88. Fintech Investing, Part 2 (Sheel Mohnot)

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Today we cover Part 2 of Fintech Investing with Sheel Mohnot of 500 Startups. In this segment we address:

  • Fintech Investing Sheel MohnotWhat was your business, Fee Fighters, doing in the payment category of fintech and how did that lead to an exit?
  • What are the major customer segments most often served by fintech companies and do you specialize/focus on startups serving specific segments?
  • It seems that often companies may be misidentified as fintech. Do you have an example of something that people lump in the fintech bucket that, from your standpoint, doesn’t fit?
  • What are the major elements you’re looking for in a fintech company that increase your liklihood of investing?
  • Have you found that the majority of fintech innovation is happening in the major, urban, financial centers in the U.S… and do you think fintech startups shoud locate in these areas?
  • Any other thoughts on financial technology startups that we didn’t cover that you’d like to touch on?

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Key Takeaways:

 
1- Categories within Fintech
 

Today Sheel talked about how he segments out the very broad fintech sector, which is really an umbrella term that includes many sub-sectors. Those segments included:

-Lending
-Insurance
-Money Transfer
-Capital Markets
-Blockchain
-Personal Finance Management
-Crowdfunding

Each of these segments is really its own sector with differences in channel dynamics, customers segments, regulatory and types of financial institutions. And recall that with each company, Sheel considers whether it is a disruptor or an enabler. Disruptors clearly disrupting existing financial institutions while enablers sell to financial institutions.

 
2- Experience Matters
 
One of the key differences that Sheel looks for in fintech startups vs. others is the experience of the team. There are significant regulatory and commercial challenges that fintech startups experience. Because of this, often the best founding teams are a bit more experienced in the sector and have thorough answers to those challenges. And, in terms of sourcing, Sheel mentioned that many of his best leads come from Series A VCs that have seen a company pitch but they are too early for the VC. 500, of course, is a seed stage investor and often invests earlier than many venture firms.
 
 
3- Factors Contributing to the Growth in Fintech
 

The term fintech is still relatively new and one that has a lot of buzz around it. During the interview, Sheel did a Google trends search for fintech and found that in Dec of 2013 the term ranked four out of 100 and now ranks 100 out of 100. While some of this increase can be explained by the emergence of the term itself, it is clearly a much-talked about sector. And, the amount of capital deployed into fintech has increased from $2B in 2010 to $20B last year, a 10x increase in only five years. Sheel also mentioned exits, which have climbed significantly by a factor of four, over the past four years.

And Sheel had some great insights when discussing the history of fintech. He discussed how technology trends go with the early adopters of technology. Early adopters of technology tend to be younger people. And fintech’s progression followed the needs of these younger folks; who started out wanting to communicate, then desiring the ability to transact and ultimately getting access to financial services.

As we reviewed the opportunities going forward, Sheel sees big opportunity in the developed world, but even bigger in the developing world. There are about 2.5B people w/ smartphones today and there will be 5B people with smartphones in five years. The majority of which will be individuals in the developing world that are underbanked or unbanked.

As Sheel articulated, two of the major customer segments that he’s following are millennials and the unbanked. I can imagine much more disruption in the developed world to better serve millennials and a tremendous degree of low hanging fruit in the developing world to serve the unbanked.

 
 

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FULL TRANSCRIPT