next Uber or Airbnb for financial services, we tend to take that at face value but really challenge that assumption. It’s the one industry where it’s very difficult to simply create a business, dump it on top of technology and call it done. There’s a lot more complexity, market structure and risk.

How much of the decision to invest has to do with people and skills that perhaps can’t be taught?
We do look for that level of ambition, but in our weeding process and getting rid of the noise — whether it’s fintech noise or investor noise — it almost always comes down to people. Early stage is a tricky, tricky business. So many early stage companies fail. And so many people need their biggest capital infusion before they have any revenue. You have to be able to appreciate that the product might not be the name of the game here.

But the product is important. How do you couple that with the people factor?
First we focus on the people, and then if they have a solvable problem, a problem they want to solve that’s big enough to create a business — and then we figure out the problem. And we’re finally starting to see that people are thinking outside of the box. That’s extremely refreshing to me.

What’s driving that change?
I hope part of the reason is that investors like us are pushing people to challenge themselves, to appreciate that if you’re one man — and I’ll say man because it’s almost always a man, right? — with an idea, the chances of you succeeding without a different opinion, a different set of skills, is pretty low.

There’s a conversation about a lack of funding for women-owned startups due to the lack of women in venture capital. Where do you stand on that?
You’re going to go long and hard to find that many senior VCs that are female. I dont think there is an issue with female founders getting funding per se. I don’t think VCs are pound for pound biased against female founders. We aren’t seeing enough female founders, we aren’t encouraging, finding, demanding enough to be able to make an honest opinion about who is going to be giving that funding.

Do you ask your companies about their plans for diversity?
All of them. If you started yesterday, you’ve got big employees, you’re one of them, you’re a founder, if you don’t fix your problem I’ve got no time for you. Goldman Sachs has done probably better than anyone at trying to encourage bring more women to the table but it is a multi-hundred-year-old organization from a time women weren’t in the workforce. We’re living in a different world and there’s no excuse for it, for selling a product to a population that holds more than 50 percent of purchasing power and not having a female voice on your board or in your C-suite.

What VCs need to know about digital identity startups

The hottest word in financial technology right now is about digital identity.

“Identity is such a core component to being able to deliver financial services,” said Jay Reinemann, a general partner at fintech venture firm Propel Ventures Partners. “It’s the way financial services are priced. It’s a core component of fraud. Even from a governmental perspective, taxation requires identity.”

Here are three big distinctions investors make when analyzing a potential deal in the digital identity space.

Financial inclusion
In the developed world, fixing identity is important for matters of security. In the developing world, it’s a way to bring identity to those that don’t have an economic identity or financial access to those excluded from the formal financial system. Investors’ checklists and how they analyze potential deals will be different in each world.

Also, some jurisdictions don’t have national identity schemes. To some investors it may be easier or more interesting to look at investments in a country that has an identity scheme on the basis that it’ll be easier to create a digital version, but others will prefer to play in the gaps.

PTB Ventures, which invests in early-stage digital identity companies, is backing a company that uses biometric authentication in markets with poor infrastructure for authentication at registration, said managing partner Dave Fields.

“In markets that have really poorly developed infrastructure, creating this basic identity scheme can be really disruptive,” Fields said. However, “if their go to market strategy was based in the U.S. I don’t think people want to be waving their hands in front of cameras every time they need something to eat or are seeking healthcare.”

Reinemann takes a slightly different attitude.

“As long as theres a bad guy they’re always going to find new ways to falsify or to steal an identity to use it for something — whether theres a national identity system in place or not,” he said.

Collaborating with the government 
Despite the many entrepreneurs dedicated to the idea that blockchain technology can solve the fragmented digital identity problem, some VCs say it’s better to invest in a business opportunity build on top of existing technology — blockchain or otherwise — instead of investing in building new technology.

“We invest more in areas where there is a clear business case — trying to find places where to implement solutions,” Reinemann said. “Even in the U.S. … there are very clear requirement of what companies need to gather but a very unclear way of how to do it,” he added, citing banks’ Know Your Customer requirements.

Andi Dervishi, fintech global head of the International Finance Corporation, said it’s interested in companies that mine identity instead of building it.

“As we enter the digital world we leave traces on a day-to-day basis,” he said. “Companies not building identity, but identifying it by reading all these different traces, could be companies we’re interested in because they don’t have this dependence on the government, they look at what’s already there.”

Any early stage business requires some strong collaborating body, Fields said. Fintech startups are partnering with banks — OnDeck Capital and JPMorgan Chase have partnered on small business loans, for example. Digital identity startups are too. When it comes to digital identity, entrepreneurs would be better off thinking of regulators as partners instead of taking an antagonistic approach to them.

Paying for protection
In a perfect world, consumers would get the money from the deals that allow companies to monetizing our data, said Andre Boysen, chief identity officer of SecureKey. Amazon pays about a 2 percent for taking customer credit card information to make a transaction. That pile of fees over the course of a year would average about $50 if Amazon put that burden on the customer. Most customers wouldn’t pay that.

That’s one reason business-to-business companies make for easier investments, for the time being, than business-to-consumer companies: Customers aren’t willing to pay for their protection. There’s a knowledge gap, however. Customers generally understand that their data is being used for reasons beyond identifying them and being sold to third parties to use in some way. Most allow it so they can easily interact with the services they like.

“Actions can be driven by who is more directly bearing the cost of these things,” Fields said. “At a consumer individual level we suspect there are privacy violations but it’s hard to attribute the cost of it. A lot of times the violations are being born of the businesses… but potentially privacy of an individual will be more solved by people who are directly bearing the costs.”

How fintech startups can succeed in an increasingly competitive space

This is Ask a VC, where we quiz venture capitalists on the latest trends in finance.

It’s been said that nine out of 10 startups fail, and given the growth of financial technology companies that have sprung up since the financial crisis, a path to long-term profitability is key. RRE Ventures, a venture capital firm based in New York City, has invested in a number of high-profile players including Ripple, OnDeck and Avant. Its investments also include technology companies such as Palantir, Giphy and SocialFlow and media outlets including BuzzFeed, NerdWallet and theSkimm.

Founder and general partner Stuart Ellman spoke to Tearsheet about what he looks for in entrepreneur pitches, the challenges of building a sustainable business model and the evolution of products for consumers and businesses.

How can investors tell the difference between the next big fad versus the next big thing?
Experience and judgment. It’s extremely difficult to figure out what’s a fad and a thing; theoretically a thing is a fad that lasts a very long time. The question is how long is something going to last, and are you going to be able to take what you have and create a lasting competitive advantage and then be able to build a business out of it.

What trend is most exciting to you right now?
Robotics. The ability to get robots to perform tasks that are helpful to people and [also] get a return on investment is really just coming online.

Is there one that’s particularly overhyped to you or has lost your attention?
There are many. Amazon’s announcement about the closure of Quidsi [parent of diapers.com and soap.com] certainly helps delineate how hard it is to be a retailer that doesn’t create its own products. Not sure if this is overhyped, but as compared to the last 10 years when we funded a variety of media startups like BuzzFeed and Business Insider, it’s much harder to break into the new media market because so many of those then-startups have become very large companies in and of themselves and have partnered with much larger companies with big distribution. And obviously, there’s been a lot of hype in insurtech as well, because you have a number of new insurance companies that are managing general agents, which means that they’re using the insurance plans from insurers and marketing them differently. There’s a lot more risk in being a managing general agent as a startup against seeing what some of the incumbents will do to combat them and compete against them.

Personal finance is getting increasingly competitive. What will the winners need to have?
Over the past 10 years, you’ve had an unbundling of products and services. You had Mint which helped you understand and learn what your financial picture looked like, and you’ve had people doing savings, like Digit, and people doing bill negotiation, like Truebill and Billshark.  

Each of these point solutions created value, but it was hard to achieve significant scale on any of them. What Clarity Money is trying to do is create the next generation by being an API that uses all of these different services. I would rather not have one thing that does the saving and one that does bill negotiation and another that does subscription management — I would rather one that integrates all of them.

For those that are underserved by the financial system, what can startups offer that’s different than the banks?
I have a personal belief that it’s not my job to make money off of people by putting them into debt that they cannot afford to have. On the other hand, getting people credit that were previously underserved is something that’s important and obviously technology is well suited to do.

What’s the biggest mistake that entrepreneurs make when pitching you?
The belief that prior success will lead to future success. It’s clear to me that every good entrepreneur fails, and failure allows you to see things more clearly.

What’s the biggest lesson you’ve learned from a failed venture?
Be careful about how much money you put into companies that may have once been a good idea but cease to have been after a certain period of time.

Confessions of a fintech VC: No one is using fintech outside Venmo

After a brief face-off between two worlds – slow, old financial institutions and fast, young technology startups – it seems peace has been restored between the two.

Legacy financial firms and financial technology startups aren’t competing for the same customers anymore, instead they’re working together. Fintech couldnt have come this far without its venture capital firms, which have been funding most of the innovation in the space before banks and private equity firms got in and started throwing in some of their capital. But today many parts of the fintech ecosystem are saturated and riding parallel hype cycles. Plus, these companies aren’t really taking off. And now that they’ve redefined their relationship with banks, startups have even more support to refocus on building solid products and developing customer trust.

In this installment of Confessions, in which we trade anonymity in exchange for honesty, we talked to a fintech venture capitalist who has worked with banks and payments companies for more than 10 years.

Chatbots were very exciting to you early on. Today that market seems kind of crowded and very noisy. Has it changed your position on them?
Consumers aren’t downloading apps they’re spending their time in messaging. The platform widely varies based on geography. People in Japan use Line; in China, WeChat; in Europe, Whatsapp; here, Facebook Messenger. Chatbots are overhyped in the Silicon Valley sense. A lot of Silicon Valley investors in fintech startups are really not experts on how the financial system works. In fintech you’re going to have a startups that do X, Y and Z, come out and go direct to consumer, and for each time they do that the banks respond with an internal homegrown version of that product.

How do you measure the potential of a young but established startup?
The thing you want to ask in fintech is how many fintech companies have gotten over a million users? That’s the elephant in the room. For all the money, all the hype, all the headlines… What are your friends actually using and doing differently that’s fintech? Direct to consumer fintech ideas outside of Venmo haven’t been blockbuster hits. Those second, third and fourth spots are what consumers at least find very interesting. But by and large all these ideas being talked about, I don’t see people using them.

But you keep investing, that’s your job. What keeps you on your toes?
I’m actually becoming much more bullish on fintech as time goes on. It was a copped industry – just three or four years ago, everyone in fintech knew each other and that was how small credit was, that’s how small payments was. Now if I go to Money 2020 I’m there for half an hour and I don’t know one person. That to me is a really strong sign for the industry.

How has fintech evolved for you?
Fintech is a ridiculous title because you’re taking one little word and including 30 industries. Chatbots, messenger and mobile first trading – that’s about five percent of the industry. Wells Fargo is pretty much a fintech company if you think about it because what are they? Ledgers, a set of accounts, databases, a website, apps. Fintech is just true financial services in the modern world… not just kitschy little cute products being built.

So legacy institutions have already “won”?
Now Citi has a whole fintech division and Goldman Sachs is building their own products. [Fintech] is actually happening, it’s just going to be a little different, it’ll be about working with financial institutions instead of disrupting them – because of the regulatory complexity of this whole thing. No one’s going to give you finance to be a bank.

There are half dozen companies right now in the running to be a really big business, a big brand, a household name. They have a lot of capital, they’re building brands, each of them are leading with what they think will be a product with a hook – mobile first trading, student loans. Once they get you with that hook, then they can offer you a whole suite of financial services.

Are startups just waiting to be acquired by banks then?
You’re going to have students that want to bank with SoFi and consumers who want Robin Hood accounts so they can buy shares of, say, Snapchat. I think you’ll have people that say: This is my life savings, this is my livelihood, I’m not kicking around and playing games with a company that’s a year old – I’m gonna have Citi hold on to my money.

Consumers want choice and people’s relationship with their own money is incredibly emotional. If my grandfather worked at General Motors and I inherited General Motors stock, I have sentimental value to this stock. It’s completely irrational and silly, but people are like that. Very smart people are like that. They’ll do an electronic check deposit from an app but won’t deposit it into an ATM because they don’t trust it because no one is around.

We spend so much time talking about technology and the future. You say fintech is now, but consumers don’t feel that.
Financial literacy is so big relative to people’s understanding of what’s safe and what’s not. Take Visa and Citi and JPMorgan and look how much money they pump into branding and marketing so people think they’re safe. There will always be that group of people that will want to bank with a bank. It will be table stakes that banks will have to offer modern products the same way they had to do debit cards, ATM acceptance, electronic check cash. Same goes for insurance. There’ll be people that want to get an insurance policy with Lemonade and people doubtful it’ll be around in 15 years when they need it.

It’s not like sending an email instead of a regular letter. The consequences are serious. Over time, the fintech companies will continue to chip away market share but that’s when Lemonade’s name is in the same breath as State Farm, but it’ll take some money to get there.

High 5! The five fintech stories we’re following this week

5 trends we're tracking in finance

1. TIAA acquires MyVest

Another large financial services firm has acquired a roboadvisor.

TIAA acquired MyVest last week, providing customers the option of using a roboadvisor for investment and retirement account management. With the acquisition, TIAA joins the ranks of other financial services firms with robos, including Vanguard, Schwab, Fidelity, and Blackrock.

Although MyVest has provided B2B services to TIAA since 2009, the acquisition clouds the future of MyVest. Will MyVest become an exclusive product to TIAA customers, or will TIAA allow MyVest to service other financial firms? Regardless, offering a roboadvisor as part of an investment platform may become required for financial institutions. It appears roboadvisory is looking more and more like a single channel, not a standalone business.

2. JP Morgan launches fintech residency program

JP Morgan CEO Jamie Dimon has never been shy talking about fintech and banking in general. After last week’s news, he’ll have many more opportunities for quotes.

JP Morgan announced a residency program for fintech startups last week. Other banks, like Citi and Barclays, invest in companies, launch accelerators, or have internal fintech teams. With this new program, JPM is doing things a bit different by  bringing fintech companies into its offices for six months. Selected fintech firms will have the chance to work side by side with the largest US bank and have the chance to co-develop products with in-house tech teams.

3. Rise of the social trader

Fintech startups are returning to Communication 101 with social trading platforms, enabling users to follow the real-time trading activities of other investors and mimicking these trades in their own portfolio without leaving the platform.

Wall Street needs all the help it can get in securing millennial investors – a March 2016 Harris poll commissioned by investing app Stash showed that nearly 80% of US millennials aren’t invested in the stock market. Part of the problem is that investing is sometimes baffling – 75% of the women surveyed found investing confusing, though millennial men weren’t far behind, with a considerable 60% bamboozled by investing.

Social trading platforms are positioned to fill the investing information gap when it comes to millennials.

4. Debt financing is the new equity round

After months of reading about hefty equity rounds, financing trends in fintech may be changing. Klarna, a leading European payments upstart, said last week that it had raised 300 million crowns (it’s based in Sweden). But, perhaps a sign of the changing tide in startup land, instead of a big splashy equity financing, this one was done as debt.

For fintech firms, using straight debt is generally a new phenomenon. Up and coming financial technology firms have a variety of financing options and straight debt may prove to be a smart financial move.

5. VC investments in fintech: Q2 summary

The end of the second quarter of 2016 is upon us and it’s time to review the portfolio moves of some of the top venture capital investors in fintech. By following the money flow, we can find insight into trends and perhaps get a view into what types of companies are being financed with growth capital for the future.We looked at 40 VCs that, in aggregate, made $1.3 billion worth of fintech investments in over the past three months, and identified a few trends that we feel are the most important.

Where VCs are investing in fintech – Q2 2016 edition

q2 2016 venture capital investments in fintech

The end of the second quarter of 2016 is upon us and it’s time to review the portfolio moves of some of the top venture capital investors in fintech.

By following the money flow, we can find insight into trends and perhaps get a view into what types of companies are being financed with growth capital for the future.

We looked at 40 VCs that, in aggregate, made $1.3 billion worth of fintech investments in over the past three months, and identified a few trends that we feel are the most important.

Trend #1: Non-U.S. investments

Of the VC’s surveyed, 35% invested a total of $500M into companies outside the U.S., including Europe, Asia, South America, and the Middle East.

Portfolio companies of note include:

  • TransferWise: International transparent money transfers ($26M Series D)
  • Nubank: Digital financial services company in Brazil ($25M in debt)
  • Capital Float: Digital finance company targeting SMB’s in India $25M Series B )

Investments in foreign countries shouldn’t surprise most people; most of the world’s GDP resides outside the U.S. now. However, looking into the data, Latin America piques our interest. Most of the investments made in Latin America this quarter were in early stage firms, a sign that the startup market is gaining momentum there.

“We looked at financial services in Latin America, particularly Brazil, and saw not only the right market conditions but also a great wave of entrepreneurs emerging,” Caribou Honig, co-founder of QED Investors, wrote via email regarding his firm’s investment in Nubank.

This isn’t an indication that VC firms are going to be investing in Latin America and other emerging regions like drunken sailors. Instead, expect VCs to continue to evaluate how they can help foreign fintech companies and find market segments ready for improvement, especially in light of the competitive conditions in the US that have pushed valuations higher.

Trend #2: Investing in B2C businesses

Another trend worth acknowledging was investment in B2C fintech companies. Over 65% of VC’s invested a total of $944M in B2C fintech companies. Companies receiving investments included:

  • Circle: International online payments ($60M Series D)
  • Digit: service that checks spending habits and automatically sweeps money into savings when possible ($22.5M Series B)
  • Better Mortgage: helping consumers get better mortgages online ($30M Series A)

After a general refocusing on B2B fintech investing during early 2016, the emergence of B2C may be coming from two places. First is the millennial desire for better relationships with financial providers (an idea we touched on in a previous article about transparency). There is still room for upstart financial institutions to win over core services from an audience hungry for new options, however hard and expensive it would be to build.

As a former senior executive at Capital One, QED’s Honig has seen the power of a B2C product, through the impact Capital One had on the credit card industry.

“B2C investments are interesting because there’s the opportunity to transform entire industries, and the results can be fantastic when you’re on the side of driving that transformation,” he said.

The second, and subtler, are the years of B2B investment in fintech. The unbundling of financial services has made it easier to build a consumer financial app by mashing up APIs. With the technical hurdle lowered, it’s become cheaper and faster to build new consumer-facing financial apps. New banking startups can piggyback on existing technologies to create innovative financial solutions.

Trend #3: Investing in insurtech

The last trend worth looking at is insurance technology. Although not as significant as the previous trends, funding in insurance startups should be taken seriously. Some notable companies include:

  • Clover Health: Low cost healthcare provider ($160M Series C)
  • Jetty: Property and casualty insurance targeting millennials ($4M Seed)
  • Bright Health: Affordable health insurance plans ($80M Series A)

Insurance has been a topic of discussion for some time now, ranging from the expensive and complication of health insurance in the U.S. to waning demand for life insurance among millennials.

Issues in the insurance sector have tempted entrepreneurs to try and find holistic solutions. Early stage investors are looking for entrepreneurs who view insurance as a marketable product, not just a service.

“I’m most excited by the companies that treat marketing, product, and underwriting as flip sides of the same coin and create something new in the [insurance] market,” Honig explained.

Although we are still in the early stages of insurtech, it’s worth monitoring the progress of how and where insurance tech evolves.

Takeaways for Q2 2016 venture capital investment trends

These trends not only give us a glimpse into what may be a few years from now, but also the areas of opportunity for entrepreneurs and investors alike.

Foreign investments, especially into emerging regions like Latin America, are a good example of the geographies risk capital feels are most ready for change. Clustered investments in a geography inevitably lead to the development of a fintech ecosystem, with startups, funding sources, accelerators, universities and local financial institutions all participating.

Fintech firms building B2C models are reaping the rewards from the billions of dollars that recently flowed into B2B startups; as more investments are made in B2B infrastructure, B2C fintech companies can focus more on marketing and UX than on building out banking pipes.

Insurtech is still young, but worth following. The smart money is betting there’s an opportunity for the right companies to come in and become future leaders of the insurance industry.

Photo credit: Samantha Jade Royds via Visual Hunt / CC BY

[podcast] Susquehanna Growth Equities’ Amir Goldman on investing in fintech

podcast interview with Amir Goldman of Susquehanna Growth Equity

This episode is another in an ongoing series on this show where we talk to some of the leading investors in the financial technology space. This week’s guest Amir Goldman of Susquehanna Growth Equity is a bit of a pioneer in the space. His firm has been investing in — and exiting — top fintech firms for more than a decade now. He takes concentrated positions and doesn’t need to diversify, so he’s swinging for the fences.

Amir Goldman, Susquehanna Growth Equity
Amir Goldman, Susquehanna Growth Equity

Some of his best-known current investments in his portfolio include Credit Karma, Payoneer, and PaySimple.

Amir’s been around long enough to have exited over a third of his fintech portfolio and has been an active participant in the technology-driven changes that the financial services industry has undergone.

We talk about those changes, some of the investments Amir and his firm have made in the fintech space and why he made them. We also discuss where he’s looking to deploy capital now and where he thinks some of the best opportunities in fintech will come from in the future.

Below are lightly edited and condensed highlights from the conversation.

The fintech investment thesis

“The electronification of transactions has created a lot of wealth across multiple industries and the financial services industry was the early adopter in this respect.

“We’re looking for fast-growing businesses that are growing north of 30% per year. We target companies doing $5-$50m in revenue and our typical investment is $5m to $50m..”

The evolution of investing in financial services

“When we first started investing, we focused on trading technology, meaning the digitization of public markets, the decimalization of trading, and low latency / high frequency trading — these big, huge investment banks were willing to spend unlimited dollars to get a technology edge made trading technology the obvious place to start investing.

“We quickly moved to electronic payments — digitizing banks, money movement, etc. — which was a lucky expansion for us because this is where we’ve made most of our hay over the past ten years.”

Example of a winning fintech investment that you’ve exited

“Probably the most substantial investment in our portfolio in the early days was CashEdge which provided the infrastructure for online banks to do online account opening and handle account-to-account money movement between banks. We had 8 of the top 10 largest financial institutions in the US as customers.”

Why we don’t diversify our portfolios

“We have a great source of capital which is the entrepreneurial group that founded and bootstrapped Susquehanna Financial Group. That creates a lot of flexibility for us. We don’t worry about running a diversified portfolio. We typically do 3-5 investments/year and each of our funds have had non-diversified profiles. For example, our first fund was a $100 million fund and our investment in CashEdge was $35 million. If we find a winner, we just want to really double down and get as much exposure as possible.”

The best investment you didn’t invest in

“We missed on a company called GreenSky which announced a multiple billion dollar valuation with TPG Group about a year after we passed on it. They automate financing for small businesses in the home improvement space — with GreenSky, these contractors, who typically work on paper invoices and have to shell out money for supplies before they get paid, can get an instantaneous loan from Home Depot to address their working capital needs. It’s turned into a monster business.”

More resources

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Raining on the fintech parade: What does fintech investing look like without Asia?

The second quarter of 2016 is finally here, which means that investors across the world have begun the painstaking task of conducting a post-mortem for the previous quarter. CB Insights and KPMG’s Q1’16 Pulse of Fintech Report is a welcome relief for any industry investors shaken by the lackluster deal activity in Q4’15: the first quarter of 2016 saw 218 deals (up 15% from the same quarter last year) and $4.9 billion invested in VC-backed fintech companies (up by 96% from the same quarter last year).

However, two interrelated characteristics of this quarter’s growth pattern suggest that investors shouldn’t pop open that sparkly just yet.

Mega-Rounds

The name of the game this quarter was not seed-stage deals or late-stage deals but mega-round funding, with 3 mega-rounds responsible for 54% of VC fintech investment in Q1’16. The size and frequency of these rounds during the quarter invites worrying comparisons.

Mega-rounds cornering over half of the capital supply for the quarter harken back to what happened during the 2012 “Series A crunch”, where a lack of capital earmarked for earlier stage investments potentially killed off over 1000 startups.

Relatedly, the companies that managed to procure these mega-rounds will increasingly find themselves in a position of power, not unlike the big banks in America who benefited from the government’s “too big to fail” policy enacted in 2008. The fears here are that big fintech companies will get bigger and bigger, smaller startups won’t be able to compete, and consumers will be left with very little choice.

Enter Asia

In February 2016, Tradestreaming wrote about about the rise of the Asian marketplace lender. In hindsight, it would seem that ‘rise’ is an understatement; Lu.com and JD Finance, both Chinese marketplace lenders, surpassed all deals in Q1’16 with $1.216 billion and $1.01 billion respectively, while another Asian online lending giant, WeLab, raised $160M in a Series B funding.

Though the Pulse of Fintech seems eager to keep all investors happy and reassured, the report’s findings show that the only market really experiencing significant growth is Asia. It is Asian fintech deal activity that will put global deal activity on pace to match 2015’s deal high, and Q2’16 promises to keep Asia at the top of the funding list, thanks to the already announced $4.5 billion dollar investment round raised by Chinese online payment service provider, Ant Financial, a spinout of ecommerce giant, Alibaba.

Exit Asia?

When you emerge, dazed and blinking, beyond the bright sheen of Asian investment in Q1’16, you’ll find yourself in the suburbs: the North American fintech scene, where not a lot has changed since the last quarter (for an even more subdued adventure, we invite you to read the Pulse’s section on Europe). Though this quarter saw a nearly 22% increase in deals from Q4’15, the sum of VC-backed fintech investment is identical to the amount amassed in last quarter ($1.8 billion), and Pulse predicts a 10% funding drop in 2016 at the current run rate.

Other discouraging findings for the North America investor include the facts that seed activity reached a 5-quarter low, accounting for only 28% of all fintech deals in North America, while VC-back series B fintech deal share dropped to 14%, down from 21% in Q4’15.

It’s telling that in the Q1’16 Pulse’s introduction to the section on North America, the lexicon is somber, rather than celebratory: lending companies are ‘resilient’ in the face of dropping share prices, but this resilience will be tested by loan practice inquires triggered by the turmoil at LendingClub. Early-stage investors are abandoning the payment space, InsuranceTech has yet to take off, and it’s unclear whether lending platforms will be able to hold on to the diversified investment sources they acquired in Q1’16.

The Future of Fintech North America

Are these trends North American fintech’s swan song? Far from it. After all, VC-backed fintech companies did raise $1.8 billion across a respectable 128 deals this quarter. Moreover, the Asian fintech market also has its challenges. The reverberations of LendingClub’s fumble are present throughout the report, with KPMG’s fintech co-leader Warren Mead apprehensive about “recent events at Lending Club and far more worryingly Ezubao, [which] demonstrate that the sector is not without risk”, while his colleague, Conor Moore, wonders whether the recent announcements by LendingClub and Prosper will drive consumers back to more traditional financial institutions. These are concerns that Lu.com and JD Finance, both Asian marketplace lenders, will have to contend with.

Nevertheless, what’s clear from the report is that North American VC-backed fintech investment could be entering a bear market. With Asian fintech investments firmly on the rise, a lengthy slowdown in North America would have major implications for investors and companies alike.

Photo credit: LukePricePhotography via Visualhunt.com / CC BY