87. Fintech Investing, Part 1 (Sheel Mohnot)

*Please excuse any errors in the below transcript

Nick: Today we welcome # Sheel Mohnot from San Francisco. # Sheel has founded multiple startups that have reached an exit. And he’s co-host of the popular podcast “The Pitch”, and of course leads the Fintech investments for # 500 startups. # Sheel, it’s always good to chat. Thanks for coming on the program.

Sheel: Likewise, always happy to chat with you as well.

Nick: Awesome. Can you start us off by just walking through your story and your path to investing in startups?

Sheel: Yeah, sure. So I guess my path was after undergrad I made software for a couple of years. Then I went into consulting, then I guess my path to fintech started out from the non-profit side. I started, was an early employee at this non-profit called # Kiva. #Kiva is a peer to peer micro finance lender that offers loans from individuals in the developed world to those in the developing world at 0% interest, and has done about a billion dollars in loans in the past 10 years. So I started there then went back to consulting at #BCG, serving financial institutions, sort of after the crisis. And then with a buddy from #BCG we had a startup called #FeeFighters. It was a payments company that got acquired by #Groupon. And then with another buddy I started an auction company called # Innovative Auctions that sells very high stakes, high, high value assets, and exited that company last year. So had a couple lucky wins. And then joined # 500 Startups as a partner late last year. And at # 500 Startups I run a fintech fund that I’m currently raising as well as a fintech accelerator within the confines of #500.

Nick: Yeah. Can you tell us a little bit more about what you’re focused on with, with the fund and the fintech investments? And also, you know, how does the fund and the accelerator interrelate and how are they different?

Sheel: Sure. So, couple things. Quick background in #500 Startups in case people aren’t aware, we are a seed stage investor that is very very active. We invest small amounts of money but do it very often. So in the past five and a half years, #500 has invested about $250B in about 1500 startups. And so that’s the sort of overall how we invest. But we also have an accelerator program. Every year we do somewhere in the order of 150 to 175 companies in San Francisco, and Mountain View. It’s a 4 month long program, residential, so the companies work out of our offices. We help tremendously with growth, fund raising and just general how do you run a company. And then in fintech specifically, the accelerator program, we bring in a lot of investors and speakers. So this was the first time we did it, January through, through May. And let’s see, speaker wise we had founders of #SoFi, #Credit Karma, # LendUp, and trying to think of, oh  # Prosper. So we had, we had founders of 4 fintech unicorns come in and speak to the guys and , and even some of them did office hours. And then there’s a lot more. So there’s, there’s a lot more like # Fireside Chats with other investors. And then of course we bring in investors. So last week we had a demo day. We had 170 fintech focused investors on Monday. Then we had a general demo day and we had about 550 investors in total for those demo days. So it’s actually, it’s, it’s a pretty cool program and really fun to be a part of.

Nick: Awesome. Ad we’ve had some folks from # Techstars on the program talking about how hands on theirs is and how there’s not a lot of product building because of all the mentoring and all the meetings. And we’ve also heard a lot about # Y Combinator and how hands off they are and how

Sheel: Yeah

Nick: the focus is very much on product building. Can you kind of talk about how the #500 program is structured and how it may be similar or different from other accelerators?

Sheel: Yeah, absolutely. I don’t know that much about how # Techstars is structured. But from #500’s perspective, it’s, it’s a 16 week program. It is pretty hands on. So each company gets assigned a distribution person, so that’s we have a 15 person staff whose job it is, is to help companies grow. And these are people from, you know, people who are had a growth at #Stripe and had a growth at #Lift, that those, those sorts of folks. And they do everything from helping you make face books ads, maybe writing a better copy, building a B2B sales force, all that sort of stuff. So you have one hour a week with those people at the very least. And that’s one person who is assigned to you based on what they’re good at and what your needs are. And then you have another point of contact who is general company support. And so in the next batch I’ve got on my team I’ve got one of the co-founders of # NerdWallet , one of the co-founders of # inDinero, and another guy who ran innovation challenges for  # Swift , the, the conglomeration of, of banks that do inter-bank transfer. So I’ve got great folks who are on our staff who are helping companies succeed. Every week you have two hours. One hour with, with one of those guys and one hour is with the distribution person. And then aside from that, you know, they work out of our office so they come up to us all the time. Let’s see, in terms of where we are really helpful, we just been through it so we can tell people, you know, how to cut burn, that sort of thing. The other piece of having a fintech cohort is so many other companies work together, they end up collaborating and/or they have the same external partner and they go at it together with a deal. So like if we have one, we have 3 companies using the same vendor that costs $25,000 a month, I go to that vendor, I say hey I got 3 companies here, I’m probably going to have 10 over the next year that are using your services, why don’t you cut them a break and you know we get that down to 10,000 bucks a month. So there’s stuff like that that, that’s sort of intangible and valuable. And then like I mentioned the, the mentorship with external mentors and sort of investors who come in. So it’s, it is a pretty hands on program, but only as hands on as you want it to be. So different companies have used the resources to different effect. And, you know, we had several multiple time founders. So they have different needs than a first time founder. Another interesting thing is we, we had a couple, we had a few lenders in this batch, and we helped them get debt. Two of our lenders we got $50M of debt for each of them. So that was pretty big deal. And I think gives them a massive leg up over their competition. And specially in this current environment, it’s actually pretty hard to get that. But we got each of them 50 million bucks, so pretty stoked.

Nick: Is there a little bit of a foundry aspect to it? Because it sounds like you’re leveraging some, some shared resources to kind of help on the digital marketing side and many other aspects?

Sheel: Yeah, there, there is that aspect of it, but, but what I’ll say is that we are not on the marketing side, we are not doing the marketing. We are telling the companies how to do the marketing.

Nick: Right. Okay

Sheel: if that makes sense

Nick: teach them how to fish

Sheel: Yeah, exactly. So we will not step in and do the Facebook ads other than maybe, maybe the first time. But then, you know, we teach you how to do them for example.

Nick: Got it. Okay. Makes, makes sense. Well, cool! Well, today we’re talking the long awaited topic of fintech investing. And I couldn’t think of somebody better to get than you # Sheel. So thanks for doing this one. Can we start out just really basic, get everybody on the same page, can you give us your definition of fintech?

Sheel: Sure. So, I think of fintech as being any any time that you use technology to make financial services more efficient. And the reason that sort of I love fintech is financial services right now are very inefficient. So fintech I think of it as a very broad category. There are companies in, that I consider fintech that I think other people might not. For example, one company that I invested in is called #Flexport . They started out doing a customs brokerage. I see it as fintech because I think the future of the company is actually going to involve trade finance. We got another company called # WorkGenius that helps 1099 workers fill out their schedules. So give them a 40 hour work week out of working for #Instacart and #Uber and all these other, other folks. But I think the future of the company involves payroll and insurance. And so I think of that as a fintech company, because ultimately it will touch financial services. And then, broadly speaking in fintech, I look at disruptors and enablers. And you know, disruptors are companies that are disrupting traditional financial institutions. Enablers are those that are probably selling to financial institutions. And then within, within that I look at sort of six or seven broad categories- lending, insurance, money transfer, capital markets, block chain and personal finance management and then maybe a, a final one is around crowd funding.

Nick: Got it. And is that how you categorize and segment out sort of the fintech space and think about the different sectors within?

Sheel: Yeah, that’s right. So I think about all my companies falling under, under one of those categories, or, or sometimes multiple.

Nick: Interesting. And then, do you construct sort of a thesis within each of those or you know, how do you get smart on the various categories that probably each have their own customer sets, their own go to market, their own regulatory, etc?

Sheel: Yeah it’s true. It’s, it’s interesting in that fintech is really not just one category. All of these things are like as big and as complex as an entirely different segment. So yeah, you’re, you’re absolutely right in that they each have their own sort of requirements and different things that we think about and different, different definitions of success.

Nick: And, I  mean you mentioned off a number of different categories there. Can you pick out a couple and maybe give us some examples of, of companies that fall into those categories?

Sheel: Yeah, absolutely. So let’s start with personal finance management. We have an investment called #Credit Karma that is doing phenomenal. These are companies that sort of tell you little bit about your managing your finances. And then they typically make money via lead gen or what I’ll call customer gen, getting customers for other companies. And then there is, there is payments money transfer, that’s pretty standard. We have a, we’re an investor in #Strip, we’re in an investor in a company called #PeerTransfer, several others in that space. On the crowd funding side, we’re investors in #AngelList and #Realty Shares, among others. In lending, I mentioned we have, we had several lenders in the past, in the past batch, # Finova, # Qwill, # Float, a few others. In capital markets we have an investment in # Neighborly, which is platform for muni bonds. We invested in a company called # iBillionaire, which lets individuals invest directly in the portfolios of billionaires, and , and several others. And then in insurance we have a business insurance company called # Embroker. And a peer to peer insurer called # WorldCover. And generally speaking, insurance is a super hot topic right now. I think that there is opportunity for a huge amount of change. And we’re looking to get more active in insurance. And I, I’ve got a few lined up for the next batch in the insurance space.

Nick: Lots of portfolio companies there. #Sheel when are you going to get back to Chicago and start investing in some of the fintech companies out here?

Sheel: I, I love Chicago. And I’m excited to get back there. One of the companies that might be joining us in the next batch is based in Evanston, so I think we’ll continue to have close ties to Chicago.

Nick: Awesome. Well sit down with #Dave and #Christina and tell them that this should be the next site for #500.

Sheel: Absolutely. And actually, you know what? There’s, Illinois has a fund that you should be aware of that anybody who’s a managing partner of a fund from Illinois has access to. And a few folks have approached us about getting some investment from the state of Illinois via that, via that fund. And then of course we’d have to deploy some of the capital in Illinois.

Nick? Really? Okay.

Sheel: I’ll, I’ll send you details.

Nick: Awesome. I’ll keep that in mind. So, you know, if we take a step back here, would you be able to walk through sort of a, a short history of the evolution of the fintech sector and why the opportunity now is so significant?

Sheel: Yeah, sure. So I think fintech as a word has not been around that long. But of course financial technology has been around forever. And the banks, I think all consider themselves fintech companies, although clearly they, they are, they are missing out. They, they do have every one of the large banks in America employs tens of thousands of peoples, people in technology, which is kind of interesting to think about. It’s, it’s absolutely crazy. But, you know, when I got started in fintech, which was I guess 11 years ago, I’m not sure that the word was around at that time. I think the, so at that time we got started around the same time as a couple of other peer to peer lenders, # Prosper, #Zopa, #LendingClub came shortly afterwards. So that, that was a hot segment for seed investors at that time. And then fast forward a couple years later, another sector that became hot for fintech investors was payments. You had # Braintree and # Stripe come out at that time. And then after that we had another sort of resurgence of lenders on the sab side. And then now sort of, insurance is, is seen as the hot sector. By the way, I just did a Google Trends search for fintech. It’s actually amazing. So if right now is a 100 for fintech, even as late as December 2013 was a 4. So fintech was 4 out of a 100 in December 2013, and now is a 100 out of a 100. And it is growing like a madman since then. So it’s like hockey stick growth. Who knows where it will go.

Nick: Does it, it’s just a new buzzword? Or is that also just because the, the sector itself is, is exploding?

Sheel: It, it’s a little bit of both. The sector is certainly exploding. I think the data suggests that there was close to $20B in funding to fintech startups in the last year. And in 2010 that was closer to $2B. So got up 10x in just 5 or 6 years. So that’s, that’s huge. And you know, the word certainly some of it is just word fintech was not being used before.

Nick: Anything else contributing to the, the buzz around fintech lately that’s worth mentioning?

Sheel: Yeah. Sure, there are several things. So exits in this space are also climbing significantly. I think we’re sort of 4x the exits that were 4 years ago. But generally speaking, I think there is, there’s a good reason for why now is the time for fintech. I think in general technology trends go along with the early adaptors of technology. The early adapters of technology tend to be younger folks. The younger folks started out initially wanted to communicate, and then over time they want to transact. So things like #Venmo came along. And now they actually want access to financial services. And so that’s where a lot of new apps are coming out geared towards millennials. Millennials generally have a distrust of banks. So I think there was a survey done last year from millennials on who were on the top 100 brands. And the 4 big banks were in the, all of them were in the bottom 10, including the number 100 position was one of the 4 large banks. And they say that, you know, a lot of them think that they won’t need a bank at all, they’ll never bank. They’re using credits cards less than they ever did before. So there’s just a fundamental shift in how young people are thinking about technology and finance. And these companies are really set up to capture that. And that’s, that’s in the US and developed world. I think there’s even a bigger opportunity in the developing world. And I think about this from the smart phone perspective. There are about two and a half billion people with smartphones right now. In 5 years that’s going to be 5 billion. So only about half the number of people who have smartphones for 5 years already have them right now. And the, the people that have smartphones right now largely also have computers or have access to computers. This next two and a half billion people were unbanked. And that’s where technology could help massively. My background of the non-profit sector, at #Kiva 10 years ago I was riding a bus and then riding on the back of somebody’s motorcycle to serve one borrower. And now there are bunch of apps where you can just do that quickly using the smartphone in seconds. So that, that’s a huge shift. That’s going to become available over the next few years to these people. And we’ll be able to bring people into the formal banking system that, that didn’t have access before. Couple other things, you know, all these stats I shared, like 20 billion into fintech in the past year, actually still less than 1% of loans in America originated online, believe it or not. So there’s still a massive opportunity there. And then sort of the last thing I’ll leave you with is financial services at this moment represent about 17% of global gdp, 13 trillion dollars. I think that that in 10 years as I build a ten year fund, I think that that will shake out very differently in 10 years. And largely it will, hopefully it will actually be smaller percentage of global gdp. But the ways that it will shake out will benefit fintech companies. So I’m, I’m super bullish on fintech over the next decade.

Nick: Awesome. Yeah, just one of your points there, you’re, you’re talking about payment processing and I remember, you know, #FeeFighters, the company that you

Sheel: Yeah

Nick: founded and sold to #Groupon. That was in the payment

Sheel: Yep

Nick: processing sector. And I mean, it’s, it’s crazy to me how archaic the systems are that we’re using. I mean, even credit cards, it’s, it’s kind of ridiculous that we still have to use, you know, this hard plastic thing, you know. People talk about bio like using fingerprints. And we, shouldn’t we get to the point where you don’t have to use any sort of physical device? It could just be a, a sensor embedded in the finger or, or something of that nature?

Sheel: I’m sure we’re moving in that direction. But a lot of folks that have tried mobile payments really didn’t work. And you mentioned the fingertip. There was actually a company called #PayByTouch. They started gosh probably over probably 15 years ago, raised a bunch of money. I think, you know, had a several hundred million dollar valuation. And they were doing biometric sensors and they gave out a bunch of biometric sensors to grocery stores. They never ended up getting used. So I don’t know what the future is. People talk about the way people pay in other countries. People do use smartphones more to pay in other countries. But still I have not seen any solution that, that makes me feel like, you know, we should get rid of the current infrastructure. A big problem with wallets is you still need your identity. So until we digitize IDs, people are still going to have to carry wallets, in which case they’re still going to be okay carrying plastic. There was a company called #Coin that had a lot of hoopla a few years ago, mostly amongst people who do not understand payments. #Coin was going to be the card that let you put all of your cards into one. I think those of us that understand payments knew that that would never work. And #Coin yesterday got acquired for a very small amount of money to #FitBit. So you know, that did not work. Partially also because we’ve shifted a little bit to EMV, this little chip in your card rather than magnetic strip. But it, it is weird that we’ve, we’re using this technology that’s been around forever. And actually, you know, the credit card technology started out by using sounds on a tape player, right. So this magnetic strip is the same thing as audio tape. Which also makes it unfortunately really easy for scammers because it’s really simple to, to replicate. And you could actually use, you could actually record your credit card on a audio tape recorder. And play it back and you’ll have a credit card.

Nick: You’re kidding me

Sheel: No, I’m serious

Nick: Wow. And then, can you touch on just quickly what the, the thesis was with #FeeFighters and what you guys were doing on the, the payment