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?

Guest Links:

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:

-Money Transfer
-Capital Markets
-Personal Finance Management

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.


Tip of the Week:   Discounting Inertia

*Please excuse any errors in the below transcript

Nick: Can you touch on just quickly what the, the thesis was with # Fee Fighters and what you guys were doing on the payment processing side?

Sheel: Yeah, sure. So we started out as a marketplace for payments. So a merchant came in, gave us a few pieces of information and then the processors bid down for their business. And we had a bunch of the processors lined up. And then the idea was originally we would be a marketplace for other small business needs such as insurance and payroll. What we found out was that our customers tended to not be the small businesses that we started out for. So we thought that like we were, we were going to help out mom and pop shops and cafes, that sort of thing. It ended up being that all of our customers were startups. And we had a ton of really big startups that used us to get their payment processor. And we took an ongoing revenue share on their payments. So that was actually a great business model. But we found that some of the processors that we connected them with weren’t treating our customers fairly. And the technology side was lacking. So we built a payment gateway called Samurai and our own payment processing. We became what’s called a PSP, which allows you to instantly underwrite merchants. And when #Groupon, we were about to raise a series A and #Groupon initially approached us about potentially being an investor in the series A. And then they said hey, you know what, we’re looking to build this technology that you guys have already built, primarily the payment gateway, it would take us a year before we could possibly get there, we’d love to acquire you. And after a bit of back and forth we, we agreed to the acquisition and went over there for a couple of years.

Nick: Well, congrats on that exit.

Sheel: Yeah, thank you. It was great.

Nick: And while we’re talking about customers, could you touch on some of the major customer segments or, or how you think about customer groups? And what startups in the fintech sector are focused on, on serving?

Sheel: Sure. So I look a lot at the, so we, we talked about Millennials already. Millennials are, are one sort of customer segment that is, has not been served well by banks. And the global financial crisis several years ago sort of exacerbated that. So a lot of, a lot of these startups are going after Millennials. So you see companies like, like #Digit, #Sofi, in the insurance space #CoverHound, #Personal Capital, a bunch of these companies going after Millennials, that, that’s one customer segment. There’s the other customer segment that is the unbanked or under-banked. And in my sort of investments, I’ve got a company into, an investment into a company called #Finova Financial, that gives loans to people based on their card title but  does it in a socially responsible way all online. Another company in that space is #LendUp. They do a tremendous job going after the payday lending space with a new product that’s all online and cheaper. Domestically, there’s also of course, the mortgage segment which is focusses a little bit later in life. There’s even a company that called #SupportPay that just goes after intermediating disputes between divorcees using payments. Because the biggest problem that, that we have is money, and, you know, if you get divorced from somebody you oftentimes don’t want to talk to them ever. So this company #SupportPay just makes, is that intermediary. So you don’t have to talk to your ex-husband or ex-wife at all.

Nick: Wow

Sheel: That’s, that’s kind of a cool one. And then of course there is the whole B2B segment. There are a lot of companies that I really like that are lending to small businesses. So you see companies such as # Kabbage, #BlueVine in that space that are lending to SMBs.

Nick: You know, at times companies may be misidentified as fintech, you mentioned this earlier in the show. Do you have an example of something that people may lump in the fintech bucket that from your standpoint doesn’t really fit?

Sheel: You know, I, I actually think of fintech more broadly than other people. So I’m the wrong person to ask that question to. There have been, let’s see, so there have been people who came to me and said hey I’ve got a fintech company. I thought well, it’s not, I don’t know if it’s fintech is the first word that comes to mind when I think about your company. So there, for example, one was a company that’s sort of trying to replace gift cards but basically it was like buy money, buy by, so instead of giving, instead of giving a gift to a wedding you give basically money through this platform. And I thought yeah that is, that is fintech in a way, of course you’re, you’re giving money but not in the sense that you’re disrupting traditional financial institutions. So that’s just a different way to look at it. But, but broadly speaking, I like to think of everything as fintech. I want my, my sort of circle that I could invest in to be as broad as possible.

Nick: What about something like #Acorns? Would you put that into, into the fintech market?

Sheel: Absolutely. They are taking money and investing it. So that is definitely fintech. They are, they are sort of wealth management for millennials is how I would think about #Acorns.

Nick: #Sheel, what are the major elements you’re looking for in a fintech company that may increase your likelihood of investing?

Sheel: Sure. So, you know, we are seed stage investors for the most part. And at that stage for fintech companies there may not be that many proof points in terms of traction and in terms of real revenue. But an important piece of fintech is regulation. And I like to see people who have good answers to the question of what do you with regulation. So, you know, the people that we back in fintech at #500 tend to be a little bit older and tend to have more experience. So we, we have a couple of folks, we have several folks who have previously exited fintech companies. We have folks who are lawyers. It just tends to be people are a little bit further along in the sort of life cycle of a person that do fintech startups. And then generally speaking we look at all the same segments that you would tend to look at… Is this an amazing team? Is there a market that I believe is huge and are a potential to get to a huge market? And then, is there some technology advantage? And then, is this the right time, is this the time for this company to shine? Or this, this type of company to shine? Other things for us, you know, we’re an accelerator, our best leads, actually we get a lot of leads from other VCs. VCs who looks at, at primarily Series A stuff and they have a company coming to them that’s too early. They say hey #Sheel you should take a look at this company. I really like it if it’s too early for me. So that’s, that’s where I tend to get a lot of my great leads.

Nick: I was just looking at a great fintech deal from Chicago, serial founder with a big exit in his background.

Sheel: Yeah, sounds good. I’m happy to get any, any referrals from you on, on the fintech side.

Nick: I’ll keep that in mind. You know, have you found that the majority of the deal flow and the majority of the, the fintech innovation is happening in, in major urban financial centers in the US? And do you think fintech startups should locate in these areas?

Sheel: You know, yes, I, I do find that the majority of innovation is happening in these big centers. And it’s sort of if you look at fintech funding and look at where the innovative companies are, it’s San Fransisco, number one. And then New York number two and LA number three. And then, of course, that’s just in the US. Then of course there’s a lot going on in London, Singapore, Hong Kong. But you do see most of the innovation still happening in the Bay Area. I don’t think that you need to relocate here. It is very helpful because the money is here in the Bay area and a lot of investors are lazy and don’t want to travel or don’t want to look at companies outside of the Bay area. So, so that’s, that’s one piece of it. The other piece of it is you know, we bring in companies from all over the world here, so about a third of our companies are from California, a third from outside of California but in the US, and a third are international that we bring into the accelerator. And we find that people just by being in the Bay area feel like there’s, the pressure is on to work harder faster. And so, so I kind of like the pressure that that gives. And then of course, being an accelerator is even more that you’re, you’re sitting across from somebody who is getting a ton of work done and getting, staying at the office late, whatever, that pressure sort of continues on and it spreads across the batch.

Nick: Contagious, contagious work habits, huh?

Sheel: That’s right. Yeah. And, and, you know, specially during the 4 months that the companies are in the accelerator, they want to show a tremendous amount of growth. And you find companies, people just working more harder smarter than they, than they ever have before, and it’s great.

Nick: Awesome. Any other thoughts on financial technology startups that we didn’t cover that you would like to touch on?

Sheel: No, I think we covered a lot of the great topics in fintech. So yeah, I think we did a great job.

Nick: #Sheel, can you talk about what you’re currently most focussed on at #500?

Sheel: Sure. So it’s three things. So we just ended, we just had the accelerator batch that ended last week, which was the second week of May. And I’m really focused on helping these companies navigate their sets of term sheets. Fortunately many of my companies are in the luxury, luxurious position of having multiple term sheets. So trying to help them sort through which companies to take investments from and that sort of thing, which investors are, are a value add and that sort of thing. So that’s my number one focus is helping my existing portfolio companies. My number two focus is bringing on new portfolio companies. We have another batch starting in July. We’d love anybody who’s listening to contact me, sheel@500.co if you have a company that you think is interesting. I’m focused on bringing in the next cohort of 10 to 15 companies. And then number three I am fund raising for my fund. It’s a $25M fund and I have raised a bunch of it but always looking to bring on interesting and useful parties into the investment.

Nick: Yeah. How’s the, the fund raising going? Is it, are you just targeting retail investors or what’s the, the collection of folks that you were discussing the fund with?

Sheel: Sure. So I’ll start out by saying abroad these might be interesting to people, a lot of people have talked about there potentially being a slow down coming in fintech on the seed stage. And what, what I’m seeing is that there’s been so much interest in my fund that there will be capital at the seed stage. And when there’s capital I don’t think there will be a slow down. So good companies will continue to get funded in this environment. But in terms of who I’m seeing as investors, I’ve got some fantastic founders who are founders of three of four fintech unicorns or lp’s in my fund. I’ve got some strategics. So, some banks are very interested in my fund. And then just general, generally speaking there’s been so much interest in fintech that I get contacted out of the blue all the time from folks who are interested in investing. So it’s been, it’s been relatively easy so far, knocking on wood. I think that I’ll probably end up surpassing the $25M mark that I, that I set out to.

Nick: Good for you, man. I, I hear a lot of, a lot of sob stories from investors that are not hitting their targets on the fund raise side. So good on you for having a compelling thesis and plenty of folks that, that are interested in partnering.

Sheel: Thanks, man.

Nick: And, if we could address any topic in venture on the program here, what topic do you think should be addressed and who would you like to hear speak about it?

Sheel: Ooh, good question. Have you done one of them frontier tech investing?

Nick: Not specifically. We’ve done a little VR stuff, we’ve done a little space stuff. But you know, frontier can be, can be defined as, as that sort of stuff. It can also be defined as sort of the, the heavy industry ag stuff

Sheel: Yeah. I think you should do both. And I can connect you to folks on the frontier side. Have you talked to folks at #Rothenberg?

Nick: No, not yet

Sheel: I’ll make some connections there. And I got my buddy #Greg Castle who was an early investor in #Oculus. I think he’d be, he’d be an interesting one to talk to as well.

Nick: Awesome.

Sheel: I’ll make some connections for you

Nick: And finally, #Sheel, what’s the best way for listeners to connect with you?

Sheel: Shoot me an email, sheel@500.co . I know I’m hard to get a hold of. Feel free to try me multiple times till you get me unfortunately.

Nick: Well, #Sheel, it’s always good to connect. Next time when you’re, you’re in Chicago, hit me up.

Sheel: Will do

Nick: I look forward to talking soon

Sheel: Likewise. Take care, #Nick.