January 27, 2023
I am excited to share this “Fireside Chat” I had with Brooks Gibbins, co-founder and Managing Partner of the FinTech Collective, at our inaugural Ideas & Networking Conference in New York City on September 22nd, 2022.
Brooks and his partner Gareth Jones have been at the forefront of investing in financial technologies over the past decade, with successful exits in companies like Quovo (acquired by Plaid), Reorg Research, and Openfolio. FinTech Collective has seeded and helped to build several dozen companies in total, including MoneyLion, Axoni, Vestwell and Embroker. They manage around $800 million in assets, and I am pleased to be an investor in all three of their core funds.
In our discussion, Brooks shares his thoughts on the current state of the venture market, his thesis for the development of private asset markets, and thoughts on the payments market. We also dig into the crypto and DeFi markets. I know you will enjoy this interview.
William C. Martin
Topics in this Issue of An Entrepreneur’s Perspective:
Interview with Brooks Gibbins: Venture Investing in FinTech
Welcome! Please tell us about FinTech Collective.
We manage just over $800 million in assets today. The team is 15, with 10 on the investment team. Our flagship core strategy is an early-stage venture capital strategy. Our current vehicle, Fund III, is a $200 million fund. Typically, we will invest up to $10-$12 million in a first check. About half of our investments are pre-revenue and half are early revenue. We’re generally getting 15% to 18% of the company. We’re joining the board and we’re super hands on. We invest in less than 5% of the companies that we do work on, not a high investment cadence. We want history to show that we have added value throughout the capital stack.
Our second strategy was launched last year, which we spun out of the core fund, which is where we do our digital assets work. We have a dedicated team and a dedicated fund, for a bunch of reasons we think are obvious, but primarily to let LPs opt into that risk, given the dramatically different nature of those projects and protocols from the traditional software and services businesses that we focus on.
Let’s take a step back and talk about the venture market broadly. How wide is the bid and ask in the market today and are deals getting done?
We tend to focus on early-stage investments. Over the last five years, the median valuation in early stage across all technology, not just FinTech, has tripled. It has gone from $20 million to $60 million in valuation. The data coming out of Q2 shows that the median valuation for early-stage companies went up, which doesn’t align with our data. We see pricing coming down. In general, we think we will retrace to basically pre-Covid levels and that we will give up most of the gains you’ve seen across pretty much any pocket of the market. We think that we’ll see a shift from a focus on velocity and direct-to-consumer business models to a focus on B2B and B2B2C infrastructure models. That plays very well to what we do if you look at our portfolio.
One area that you’re focused on is the development of private asset markets. Can you talk a bit about that?
We broadly think about it as capital moving closer to the source of risk. You could apply that to secondary markets, you could apply it to insurance. Ultimately, you could apply it to new asset classes, some of what’s happening in crypto and DeFi. We made our first investment in the democratization of asset classes, or access to asset classes, in Artivest during 2014-2015. Artivest was a successful exit. They didn’t win the market. They were acquired by iCapital, which is going on to be a big player in the space. That was a lot about digitizing the alternative investment process. It was the early days of the big private equity shops starting to think about diversifying their capital sources away from just institutional money and how to tap the retail market.
As an example, we did an interesting transaction in 2019 where we offered a secondary transaction in our first fund. We returned 4.5x gross capital to our LPs through a secondary transaction with a fund of funds. That was an early indicator of something we’ve been looking at for the last couple of years. That is, how do you create more portability in LP and GP stakes? How do you create more portability of security ownership in the private markets all the way down to the employee and company level. Barry Silbert and Second Market was trying to do this in 2005-2007 – it didn’t work. NASDAQ acquired it, tried to make it happen, didn’t work. Forge Point is in that space, as are several others.
In the last two years we’ve seen half a dozen different models trying to attack the underwriting and pricing process. How do you define if somebody wants to sell their individual shares? How do you come up with an effective price for that – enabling common stock transactions in the absence of a liquid market? We’ve seen some innovation in the regulatory space where a holder of a single interest in a private company could basically exchange that for a share of an interest in a pooled set of securities, which is an interesting concept. We’ve seen some platforms that are helping LPs for rebalancing purposes. They might have significant asset appreciation in one asset class and the need to rebalance. Today, all of that is an intermediated process. There’s not a lot of data.
Just look at the appreciation in enterprise value between private markets and public markets. Today companies are waiting to go public, often until they are tens of billions of dollars in market cap. With that comes companies staying private for a lot longer, and people needing liquidity for lots of different reasons. We do think we’ll see some innovation in that space. We haven’t seen anything that we think is backable yet there.
Similarly, we’ve seen a couple of companies that are trying to tokenize and create a phantom interest in a piece of a security. Not surprisingly that’s being done outside of the U.S. to create a fully liquid market with full portability in those interests. There’s some nuance around whether the holder of the security has the right to be able to transfer that interest without the company having the first right of offer on that security or without the company having to approve that transaction. Also, a lot of private companies don’t want to do a one-off transaction because it might create a mark. That is arbitrary. There are lots of considerations.
There seems like there is lots of innovation on the private equity side, with companies like Apollo (NYSE: APO) leading the way.
I do think there will be innovation in the underwriting space. How do you price assets? Goldman Sachs was always known for being able to price any risk asset that came over its desk instantly. We’ve seen a few companies who are trying to innovate in that space.
Apollo, through a fund that they made a GP investment in, has recently invested in one of our companies that is a digital credit originator. It’s a platform that’s originating credit assets online. We definitely have exposure to that space. We have a number of different asset-backed credit platforms.
We work with an advisor that has a couple hundred billion in AUM of advised assets and they’ve created a ’40 Act fund for private equity. They’re raising a pretty significant amount of capital per month today. I think a lot of people in the space would say the next leg of growth in capital into private equity markets will be retail.
Certainly, if you talk to anybody in the DeFi space, they are thinking about how you tap hundreds of millions to billions of people to participate in markets more fairly with more accessibility.
Can we dig into the payments space?
Historically, the payment sector has been 15% – 18% of our deal sourcing but less than 10% of our capital allocation. We don’t believe that the interchange model alone is a sustainable and durable business. You won’t see a lot of pure, interchange-based business models in the portfolio.
Real-time payments are a great example of where the U.S. lags versus many other parts of the world. Many countries now have real time payments, often bundled with a nationwide identity system. This is very powerful within Latin America, which has been a focal point for two of our funds. We have invested in ten companies across Latin America.
Brazil is well ahead of everybody else. When you pick apart the nuance of why, you see a very strong central bank with very tight relationships with the oligopoly of banks in that country. In other countries, you don’t have the same strength of their central banks. In Colombia, for example, we backed a new company several years ago called Minka, which is building a real time payments infrastructure and licensing that to the regulators and banks in the region in Mexico. Banks in those markets were slow to move on real time payments, tried to go to market with a QR-code type of platform, but it has not gotten a lot of traction.
What do real time payments mean for the ecosystem? Is that margin out of Visa’s and MasterCard’s pockets? Do you still need application companies to build on top of those new rails? Or, how do you think about it?
Yes, I’ll geo skip over to Nigeria, where we backed a company called Flutterwave. We backed Flutterwave when it was a $50 million company. They raised on a $3 billion valuation earlier this year.
In Nigeria, and in a lot of these ecosystems, you’re looking at a generational shift from cash to other forms of payment. Whether real time payments is in the system or not, there’s a huge stack of software that needs to be developed, deployed, utilized, rebundled, broken apart, and put back together again to help merchants, help consumers, and help small businesses be able to transact across those systems. We’re pretty active across both Latin America and Africa in that theme.
Are interchange revenues at risk?
Across Visa, MasterCard, PayPal, etc., you’ve got almost a trillion dollars of combined enterprise value. That’s a lot of incumbent value to motivate new companies to go after.
I do think it’s a case where interchange is going to continue to come under pressure and come down, reducing margin. In general, you’ve seen a lot of standalone fintech companies trying to go out and compete, and one of the most exciting areas is embedded financial products and services. That’s to us really about moving away from focusing on digital customer acquisition to more deeply deconstructing the value chain. We think there are massive opportunities to bring unique data sets and unique connectivity within ecosystems to deliver much more elegant fluid, seamless real-time transaction capabilities, whether it’s in payments or capital markets.
If the Federal Reserve rolls out real-time settlement, does that undermine someone like Block (NYSE: SQ)? They make a lot of their money on cash advance, as do companies like Moneylion (NYSE: ML), which is effectively doing cash advance on payroll.
I think it does, ultimately for sure. I think margin pressure in that space will definitely come.
Does it threaten Visa and MasterCard, or is that really a whole different business model?
I think their businesses are a lot about merchant lock-in. To ultimately disrupt those businesses, you have to replace their businesses with a new network. And then you will start to get an impact.
No conversation would be complete without discussing crypto. Are you a believer, do you own Bitcoin? Do you own Ethereum?
I am. I own Bitcoin. I own Ethereum. I have a couple of NFTs. I don’t have a Bored Ape. I don’t have an NFT art collection.
I think if you spend time with anybody under the, say arbitrary age of 35, and you look at the proportion of time that they spend on some form of device and what they’re doing on those devices, and what you realize is that they’re developing, maintaining, and expanding relationships digitally. With this, I think you can start to appreciate a little bit better the potential appeal for some of what you see in digital assets in the crypto space.
There are a bunch of different layers to the conversation, and I do think one of them is that the generation behind us is not interested in walking into a Bank of America branch, is probably not interested in buying an ETF or a mutual fund, but yet they are probably going to have an opportunity to own the breadth of asset classes that people in this room are able to get access to. More so, their lives are going to traverse both physical experiences and digital experiences. I think this gets into the NFT space and digital art space.
We started investing in this area in 2014 and our whole thesis at that time, and still most of what we think about, is the institutionalization of this as an asset class. We were focused initially on blockchain technology that would strip inefficiencies and friction out of the institutional markets. I think that opportunity still exists. There’s been plenty of debate around, is it just a better database? In those cases, the better database is going to win, but there’s still cases where settlement doesn’t happen instantly. Disbursement doesn’t happen instantly. We talked about the case of sending out wires, we just did a distribution, which I’m happy to say in this market, we’re sending money back to people, which is good, but we did a distribution and there is substantial risk around the wiring details and something getting fat-fingered. I do think there’s plenty of opportunity in that space. And I do think this tokenization of assets ultimately has some merit to it.
I also see a role for blockchain when looking at the complexity of supply chains and contractual relationships from its raw material to end state. There are a lot of people, paper and money in different forms throughout that chain. I get excited thinking about being able to programmatically encode that into a smart contract that lives on a universal ledger where there’s no dispute as to what the number is and who has authority and entitlement over it. This is when we start to get excited about the potential of some of the things happening in this space.
Thank you and good luck!
A Selection of Recent Tweets from @RagingVentures:
Silicon Valley Bank $SIVB reports earnings tomorrow
Investors have rightfully been fixated on $SIVB's large exposure to the stressed venture world, with the stock down a lot.
However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB… 1/10
— Raging Capital Ventures (@RagingVentures) January 18, 2023
Investment banker told me Friday that the current cost of debt for mid-market private equity deals is around SOFR+750 bps, or just under 12%. This assumes roughly 50% equity down.
— Raging Capital Ventures (@RagingVentures) January 14, 2023
Why can’t $ROKU resize cost structure and generate meaningful EBITDA? Why isn’t this an asset that a $CMCSA or someone else would love to own to help gain scale in streaming? $2 b of cash, sub $5 b EV now.
— Raging Capital Ventures (@RagingVentures) January 12, 2023
I'm skeptical of this activist's idea of doing a sales-leaseback on $SIX's real estate…that doesn't make sense for a business with a true long-term time horizon, and this is an increasingly difficult environment for financial engineering.
— Raging Capital Ventures (@RagingVentures) January 6, 2023
$ESTC seems super attractive. High quality, strategic software asset that dominates enterprise search, expanding into security. Even discounting growth rates, trades sub ~3.5x EV/revs on NTM with 10% targeted op margins. Even a value investor can make the math work.
— Raging Capital Ventures (@RagingVentures) January 6, 2023
For those with who are patient and who enjoy illiquid small caps, it looks like the (tax) selling at $CWGL is done. Spun out of Jeffries (controlled by Steinberg), $CWGL owns numerous vineyards, including Pine Ridge, which owns super valuable Stag’s Leap land. 1/2
— Raging Capital Ventures (@RagingVentures) January 5, 2023
Nice interview. Bill Nygren is always a cogent thinker… I like the $WBD idea as a “buy it and forget it” position for a few years (or own long-dated OTM calls). https://t.co/srlInTkWVn
— Raging Capital Ventures (@RagingVentures) December 30, 2022
Fortuna Audaces Iuvat – Fortune Favors the Bold!