Confessions of a FinTech Junkie

I was talking to a former Capital One alumnus a while ago and we talked about a host problems that still needed solving in the financial services space.  He made a very important distinction that’s stuck with me ever since.  There are problems that can be solved by Entrepreneurs that possess skills in the strategic thinking and financial engineering arenas and there are those problems that require industry specific expertise and very specialized skills to crack.  I found this categorization quite interesting and started to mentally map the businesses I’ve come across into the two buckets.

One conclusion popped out that I think is profound:

THERE ARE MANY FANTASTIC BUSINESSES THAT CAN ONLY BE BUILT BY INDUSTRY INSIDERS BECAUSE THEY UNDERSTAND THE PAIN POINTS INTIMATELY AND CAN DEVELOP PRAGMATIC SOLUTIONS BASED ON TRADE SPECIFIC SKILLS AND KNOWLEDGE OF HOW THE ECOSYSTEM WORKS  

And there was another conclusion that I found equally profound:

MANY OF THE PAIN POINTS EXPERIENCED IN AN INDUSTRY AREN’T EASILY UNDERSTOOD OR APPRECIATED BY OUTSIDERS AND THEREFORE THE BIAS IS FOR INVESTORS WITHOUT INDUSTRY SPECIFIC OPERATING EXPERIENCE TO QUICKLY DISMISS CERTAIN START-UPS THAT HAVE SIGNIFICANT POTENTIAL

Building these businesses is equivalent to “smelling the weeds”.  At 50,000 feet you can’t spot a weed in a garden.  At 500 feet you might be able to identify that there are weeds in the garden.  When you’re on your hands and knees crawling in the garden you can identify every type of weed and one-by-one pick them, pull them or (gasp) even smell them.

A few examples of businesses that are being built by “smelling the weeds”:

1) Signifyd – (QED Portfolio company) – Fraud detection, prevention and insurance services for e-commerce businesses.  The founder (Raj Ramanand) had a background in the fraud space, having previously been the Head of Payments and Shipping Risk at FedEx and the Head of Emerging Markets Risk at Paypal.  As a result, he understands the complexity of the e-commerce fraud problem, he is keenly aware about how bad the current market solutions are, he knows what potential clients care about, and he has been able to build a nearly frictionless solution that in many cases can be turned on with a single click.  4 years into its life and Signifyd has hundreds of paying clients that range from small Shopify merchants to giant e-commerce retailers.  What’s interesting to note is that some of the recent entrants to the space are well funded but struggling mightily due to the “outsiders looking in” syndrome.  They don’t come from the space and as a result haven’t been able to build or sell a compelling solution.

2) Nestiny – (A personal Angel investment) – A Netflix style walled garden of original content, tools and games for homebuyers.  The founder (Jody Clower) has a workflow automation background but also spent nearly a decade ploying her trade as a real estate agent.  She realized how dangerous the internet was for homebuyers because it was chock full of outdated content, false information, and bad advice.  She had to constantly undo the damage done by the internet searches her clients had conducted and the trend was pointing towards more and more clients heading towards this cliff.  Since much of the consumer facing innovation in the real estate space had been focused on “home search” rather than “education”, Jody felt there was a clear weed worth smelling.  Less than 1 year into the build and a few months of being live in the market and Nestiny has hundreds of pieces of content being read daily and a weekly growth rate that’s definitely exponential.  With volume they’ll be connecting buyers to agents and allowing agents to brand the experience for their own clients.  And what are the big guys doing to help agents and buyers?  Fighting for more market share in the home search space and being disliked so much by agents that the major portals have massively negative net promoter scores (REALLY bad).

And sometimes success relies not on being “one of them” but rather on assembling a team with specific industry specific skills and knowledge.

3) LendUp – (QED Portfolio company) – Just about every business that has a creative business model that wants to extend credit to the working poor needs to be built by industry insiders.  There are so many Entrepreneurs that feel like they have an “ah ha” moment about how to crack the problem of extending credit to the working poor without charging exorbitant rates.  Models that are sold through employers and tap directly into payroll for payments.  Models that rely on some form of co-signer to enhance credit performance through social pressure and backstops.  Models that tap new sources of data to effectively find the “cream of the crap” or “fallen angels” (not my terms).  This is a space where the details actually matter a lot and if you haven’t lived them you’re very likely to fail and fail hard.  The founders of LendUp (Sasha Orloff and Jake Rosenberg) are on a mission to create best-in-class financial services products for the working poor, new entrants to the credit market, and the credit damaged.  Along the way they’ve assembled a fantastic team chock full of “been there done that” people.  The resumes read like a who’s who of the sub-prime lending industry and I can attest to their talent having managed or worked with many of them personally.  Approve/decline/pricing decisions?   LendUp has a 15+ year veteran from Capital One and Paypal along with a team full of experienced credit talent.  Fraud detection and prevention?  LendUp hired a 20+ year veteran from Capital One with specific operations and analytic experience in the fraud space.  Compliance and Regulatory Affairs?  LendUp has many experienced people on staff including a former Enforcement Attorney from the CFPB.  Scaling a lending business from dozens into the hundreds/thousands?  LendUp hired a 25+ year veteran from Capital One and Travelers Insurance who’s managed a variety of customer facing departments (i.e. – collections, recoveries, customer service, etc), some with thousands of employees and multiple geographic locations.  Mistakes will still be made but not the big ones.

As an operator turned investor I can say that I relate to Entrepreneurs that are busy smelling the weeds.  Sometimes they smell pretty good….