2021 saw a 100% increase in fintech investments. What should founders and investors expect in 2022? Laura Speiker, the co-founder of Alloy, talked with four fintech investors about early-stage funding trends, their fintech wishlists, why embedded fintech is so compelling, and how people really talk about money.
Aditi Maliwal, general partner, Upfront Ventures
Katie Palencsar, investor and global head of venture studio, Anthemis Group
Laura Spiekerman, co-founder and CRO, Alloy
Sydney Thomas, principal, Precursor Ventures
Jillian Williams, principal, Cowboy Ventures
This transcript has been edited and condensed for length and clarity.
Laura Spiekerman:Thank you for joining. I’m going to kick us off here. I am Laura Spiekerman. I’m a co-founder and chief revenue officer at Alloy, which is an identity decisioning company serving financial services in this industry. Both fintech companies and banks, we help manage their KYC (know your customer) and AML (anti-money laundering) risk and fraud decisions in a single API platform. I
I’m thrilled to be here today with these lovely people. One of the great pleasures for me here is that usually I’m the one getting grilled on the other side of the table, and now I have a bunch of VCs in here. So it’s pretty great for me. I want to have everyone introduce themselves, but just say I’m really thankful you’re all here. Sydney, Katie, Jillian, Aditi, thank you for joining us. I’m going to call each of you out and ask you to give a very quick bio introduction. So Sydney, why don’t you take us away?
Sydney Thomas:Cool. Thank you so much for having me. Excited to be here. I’m Sydney Thomas. I’m a principal at Precursor Ventures. We’re a pre-seed investment firm doing a little bit of everything, which keeps things interesting. I do a lot of specifically fintech deals, and I’m so excited to chat about how things look from my neck of the woods.
Laura:Katie, over to you.
Katie Palencsar:I’m Katie Palencsar. I’m an investor at Anthemis Group. I actually currently lead a specific fund within Anthemis Group, which is the Female Innovators Lab Fund. We’re focused on investing in early-stage female founders in fintech.
Jillian Williams: Yeah. Jillian Williams. I’m at Cowboy. We’re a seed-stage venture fund. While we’re more generalist as a fund, I focus on everything fintech at the firm.
Laura:And last but not least.
Aditi Maliwal:Hey, I’m Aditi Maliwal and I’m a partner at Upfront Ventures. We’re an LA-based fund, but I’m based up in San Francisco and I opened our offices up here. I spend probably 60 to 70 percent of my time in fintech. I worked previously in product in fintech and invested in a different fund, and in the finance financial services space as well. So excited to be here with all of you. I think actually, Laura, you and I met in 2015.
Laura:We did, when I was just starting out. Yeah.
The explosion of capital into early-stage in 2021
Laura:Sure did. Million years ago. Well, we’re lucky here to have prolific fintech investors, but also some of your more generalist funds. So I just want to start with level setting on venture, broadly speaking. It’s been crazy, from my perspective. (I don’t have to play the game.)
So Q3 2021 had over 160 billion invested globally—up 78% year on year. Just tell me your thoughts. What are you seeing right now? Are you feeling that in your day-to-day jobs? In what ways is that coming across before we get specifically to fintech? This question is for any one of you.
Aditi:I’m happy to jump in. It’s been, obviously, a crazy quarter. I would say 2021 in general has been a year of incredible amounts of funding. I think venture as a model has been changed by quite a few firms in terms of how they’re thinking about investing dollars.
Plenty of folks, probably in the audience and also in this panel, have read about the variety of different models from the later stage. You know, some of the crossover funds are coming much earlier, coming in to do Series As and Bs. Think of the Tigers of the world [Tiger Global] and whatnot. For the first time—well, not for the first time, but for the first time since I’ve been investing—capital has seemed much more of a commodity than it’s ever been before.
I find this as an early-stage VC: You have to seem a lot more differentiated than just coming in with capital. People can raise from almost anyone. You don’t even need to raise from a venture capital firm anymore. There are SPVs, there are AngelList funds. There’s a whole variety of different ways in which fundraising is happening.
I also think a lot about the accessibility—or rather, the number of funds that are trying to come into our ecosystem. The number of LPs, family offices, folks in all different parts of the world who are trying to invest in the U.S., trying to invest in Silicon Valley, trying to invest in different ecosystems now.
There’s been a large flood of capital that didn’t necessarily want access. I think that in the last five years, we’ve seen what crazy valuations can look like, what exits can look like. So people want access. I’m coming to terms with new valuations. I’m coming to terms with dollars being raised. I’m a seed investor. So for me, my checks are still relatively small compared to what other people are writing, but that’s my take on it. I want to open it up to others and how they’re thinking about it, too.
Jillian:I completely agree. The typical seed-stage round has grown tremendously. Laura, I know you and I spoke at your seed round. How large was the seed? You’re probably raising more.
Laura:Yeah. We think we raised 1.5 (million) and then we raised two. Yeah. That was different.
Jillian:Exactly. That would be a pre-seed at this point. And now, pre-seeds could be up to $3 million, or even more than that. Seeds now can be like five to 10 million, which used to be a very normal Series A.
The dynamics of how much has changed even in just the last few years of venture, and especially, as Aditi said, in the last year. But really, in the last year and a half or two years, it has been dramatic.
It’s the competitive dynamics, definitely having to differentiate yourself, but also, especially at the early stage: how you find these founders and find the talent that you want to be backing, and really having to go earlier. Even that definition of pre-seed and seed is kind of blurred, honestly, because oftentimes you can have someone raising $5 million for a seed—where it’s still an idea.
Jillian:And then someone raising $2 million for a pre-seed where it’s also still an idea, and traction is not really necessarily a difference. Sometimes it can be the pedigree of the founder. Especially within fintech, you now have a lot of large companies that have exited or have really gotten to multi-billion-dollar valuations, and you have those talent mafias that are now being created out of it. I think it’d just be creating this very interesting flywheel where you’re searching where people are still at firms—still at their current jobs—and trying to find out when people are even just starting to think about starting a company.
“I mean, Sesame Street has a venture arm now”
Laura:You both referenced competitive dynamics as an investor and differentiation. How do you think about differentiation in your roles, in your firms? What Jillian referenced is not just differentiation but also as a brand, or as an offering. What are the pockets? Is it finding niche pockets of talent that other people aren’t finding, or going earlier? What are the places you’re seeing you can try to carve out for yourselves—or is it just like, pay the highest price?
Katie: To add on to what Jillian and Aditi were saying, everyone is very much aware of venture. Everyone’s a venture investor, involved in some way. You see the growth of retail investors. I mean, “Sesame Street” has a venture arm now. You see this awareness. More companies. It has become quite competitive. And specifically, Laura, the question that you asked spoke to me because I’m focused on the earliest stages of fintech and female founders. And to Jillian’s point, too, that’s ebbing and flowing.
I was just looking before we spoke: The average seed round now is 3.5 million at 16.9 million post. Also, what’s attractive to founders is interesting. We have a lab which has dedicated resources, talent, tech, product, working with companies and for some companies. That’s really interesting. Right? But then others are like, “We want these massive valuations and get out of our way.” Figuring out which founders are a fit for your thesis and the type of investor you are is also important, in addition to the types of deals that you’re looking for.
Sydney:Following up on that: I’m at Precursor. We’re pre-seed, which really means no traction required. The additional thing—which gives us that opportunity to be a part of rounds that are still not super-hypey—is that we don’t have really any expectation that the founder was one of the first 10 folks at Coinbase or rolling out of, I don’t know, one of the coolest, hippest places to be. We’re really looking at is: “Is this a founder that we want to work with? Is this a founder who has a unique insight on the market? Is this a founder who’s building something that we actually want to be a part of?”
So my focus, in addition to that, is on the long-tail thesis that I drafted, which is really around how we make life better for—honestly everyone. But us in the room, I think our lives are already pretty great. And there are a lot of people who get left out, particularly in the financial system because of how it was built. There’s a huge amount of opportunity for us to invest in companies that are building products and services to make their lives better. So that additional focus gives me a unique lens in addition to the founder focus.
And also for us, we’re still participating in pre-seed rounds that are 500K, a million. We haven’t seen the bifurcation that maybe some folks have, especially on the seed round, who have to deploy a much larger check size in order for it to make sense for their fund. That’s just not our model. And so it’s been interesting to say the least.
Aditi:Laura, actually, I wanted to add on to that a little bit of the point that you were raising around the differentiation as a firm and differentiation as an investor, especially if capital is a commodity. We’ve talked a lot about this internally and it’s actually been pretty fun. With Precursor and Sydney, we got to work on a deal together. One thing we just saw with their process was just speed. I think what pre-seed investors are really good at, and also what some of the best seed investors are doing a great job of, is speed. Speed is providing for differentiation.
And conviction in your decision making—Sydney alluded to this too: They aren’t necessarily looking for your 10th employee from Coinbase, but really it’s knowing that that person is the team you want to back and that you have your own metrics as to how you’re gauging their success.
That’s something that we’ve talked a lot about at Upfront, and we’re pretty focused on too, is just conviction and decision-making. We are more oriented around: You have conviction, you go for it, thinking about speed, and then thinking about communication with founders. A lot of times thinking about email, text, what’s the best way to communicate. Things are lost in translation.
It’s actually crazy, but hopping on the phone now is almost a given after the first call. We did an awkward Zoom or got to know each other over 30 minutes, and we needed 45 more. “Hey, do you mind if I call you at 7:00 PM tonight?”
Covid made it a little bit easier in some ways. It’s also made it harder to find balance, but I think just being more accessible and approachable with founders and not just saying, “We’ll add in my assistant to schedule another 45 in two weeks from now.” Being aware of ways that we can win is something that’s top of mind for us right now, because capital is truly becoming a lot easier to get access to.
Laura:It’s a great point. As a founder, I think the conversation too often veers towards valuations, and everyone looks really greedy right now. I’m sure some of that is true, but I think the points you just made, Aditi, really resonate with me. In my last couple of fundraising rounds, speed was the most important factor, full stop. Second most important was probably having people who we felt we wanted to spend time with and who had a high degree of confidence in us and our vision—which was shown through what you’re talking about: communication styles. Excitement, and enthusiasm about what we’re doing, too. That’s huge.
The most interesting trends in consumer fintech
Laura:I want to get to fintech more specifically. We’re dancing around the edge of it. We’ll get into the B2B and infrastructure stuff, which is the most expensive of the most expensive, but I’m interested in B2C. What are you interested in B2C now?
Sydney, you were talking about how to improve people’s financial lives. Obviously, we’re still feeling like there’s certainly room for improvement here. We’re seeing neobanks have their ebbs and flows. One day we love Chime. One day we hate Chime. There’s this so-called niche banking, right? Banks for specific demographics or job types. I’m very interested in what this group is hearing, thinking about. What would you want to fund?
Banks as a service
Jillian:I think there’s a really interesting opportunity within consumer fintech right now. It’s because of the B2B infrastructure that you mentioned—because there’s so much attention on it, and there has been so much tension going into it, it’s really created this opportunity within consumer. Five years ago, it was a lot harder to start a consumer fintech company and you had to go through a lot more regulatory hurdles. Right now, it’s a lot easier, and a lot of those barriers have been taken away—because you can partner with one of the “banks as a service,” “credit card as a service,” “X, Y, Z as a service” companies to more easily spin up a product. And then…
Laura:Are you seeing time to market decrease then?
Laura:You’re just seeing companies come up faster?
Jillian:Yeah, absolutely. If you think about the original banks, like Simple Bank, it was several years—versus now, it can be months to getting time to market. And not only time to market. People are raising more money, but the amount of capital that you need is a lot lower. So because of that, you’re also able to do a little bit more interesting things because you’re not just having to deal with figuring out negotiating your banking partner, but actually be like, “All right, we can set that up pretty easily now. What is that really interesting value proposition that we’re actually working on?”
Some of the areas that we’ve been focused on have been some of those verticalized and niche areas. However, we’re not necessarily purely focused on specific traditional demographics—although those have a lot of opportunities as well—but also in terms of different ways to personalize based on consumers, in terms of how they generate income. There are really different ways and financial needs of freelancers or creators that creates really interesting opportunity.
I didn’t realize how massive the gaming space was, and actually how wealthy. They’re not all teenage boys sitting in their basement. That’s actually a really big opportunity in terms of thinking about rewards around that. So we’ve been thinking a lot around those types of areas. And now there are so many options for consumers. For example, you go to a checkout page and you’re exposed to 10 different options. How do you help consumers filter through what exists and make the best financial decision for them? So thinking about distilling through a lot of this information in an interactive way, that’s not just pure financial advice for the sake of it, but actually helping them in that point of action.
Alternatives to PFM systems
Laura:So you think of it as if we were to say…I mean, I’m putting words in your mouth here, but we think, I think there’s somewhat of a consensus that PFM [personal finance management systems] never really materialized in a way that made sense for folks. Do you think of that as an extension of just how PFM should actually work and realize?
Jillian:Exactly. When it comes to PFM or financial education, I’m not excited about it for the pure sake of financial education. A lot of it for consumers is a means to an end: “I am engaging with my money for the purpose of X, Y, and Z.” If you can instill that into it, into the actual action that they’re taking, I think that’s how you can really make a true impact on consumers. I’m in fintech, I’ve been in traditional finance. I hate using PFMs. I don’t like just seeing that I’m in the red and spending money, and I know I’m spending it irresponsibly and I’m not really going to change that.
Laura:It’s also never particularly accurate.
Laura:Everything’s breaking. Yeah.
Sydney:The company we did together in this space addresses some of the ideas that Laura was mentioning around niche markets—markets that at least were previously considered niche. From a banking perspective—yeah, Chase Bank might consider couples banking niche, but that’s because Chase Bank is a, I don’t know, trillion-dollar company at this point. I don’t even know. That doesn’t mean that there can’t also be billion-dollar outcomes in this space.
What we did together was called Zeta, building out a way for couples to manage their finances together. I use it with my partner, and it’s awesome. You don’t realize the breadth of all the different types of opportunities within fintech because the legacy players are so terrible, for lack of a better word. They just are.
And because they’re slow and because they’re not doing anything, the amount of innovation that you have to put in order for somebody to actually switch to use your product versus one of the legacy products is super…I don’t want to belittle the product innovation, because it is also significant, but the types of actions that I’m taking on my phone, I would’ve thought that Chase could have created this if they really wanted to—but they just don’t or they just can’t. I don’t really know, but I think that gives us a lot of opportunity in this space as investors as well.
Aditi:I was actually also going to add to that. It’s quite interesting because we’ve talked about the pedigree founders, but as you think about it, there has been a lot of wealth generation with certain types of demographics—say, software engineers in Silicon Valley; say, the first 10 employees at X, Y, and Z Company. On the PFM side, I think last summer maybe, there was this focus around “who’s going to be the next JP Morgan Private Wealth Management for this new generation? You’re a founder who’s exited, or you’re a founder who’s not yet exited, but has a high-value company. How do you think about wealth management?”
There’s also this whole conversation around how millennials think about wealth management. Are they using Betterment? Are they thinking about Wealthfront? That was created 10, 12 years ago, and I don’t know if it’s as top of mind. Also, is robo-advising really the solution we’re looking for, or is it a combination of us taking real control of the money, but also having some amount of robo involved? I spent a bunch of time looking at companies that were trying to do it around that time—I was looking at these PFMs and always seeing the red. I thought something that was really interesting is that people talk around. There’s community to be built. If you go to a bunch of subreddits, there’s all these communities on saving and how we saved 10K, or saved a hundred. There are some awesome communities there. What people actually really like to do is make money. That’s when you flip it on its head.
How people are talking about money
And then that’s when the rise of stocks and all of Wall Street Bets, and that entire meme culture that exists comes into play. All people really want to talk about is, like, “I just bought a new Ferrari because I made 300 whatever on X coin.” It’s funny, because I spend a bunch of time looking at the savings thesis. And when I was thinking about savings, I was like, “Actually, natural human behavior is around making money, and community around money.” Generations past didn’t talk about money. People want to talk about it all the time, because we’re also these digital versions of ourselves, talking about it in places where you can be nameless and faceless. So it’s sort of controversial, but it’s something that has caught my attention and that I’ve been spending a lot of time thinking about.
Katie, you unmuted yourself. I’m guessing you had a perspective.
Katie:I was on a panel a couple days ago talking about inclusivity. The message has been, “Well, save, and then you can build wealth and participate in these investment communities.” But there’s a whole other message that we’re seeing with the creator economy: “How do you make money? What are some other kinds of revenue streams?” Disposable income and financial equity equaling workplace equity, I think is another theme around that.
Jillian, you wrote about this—about flex spending accounts and how that money is rerouted. I was talking to someone yesterday. I cannot believe the challenge hasn’t been figured out. As a mother (and Aditi, you might learn this here, but your daycare spending dollars, your flex spending dollars are held in an account all year long. You’re paying for daycare up front, but you can’t get access to them. That’s money you could be putting to work throughout the year. Right? So—creative ways to think of building new user communities and putting dollars that you’re making, or that exist, to work.
Laura:That’s funny. I’ve been thinking this week. It’s on my to-do list to figure out my FSA stuff, because we have a deadline and I go in there every day and I’m like, “OK, I’m going to figure this out.” And then I get totally confused. I’m Googling, “Can you spend this on diapers?” The answer is you can’t. It makes me realize these are things I never would have dreamed of a year ago, two years ago. Who’s thinking about these problems really matters here, and who’s developing the next set of solutions.
Which fintech founders get “cool points”
One of the things I want to talk a little bit about—we’ve circled around this idea. This was from Aditi, who leading up to this panel was talking about valuations and the hot market right now. She said that we treat anyone at Stripe or Plaid starting a new company like we should pay a premium for their pedigree.
I think we’re seeing two things happen. One is there are these very valuable, very hot fintech companies that have these alumni networks emerging. They all have money. They can raise a ton of money and start new companies. They’ll raise higher valuations because they have this pedigree. On the other hand, you might have new types of new founder profiles and personas emerging. Sydney, sounds like you’ve funded some of them. Katie, I know you’re focused on women. Tell me more about how you think about these two archetypes, and there’s plenty more, but they feel a little bit disconnected to me.
Sydney:I can go. I’ll go really fast. When I think about the type of founder who I want to work with and the type of founder who I think can build a really large business—this could also be my own bias because I didn’t come from a tech background; my background is in the public sector—I don’t think working at Stripe really means much. I know that sounds really mean, but you don’t get cool points for me for working at Stripe.
I think that similarly, when I think about the Googles of the world or the Facebooks of the world, honestly, a comparison that we don’t talk about enough is that once you get to these large companies, like a Google or a Facebook, it almost is like working for a city government. You’re working in a community of hundreds of thousands of people. You’re moving the needle on a knob maybe once a year, maybe. I feel like that is not the type of skill set that’s necessary to be an effective early-stage founder.
Laura:So what do you get cool points with Sydney for?
Sydney:I’m really excited about someone who’s been noodling on a problem for a really long time. This is something that you’ve just been obsessing over for years. Maybe not full time, but you’ve been in tangential roles where you thought about this problem. Actually, there’s a company that Jillian sent me where I’m really grateful for the founder. She’s not in fintech, so we don’t have to focus on her, but her background is focusing on one problem, her entire career. That gives you such a unique leg up when you know this one thing inside and out. You’re able to see around the corner faster than other folks; you’re able to dig into the trenches. You’re able to know what to look out for.
And then my role as an investor is to help you with some of the other stuff. I don’t think you need to be a great fundraiser to be a great founder. You need to be awesome at hiring, but that doesn’t mean that you need to hire from all the Stripe folks. It means that you just know folks who you think are going to be really great for these roles—or that you’re connected to other people in a way that allows them to introduce you to folks who can be great fits for your company. I think the skill sets are not always one for one. It’s just that the access to capital is much more available.
Jillian:Maybe a little bit different from Sydney, we do think there is value in some of these people that have been at these large companies. I think some people maybe over-exaggerate a little bit. I don’t think someone who was at Stripe for six months in 2021 is necessarily the same as someone who was there in year one and really saw that company go from zero to a hundred. To Sydney’s point, when you come in at such a later stage, it’s not the same as building an early-stage company. All the infrastructure is there. It’s a very, very different working environment. We do think about it that way, but we also think that being inside a company like that, hopefully you’ll have a deep understanding of a specific pain point—and oftentimes, you might be building for that pain point that you’ve learned from being there.
That does matter in terms of what you’re actually looking to build, but also for us, it’s that you’ve been through some of the challenges. Maybe you weren’t necessarily the one building it yourself or doing everything as the CEO, but you do understand the ups and downs of building a fast-growing company. I think that’s somewhat how we think about it.
However, are we going to do every single deal with a Stripe founder? (We keep using Stripe.) Probably not, only because it would be very expensive. We would be putting a lot of money to work or having very, very little ownership in all of those companies. So for us, we know we’re going to make some exceptions where we’re going to be paying a premium to invest in some of these exceptional founders. And hopefully, they’re not just exceptional on paper; they’re exceptional when we speak to them and interact with them and do references on them.
But then, we also look at other founders—a lot of founders that maybe have not had the founding experience before, maybe are new to tech and have very, very different experiences, but have that hustle, or something else that makes us have conviction in them as well. It’s very much all over the place in terms of how we look about backing. But we do understand that unfortunately, given the competitiveness of this market, we usually have to pay up a little bit more for that sort of pedigree in terms of startup.
Aditi:Laura, can I just jump in really quickly?
Aditi:I wanted to echo a similar sentiment. You know, folks have been through figuring problems out in the company and stuff. I think everyone in this conversation will agree to this: Fintech wasn’t a term until about eight years ago. Maybe not even, right? When we did Chime at Crosslink, it was 2014. Our comps were Bank of America and Wells Fargo. Because of the nascency of the actual industry and vertical we’re in, there haven’t been experts in the space for all that long. Laura, you were in fintech before fintech was a thing. You were doing it all over the world, too. You know?
The really interesting part is that people were afraid to talk about it. There were a lot of regulatory concerns and big words being thrown around that used to scare people—from investing in this space, but also from starting companies in this space. Now, all these infrastructure tools have made it so accessible for people to launch products so quickly—but also, we can now start talking about it a lot more. So yes. Maybe you joined Stripe, or you joined Alloy—even if you joined them in 2016, right? Or in 2018, we were still in the early innings of what fintech is. If you were there at year four out of an eight-year lifespan of fintech, that’s still a lot more experience than most people have in this industry.
Laura:We’ll get into infrastructure and benefit tech and all those things—but one of the things I’ve been thinking about is five years ago, you might have had to have a founder who knew a lot more about the regulatory landscape, the partner banking. You had to have that gravitas, that experience, that understanding of compliance requirements, the whole thing. Right? How money moves alone was a huge topic: understanding ACH rails, for example. We were talking about this earlier, Jillian—about getting to market a lot faster with some of these tools, but that also potentially changes the profile of a founder. You don’t need to know everything yourself now. Right? You can buy Alloy, you can buy Plaid. There are all these tools you can bring in. So I do wonder if that is able to change who you can fund at this stage.
Jillian:Absolutely. If I think of a consumer fintech company, for example, if it was like a neobank, I’d probably be overweighting someone who is a great marketer or who knows how-to’s like distribution for consumer more than anything, because the regulatory risk and building it to get to market wouldn’t scare me as much. It’d really just be, “How are you going to acquire your customers as quickly and efficiently as possible?”
Katie:The other thing is the talent. Some of these founders are attractive because they can recruit talent and with more dollars pumping into the market, you all of a sudden have to hire a lot more people more quickly. I was even thinking about some of the past investments that we’ve recently done; it’s been all over the board. Someone from a founder, from one of these hot fintech companies, someone from Uber, someone from JP Morgan, Reddit, someone who’s a “Shark Tank” product founder. Right? To Jillian’s point, too, you can really diversify the founders now. But the talent piece: “OK, well they’re going to raise a massive amount of money. They need to hire very quickly. That network’s definitely going to help.”
Laura:We think about that internally in hiring, too. There’s a certain amount of financial services experience we value in certain roles, for sure. And then a lot of it is like, ‘Can you keep up with the hiring pace we need?” And being an excellent hiring manager is critical for some roles.
Why embedded fintech is huge
Laura:OK. Infrastructure, embedded fintech, banking as a service—everyone’s favorite topics. First of all, can anyone justify the valuations? I would love it if you can. Tell me how you think about the valuations in this space. And then also; There are a lot of banking as a service companies we’ve seen emerging and competing with each other, for example. Is there room for everyone? Are some of them going to die out? What are the qualities that make one more attractive than another right now? I would love just all the thoughts there on what’s coming, what we’re going to see as the next 12 months shake out.
Jillian:Yes, obviously valuations are high, especially because a lot of these companies are pretty early. Especially at the seed stage, we’re all paying for the future quite a bit more than we even used to. Really, the interesting thesis around the banking as a service infrastructure, embedded finance, is this idea that the definition of fintech is able to expand because of it. So ideally, then even more money can pass through and these companies then have potentially even more and bigger customers than we think about today. The market that they have today could actually be multiples of what it is. When we think about the basic infrastructure companies as the initial banking as a service companies, the idea is that hopefully every single fintech startup that’s trying to build a checking and savings account will build on top of them.
That can be very big when you have companies like Chime, which has millions of customers. That’s the thesis of what we can look at, because then you can multiply Chime by x number of companies that start up. Obviously, there are questions and risks long term around what happens in any company where at some point you usually bring the infrastructure in house. You can look at Robinhood and Apex, for example. Robinhood decided at some point to bring the clearing in-house because yeah, why not? When you get to a certain scale, you keep more of those economics for yourself. So I think for certain larger companies, we will probably see some of those challenges where they’re probably likely to spin off.
Laura:Where do you think that will happen, more or less?
Jillian:I think you’ll see that more where whatever you’re building is the core product for that company—versus if it’s an additional product. Then, they add it on. So it’s not necessarily some company that’s not a fintech company wants to add on a banking account. It’s less likely that they will at some point do it, but if it’s your core bank account (I’m using bank account) … if it’s your core bank account, at some point you might really think about, “Hey, why don’t I actually bring this in house?” That is a risk. But again, that’s still not an easy feat to do that yourself. There still are hurdles around that. So really it’s why go through those hurdles, unless it’s really, really meaningful to you. There aren’t going to be tons of people where they’re at that highest end. That’s probably the top 1%, but you have the entire rest of the market that wants to build on your infrastructure.
Aditi:To that point of is it worth building in-house or using a product that exists, the question is: Who are you? Who is the customer? Right? People are building, and a lot of the infrastructure tools are for developers. aAnd developers are getting smarter and more ingrained—or, rather, are getting more specific to the orientation around fintech. Right? and so they’re like, “Hey, I can build X, Y, and Z, but actually I know that there are these other products that I could use that would make it so much easier.” Today, I think we’re thinking more about building for the developer. A lot of these infrastructure companies are building for them, versus doing these large sales to X, Y and to the head of procurement or head of tech at some of these companies.
That’s one. Keeping the developer in mind is pretty crucial. That’s why I think embedded fintech is getting so large. And by the way, so many fintech founders now are actually technical. That’s different from before, too. And then the ones who are not technical know exactly: “Hey, I have this toolkit of X, Y, and Z that I’m going to put together and build this.” Right? We’ve made it easier. And then the second thing that I have been thinking a lot about is there are companies now that are disrupting companies that weren’t actually that different or not that much older. Apex has obviously existed for a long time, and there have been other clearinghouse products that have existed, but then now there’s the rise of the new clearinghouse.
And then there’s the rise of the even newer clearinghouse. It hasn’t been that much time, but then I think a lot about the developer once again—or the user experience that you’re creating, because fundamentally what you’re saying is, “Hey, actually, the way that this older product worked wasn’t as convenient. They weren’t modules. It wasn’t as flexible as I wanted it to be. Therefore, I thought I would leave my company and go start a better version of it.”
This modularity and the flexibility to customize has become so crucial because now, even as consumer fintech, you have to be differentiated in some way. So you want modules that you can pick and choose from from different parts of an offering. That is a lot of power in the hands of the developer, and that’s a lot of power for why embedded fintech is getting as much funding as it is in general. The thing that comes up in my mind a lot is: How much consolidation will there eventually be? Because now we’re saying, “Let’s break down every single part of infrastructure. You want to pick up something, we’re going to build a product for you.”
Laura:And from a perspective of buying that software and integrating, you have to figure out how all those then fit together, too.
Laura:It makes the case for consolidation.
Aditi:Yeah. And makes the case, maybe, for products that are like, “Hey, we’re the starter pack. Buy us, because we’ll tell you all the 500 different things to do.”
Sydney:That’s one of the reasons why we invested in Phoenix. I think to that point of being that starter pack for a company that’s able to build for developers and on top of an infrastructure that doesn’t take away so much of every single transaction, like Stripe. I agree.
Fintech companies on their investing wishlist
Laura:OK. We have two minutes left. The holidays are coming. What’s on your fintech wishlist? Rapid-fire question for everyone here. Like: We have entrepreneurs in the audience who are thinking about starting their next company, and one of you is going to fund them. So you’ve got to tell them what you want.
Jillian:I’ve been really into the intersection of healthcare and fintech. So I think something in that space. I’ve been wanting to make an investment for a while. Even you talking about going through your FSA and open enrollment and everything.
Laura:Oh my God, please. Yeah.
Jillian:That is a space I’m excited about.
Katie:I’ll talk about what I was talking about earlier. The kind of workplace equity, financial equity. You know, we see daycare companies, et cetera. And how is that traditional fintech? Not necessarily, but there are so many tax breaks, rebates, money around that which can be used and that can be offered as a benefit—especially as we look at this Great Resignation. So how that money moves, how the tax incentives move, that’s something I’m definitely interested in.
Sydney:I’ve been looking at a few companies in the space of like, how do we give protections to folks who might not have insurance? For example, I have insurance, obviously, on my house, because that’s very important to me. If I don’t own a house, but I also have something that’s valuable, how do I protect it? How might I be able to invest in insurance or other products, financial products that allow me to trade, keep, sell, improve these underlying assets that I have, which I might not have previously seen as an asset. And this goes back to the long-tail thing, giving other folks access to an opportunity to make money on what they already own. So I’m digging into that space a lot.
Aditi: One thing I’ve been thinking a lot about is just SMBs in general. Everyone’s talking about small businesses. Go to market will be hard—it’s always hard with SMBs—and if somebody can really think through how to get—whether it’s bookkeeping to insurance, to financial management, whatever it may be—just better equipping SMBs with financial products and knowledge. And then ultimately, I will never back away from wanting to dig into more products around how to get people to think more about the ways that they’re using their money. Fundamentally, that will always be thematically just so interesting to me—whether it’s spending, whether it’s investing. That is a category that will continue to be very interesting, and I think 2022 is going to see a lot more funding in that space, too.
Laura:Well, I’m incredibly impressed that no one had NFT or Web3 in their answers. That’s shocking to me.
Katie:I was scared of the questions that would come in. So I wasn’t touching it.
Laura:Exactly. Or the pictures. Thank you, everyone. I think we’re at time here. I very much appreciate all of you guys spending time with me. I feel very lucky to have this conversation with any of you, whether we get to do it online or offline. So it’s really been a pleasure. Thank you, Carta, for organizing this. It’s been fantastic. Excited about the report you guys put out today as well.
Aditi:Thank you, Laura for moderating the panel.
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