Most entrepreneurs look to Silicon Valley when it comes to raising money for their fintech startup. But it is certainly not the only place to look. There are niche VCs and private equity firms all over the country willing and able to provide capital. We find out about one such company on the next edition of the Lend Academy Podcast.
Chris Sugden is the Managing Partner of Edison Partners, a growth equity firm based in Princeton, New Jersey. They provide growth capital for small business doing $5 million to $20 million in annual revenue, typically based on the east coast between DC and Boston. They have never invested in a Silicon Valley startup.
In this podcast you will learn:
- Chris’s long background in fintech.
- The history of Edison Partners and their unique New Jersey location.
- The difference between East Coast and West Coast entrepreneurs.
- The size of company they look to invest in.
- The three different verticals they cover.
- Why Chris decided to make an investment in MoneyLion.
- Another lending platform they invested in a few years back.
- Why Chris thinks there is more innovation to come in the lending space.
- The impact that Marcus will have on the broader fintech space.
- The shift Chris has seen with the banks as they embrace fintech.
- What does a company need to do to get Edison to open their checkbook.
- The interesting fintech trends Chris is focused on right now.
This episode of the Lend Academy Podcast is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services.
Download a PDF of the transcription of Podcast 154 – Chris Sugden.
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PODCAST TRANSCRIPTION SESSION NO. 154 / CHRIS SUGDEN
Welcome to the Lend Academy podcast, Episode No. 154. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.
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Today’s show is sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s coming up on the 19th and 20th of November in London at the Business Design Centre. We’ve recently opened registration as well as speaker applications. You can find out more by going to lendit.com/europe.
Peter Renton: Today on the show, I am delighted to welcome Chris Sugden, he is the Managing Partner of Edison Partners. Now Edison has actually been around for several decades as an equity investor and Chris is the Managing Partner there now and he has been at the firm for many, many years. I wanted to get Chris on the show because I’ve been hearing their name more and more and they also won the Fintech Equity Investor Award at the recent LendIt Fintech Conference.
So I wanted Chris on the show to talk about his thesis, how he decides to invest, what his view of the fintech space is, in particular the lending space. We talk about some of his investments, we also talk about the role of banks and the impact that Goldman Sachs is going to have and much more. It was a fascinating interview. I hope you enjoy the show.
Welcome to the podcast, Chris.
Chris Sugden: Thanks, Peter, great to be on.
Peter: Okay, so I like to get these things started by giving the listeners a little bit of background about yourself. I know you’ve been at Edison Partners for quite a while, but why don’t you tell us sort of what you’ve done, so far, in your career.
Chris: I’d love to. Thanks, Peter. Kind of an interesting way I’d like to put it is I was doing fintech before fintech was cool. I actually joined an internet billing and payment company back in the late 90’s, pre-dotcom boom, but we were on the front end of that. Actually that was when rendering a bill on the internet, and I always wanted to click a pay button, was pretty novel, but like so many things we see even today in fintech, adoption curves were longer than we all thought, but long story short, that company was called Princeton eCom and eventually we grew it from just a couple of million bucks in revenue when I joined to north of $40 million. We sold it for what we’d call a pretty good outcome, particularly given that we went through a boom and bust cycle, you know, pre-9/11, pre-Y2K and sold it post all of that.
So I’ve been doing fintech for quite a long time. My 16 years at Edison, I spent most of my time, probably 90% of it in the fintech space and I got to the venture capital, growth equity/private equity landscape in what you might call a little bit of an unconventional way. Having been a CPA to start my career and doing a couple of startups in the CFO/COO track, when I joined Edison it wasn’t clear I was going to be an investor and managing partner 16 years later. I was thinking I’d be an operator someday, but joined the firm to sort of look at their companies and look at new deals with the partners here. Lo and behold it stuck, if you will.
And now 16 years later, not only running the firm, but doing lots of fun and exciting deals. I would say, you know, I have one of, if not the best job in the world meeting entrepreneurs who are going to change the world or make their dreams come true or a little bit of both so spending your days listening to those kind of folks or having conversations with them certainly is an exciting business.
Peter: Sure, so then can you just tell us a little bit about Edison Partners. I know it’s been around for quite some time, I mean, you’re not one of the founders, right, you’re not the founder, you’re…
Chris: That’s exactly right.
Peter: Yes, so can you tell us a little bit of the history and background for Edison Partners?
Chris: Sure, I’d love to. The firm actually started in 1986 so it goes back and has really been around right in the same kind of length of time or tenure as some of the pre-eminent brand name firms in the industry; always a bit unconventional that it was sitting in New Jersey, not part of the hot bed of venture or growth equity, but here we are 32 years later with much success. As you said, the firm was actually founded by a gentleman named John Martinson who about five years ago, myself and a couple of other partners bought him out and now are running the firm again called Edison Partners. Back in the day it was Edison Ventures, the firm has been known for a long time as a venture capital firm, and about ten years ago, we shifted to more of a growth equity strategy. There’s a couple of interesting tidbits about that.
Growth equity is a very, very sort of wide definition…you have some LPs, limited partners who think about growth venture versus growth buyout and everything in between and yet funds as small as ours are…our last fund was about $275 million, our next fund will be just over $300 million and the long story short there is we’re what I would call the smaller end of growth equity both in terms of companies we invest in as well as fund size because, frankly, growth equity firms are calling themselves growth equity and doing deals that look a little bit more buyout-like with several billion dollar funds.
But the long story short is Edison, as even a venture firm always had a couple of million bucks of revenue, sort of a dog eating the dog food kind of thesis around it. East Coast entrepreneurs, frankly, we may get into this later, but the difference between East and West Coast entrepreneurs having been doing this for over 20 years in the startup world and also in the investing world, I think the general sort of theme on the East Coast is we’ll go build a business and we’ll think about raising capital later. So you have this bootstrapping mentality that even to this day sticks and so Edison had created a niche for itself, really a Northeast kind of firm, DC up to Boston, 30 some odd years ago looking for companies doing a million or $2 million of revenue and investing a couple of million dollar checks.
Over time, we’ve gotten to be a little bit bigger fund and also now investing in companies that are a little bit more mature. So our sweet spot and what we define as growth equity are roughly $10 million checks, first check sizes; the company is doing roughly $5 to 20 million in revenue and to tighten that up a little bit for you and your listeners, $8 to 12 million for us is a proxy, revenue that is, is a proxy for the dogs are eating the dog food, the customers really see a repeatable use case that we can scale a sales and marketing model around.
Our capital comes in at a time when the companies haven’t raised a whole lot of money. In fact, when we say Series A, sometimes our limited partners look at us wondering if we’re a venture capital firm, but for these companies, believe it or not, it is often a Series A investor in that it is the first money they’re taking in. But yet they’ve gotten their company to an $8,10,12 million revenue run rate by bootstrapping and selling customers on their solution to tie that off a little bit more with kind of the history and the evolution…as I said, we are DC up to Boston and now we’ve extended into the Southeast and out to the Midwest and even a little bit more towards the West, but more Texas and Utah and Colorado, as far as states go.
But one of our core sort of strategies, if you will, or differentiators is we’ve been investing for a long time in underserved markets so proud to say, if you will, that about 25 to 30% of our deals have been in the New York metro or Boston area. We haven’t done any Silicon Valley deals in our history and so that leaves a lot of territory that we’ve covered in what most would call underserved markets and it’s kind of been a hot topic recently in the popular press or media.
But long story short, we have 2 active deals in Atlanta, we have an active deal in Nashville, three active deals in Ohio, a couple in Columbus and one in Cleveland, two deals in Chicago. Just to give some sense of that, one deal in Dallas so I don’t really define these regions by state as much you do…sort of big cities and even mid-sized cities, but pretty proud of the fact that we think we bring a value add or what we call the Edison Edge to the table that allows us to bring an ecosystem with us besides our capital.
Lots of investors talk about value add, maybe we’ll have time to talk about that. You know, this is more about fintech, but long story short, really proud of the fact that we not only are talking a good game about underserved markets, but we’ve actually been in these markets for quite some time.
Peter: Right, okay, So then what about industry focus. You said you spent a lot of time in fintech, but the firm as a whole, I mean, how much of your focus is fintech, how much of your focus is other verticals?
Chris: Great question. Probably if it was only my way we’d do 90% fintech because I love the space so much, I think there’s so much to do, but we do cover three verticals, but you’ll see a bit of a theme where some of these overlap. So we do healthcare IT in addition to financial technology, but it’s easier to say what we don’t do in healthcare IT. We don’t do any biotech, we don’t do any drug discovery and then our 3rd vertical or industry area we talk about is more enterprise so we talk about verticalized SaaS as well as security and mobility as the key themes in our enterprise solutions.
But interestingly enough as you well know, to pull us apart a little bit or dive a little deeper as we talk, but healthcare for instance, you look at revenue cycle management or payments and healthcare…a lot of fintech going into healthcare now, i.e. from a vertical specialty kind of area so being deep in fintech, I think, has made us better investors in a couple of other enterprise or healthcare areas and vice versa. If a company is doing a payments capability for the healthcare space it helps to have real deep healthcare roots and knowledge so we are seeing a blurring of the lines among those three sectors, but those three sectors are where we spend our time from a fintech percentage perspective, historically, it’s been right around 35 to 40% of our deal count, if you will, logos as they say. It’s actually slightly larger than that, probably closer to 40%, that’s the higher range of that, not higher than that, but the higher end of the range of that on dollars. It’s been our most important, every fund it’s been our most active, if you will, most important is probably the wrong way to put it, but the most active area.
Peter: Right, right, okay. So I want to talk about some of the investments you’ve made. Maybe let’s start out with MoneyLion. You know, I had Di, the CEO and Co-Founder of MoneyLion on the show a few months back or it was last year, I guess now. Anyway, tell us a little bit about that company, what you saw and what made you pull the trigger there.
Chris: Yeah, thanks for bringing that one up. We’re really excited about what Di and his team are up to and I know we may talk about another lending deal and lending in general as a fintech topic here as we talk a little more, but MoneyLion, interestingly enough, has a lending platform but it’s far more than that. In fact, I give the company credit for using this sort of rebundling term.
I know it’s out there a little bit in the press or in the media, but from my perspective I think MoneyLion has sort of captured the essence of bringing all the banking services back together in a mobile first application. So you look at the company having a PFM that’s as powerful as any other in the market, you look at having a credit solution as powerful as any in the market, a credit or lending solution as well and back just a few months ago towards the end of the year/beginning of this calendar year, we launched MoneyLion Plus which includes now a robo-advisor.
I think what they’ve done is really revolutionize the way I think fintech is going to be delivered to the consumer, i.e. all the services you want in one package with a subscription model which is pretty revolutionary that was not necessarily the thesis. As all great entrepreneurs, they either pivot or add or innovate. We had it more visionary when we invested in the company about a year and a half ago, we knew that’s where we might take it, but both technology had to catch up and we had to continue to expand our capability at MoneyLion, but really excited about that.
But what makes it a company beyond the rebundling aspect really special is their use of machine learning and AI being…I know, way overused, cliche almost now. It’s pretty extraordinary from the standpoint of, from an underwriting side of the business as well as from an origination side of the business, you know, finding customers, if you will. The big challenge in lending is both of these being truly technology-driven.
I can tell you MoneyLion is absolutely 100% technology-driven in those aspects, but what’s really interesting and we’ve seen this in this MoneyLion Plus launch is the thirst, if you will, for the consumer to have all the capabilities they need or want when they need or want them so the idea of the subscription is you can pay for really the access to a credit line. What probably won’t be lost on your listeners, but sometimes we wonder if our consumers are going to hear this messaging right.
If you think about the private bank for the masses or for everybody else, high end customers can get private banking services at some of the best known banks in the world, everybody else is stuck without those kind of services because your local bank branch won’t necessarily offer those to you. MoneyLion Plus does that in a subscription form and what’s really been interesting in the first six months or so post MoneyLion Plus launch is the thirst to invest combined with the desire to make sure, in case there’s an income shock, they can get access to a credit facility.
At the risk of sounding negative towards any other businesses, I don’t mean to sound that way…what I have always thought and I was out front invested in another deal in the lending space over eight years ago…I’m a fan of the lending space because I think there’s so much disruption that’s still to come in this space and has come already. You’re seeing the robo-advisory world and I have to be careful to not paint too broad of brush, but if you don’t have a credit solution, you’re a long way to monetization for your business model so it’s one thing to provide a really interesting service to a customer and it’s another thing to be able to have monetized that for your investors and shareholders and really grow a great business. And I think you’re starting to see a few of the robo-advisors, at least that’s the buzz that I hear, trying to figure out this whole credit side of the balance sheet, if you will.
In our opinion, what makes MoneyLion Plus extraordinary in terms of an opportunity for consumers is you can have your asset and your liability part of the balance sheet together under one view and help with those shocks that so many consumers have happen to them during the course of the year, have those taken care of and not getting hit with big bank fees. So MoneyLion in a very quick nutshell…hopefully, I didn’t go on too long because it sounds like too much of a plug for our own investment (Peter laughs), but it’s really an exciting business and I think they’ve really started to turn some heads with this MoneyLion Plus offering.
Peter: Right, I wrote about that when it came out and I think it’s a really interesting new development that’s, you know, MoneyLion…I love companies that sort of that are thinking outside the box and sort of breaking new ground in offerings for consumers. They’re not following the well-trodden path, they really, really are doing things their own way.
So I wanted to move on and talk about another…I think you probably alluded to it, BFS Capital is another one, another lending platform and it sounds like it was a while ago that you invested there, but can you just tell us a little bit about that company?
Chris: Yeah, the company, the sort of arc which we’ve seen with a couple of the public companies, certainly OnDeck and LendingClub, more in the realm of OnDeck than LendingClub in terms of what BFS is today or was even back then, but frankly started out closer to…it was known more as a merchant cash advance company. Although when we invested, we’d already seen some of the data around the small business loans that were beginning to take off, I would say one of the things that sort of, underlying my investment thesis, both with MoneyLion and BFS Capital is…maybe I wasn’t smart enough to be out there kind of pounding the press with this.
But I was a bit dubious of the exchange or marketplace model because while you say you’re taking risk in moving off of your balance sheet, at the end of the day, those buyers of those loans aren’t going to show up at the exchange or marketplace if you’re sending them bad credit and with both BFS and MoneyLion what I have always liked about both businesses is, you know, you sort of live and die by your ability to find new customers and write great loans for your customers, and I say write, obviously technology-driven, but you get the idea. So BFS is sort of a traditional, so to speak, but with quite a bit of technology around underwriting specifically. On an origination side, it’s a combination classic, if you will, ISO, merchant acquisition model with partners but also a direct model as well.
What’s interesting is, like I said, starting as a merchant cash advance company, the company is now almost 15 years old, we invested in it about eight years ago. The company has really done a nice job growing into and over the time of our investment being truly a lender from end-to-end, small advances in that $5,000 to $10,000, but more $10,000 range on up to several hundred thousand dollar loans for small business. Although we’ve seen this sector have a few of it’s own challenges with some of BFS’s competitors, I think we’ve seen, for lack of a better way to put it, a little bit of a settling in or resetting.
Another colleague in the investment space sort of said, it looks now that Wall Street has sort of reset valuations to look less fintech and more financial services for a couple of the other lenders. I think that’s probably fair…it may have overreacted a little bit, but it’s probably because there was a little bit of…too much exuberance for a couple of the original IPO’s in this space and now it’s probably why so many things on Wall Street and financial services have probably swung too far the other way. Somewhere in between is probably the right answer because there’s a ton of technology in a company like BFS. We’ve done a couple of acquisitions over time with BFS, we continue to be in aggressive growth mode.
We also launched a company that’s owned by BFS Capital called Boost Financial. Boost is our UK subsidiary, and so we do have additional global sort of aspirations as we continue to build BFS over time. Long story short, what I love about the on-balance sheet model is you have to have real conviction around your underwriting and your models and the good news is when you get it right, the business model is a very strong one. Obviously when you get it wrong, you pay a heavy price, but so far, I’ll knock wood to say our biggest plug for BFS is having been profitable really consistently over the time of our investment which is a uniqueness in this space, as you know.
Peter: So I want to go back to something you said just a bit earlier there. You were talking about like the online lending space still has some innovation to come, I don’t know exactly the words you used, but when you look at the online lending space today, you know, it seems to be…I mean, it was overly exuberant a few years ago and there was so much money coming into the space, but the weaker companies have already gone away and I’m curious what you think of the space today when you say that you think there’s more to come, what you are actually talking about when you say more innovation to come?
Chris: Yeah, so I think…you know, you’ve seen a couple of…even with the most recent IPO, you know, just last week where you see partnering up with merchants to provide home improvement loans right there at the point of sale or provide credit to consumers, I think there are angles or aspects like that. If you actually look at the healthcare space where I mentioned before, the convergence before, we actually continue to enter a world of patient-centered healthcare, centered by the way…now, I mean, your actual wellness, but your need to cover your own costs and understand how your health plan works because it won’t be as much employer-owned, not just because we have…you know, government involved, but in general, the patient is going to be more in charge of their own healthcare.
We saw a wave of election type surgeries or procedures, a few financing options, whether it be cosmetic or dental or some other, that was one wave. I think you’re going to see another wave, frankly, around the healthcare space that will provide a need for lending and credit solutions. So I think what you’ll end up seeing is call it vertical or specific niche type lending applications. We’re looking, frankly, at the logistics space as an example. We think there’s a pretty interesting opportunity where you see a space that hasn’t had necessarily a ton of innovation, has some capital constraints, has frankly, thin margins, but you’re seeing an opportunity to grow if there was a working capital availability for those businesses.
So I think what you’ll see is less of these, for lack of a better way, grandiose kind of consumers will now transact their loans online which is a very huge opportunity and a huge game changer from a B2C perspective. If you look at it from a B2B or B2B2C perspective, there are niches where credit is required or working capital constraints could constrain growth or slow growth down that we see opportunities that we continue to sort of probe into. I would hesitate to mention a name on a podcast that we haven’t done an investment in yet, but I would say, from our perspective, the logistics space is one we’re digging into pretty hard because we think there’s an opportunity there, as an example, if you will.
Peter: Okay, so look at a company like Goldman Sachs that has become very aggressively moving into not just the lending space, but they plan to really have a major banking operation with many different consumer facing offerings. So how does that sort of play into your thesis when you’re looking at not just companies like MoneyLion, but consumer facing fintechs in general, what do you think the impact that Goldman Sachs is going to have on this space?
Chris: I think one of the things you could say from a purely…you know, I guess when you’re in my business you definitely live in the half full optimistic world because entrepreneurs are trying to do things that haven’t been done before and millions of people or hundreds of people say it’s impossible, right. From that perspective, of a Goldman participating and with a Marcus type offering, just go back. It wasn’t all that long ago. I guess for guys your age and mine, that Goldman…the last thing they would have thought is about being a bank and here they are as the credit crunch…The Great Recession caused that to happen, but to their credit you look at how they’ve evolved and sort of embraced…wait a second, we have a huge balance sheet, we ought to use it to grow our business.
I think the real question for, as you said, other fintechs we look to invest in or other companies that are looking to disrupt either lending, investing, wealth management, etc., you’ve got to keep an eye on what Goldman is up to and the kind of customers they’re looking to attract. I personally would say the market they appear to be going after, so far, is at a higher credit rating, if you will, or at the higher end of the income spectrum than a MoneyLion customer.
That’s not to say there won’t be some merging or blurring of the lines, it seems to me, and this is knowing enough maybe to be dangerous or then some, you know, the SoFi customer and the Marcus Goldman customer look a little more similar than the MoneyLion customer and the Marcus customer, in my opinion, but that doesn’t mean they can’t shift gears and sort of move into our market as well.
So I think from that perspective, a firm like Goldman, you know, putting their muscle behind an opportunity and frankly, we can look at it and say, it’s taken them a couple of years to really decide that they want to come after this market in a big way. I don’t know if that has been more of a comfort with the regulatory environment or a comfort with their own business, but I will say it feels now, in the last six or nine months, to be an effort that’s not just sort of a hobby, if you will, for Goldman, but something they really look to grow. A hobby may sound too negative, but you get the idea, it feels to me like it’s here to stay for Goldman as a real business.
So I think from an investor’s perspective, we have to understand what they’re up to, where they’re going. So far, it seems to be pretty, it seems to be away from their capital markets and trading and their investment banking business…of course, all banks want to have cross sell opportunities so I’m sure there will be some impact there, but we have looked across the spectrum even though we spend a little bit of time here on lending. We’ve done capital markets, we’ve done wealth management deals. I should say capital market trading, technology investments…there you always look at Goldman more as a customer, as a prime broker, as another participant in the supply chain, if you will, so I see less of Marcus in that realm where we invest and more in the…let’s call it the lending and the other consumer financial services areas.
Peter: Yeah, so what about banks then, in general, because you’ve got some major banks really…they’re paying attention. Goldman Sachs is obviously a very high profile company, everyone pays attention to what they’re doing and I think you’ve got companies that have long histories of consumer banks. They look at what Goldman’s doing and they think well we don’t have what they’re offering.
At LendIt, I’ve said this before, we had so many banks come, we had more banks than ever before, more than double the previous year and I just see when I look around that banks are paying more attention than they ever have to the fintech space. I’d like to sort of get your perspective, what are you seeing? Do feel like banks are really going to be acquisition targets for some of your portfolio companies or how do you view the banks, in general?
Chris: I actually think like all aspects of technology and call it venture and growth equity investing, the strategics are in need of great innovation, great entrepreneurs as anybody else. So what’s interesting about financial services and the banks themselves, historically, they’ve been okay acquirers, but not overly aggressive, a lot of build it here kind of mentality. Hopefully that again doesn’t sound too negative, but that would be sort of a generalization folks in my business would say. I think you’re seeing in the last five years, maybe a little longer, maybe a little less, an appetite for bringing innovation in all the way from fully baked companies that have scaled to acqui-hire, to bring in talent that understands what a fintech actually is, what a blockchain actually is, needs to get inside banks.
So in my opinion, yes, there’s much more of a collaboration partnership going on than there is competition. I think, let’s face it, until…again, I think five years is probably going too far back, I don’t even know if it’s in the last three or four years where you’d really say the banks have embraced really the need for keeping pace, if you will. Of course, the banks are saying no, it’s been more like ten years, but if you really look when they got involved with real effort behind some of the, again, either wealth management or blockchain initiative or actually an alternative lending initiative, you’d see them coming much later to the party, but now they’re here for certain.
I think there’s still a big struggle because they’re big targets, they’ve got a whole different regulatory regime than a financial technology fintech would so from my perspective, it’s still good to compete with banks as a smaller company because of the ability to be nimble. The other part is, frankly, let’s just face it, architectures are quite old inside a lot of the banks and so they have to acquire or do something new to really offer financial services in a way that a fintech can.
I sort of go back to MoneyLion and you look at all the capability that fits right on your phone inside a MoneyLion Plus account and to get all of those same services in one offering at a bank, it’s nearly impossible. Forget about even seeing a wealth manager on the same interface as you do your home banking screen, something as basic as that; even signing up to be a customer if you’re going through a large wealth management firm to be a customer for a mortgage or a credit line, you’ve got multiple different contracts to sign, applications to sign, etc. so unifying all that…we’re still in the fairly early innings of that. So I think there are those niche opportunities for fintechs to solve some of those problems and there are much more sort of grand like a MoneyLion would be which would be to sort of solve an entire part of the populations need for both credit and investing.
But to circle it all the way back to the banks…look they have great trust for the most part, I’d say trust by the consumer base although the consumer base still thinks there’s still…you know, from a fees perspective there’s always a wonder…is my bank really my partner or not, but a trust in terms of your money being there, not losing your money, etc. That’s a huge asset, the brands are a huge asset. I think you’re starting to see a few separate themselves from the pack and I think we’ve mentioned one already with Goldman.
And so, in general, I think the simple answer is there are more partners and allies in this race to really revolutionize financial services than I would say on balance are enemies, so to speak, or ones we worry as much about as other financial technology innovators, if that’s fair.
Their size is always a challenge, their ability to borrow money for next to zero. Obviously in a rising rates environment that may change a bit, but the point is, those balance sheets need to be activated and I think the technology partnerships that they create are a way to do that.
Peter: Right, right. Okay well we’re almost out of time, but there’s a couple of more things I want to get in here. Firstly, what does a company have to do to get on your radar, not even that…to get you to open up your checkbook? What are the things you are looking for and how has that sort of changed over time?
Chris: The over time part would be a firm strategy, being a little more mature of a company, and I say old days, ten plus years ago, a couple of million, $2 million in revenue run rate would be right on our sweet spot. Now we’re in the five to ten of run rate revenue. So we do want to see some customer traction. Actually for us in fintech that can be a challenge at times when you have a two sided marketplace when you think about payments applications, even what I used to at Princeton eCom, where there’s a billing payment solution, adoption takes time, you’ve got to build the marketplace up.
That and mobile payments was also a challenge for Edison and me personally over time, but in terms of…that’s one, is traction, growth would be the other. We don’t do turnarounds and we don’t sort of if I just had a little bit of capital, I’d be growing fast. When entrepreneurs say that to us, it usually doesn’t go very well or the conversation doesn’t last very long so I think growth, in some respects, trumps all. As it relates to the specificity around fintech, as we’ve talked about. I’ve invested in lending companies and as a firm we’ve invested in those, we’ve invested in compliance companies, we’ve invested in wealth managers so we’re across four or five of the big theme areas within fintech so there’s not really a specificity for us in that space.
I would say from the perspective of fintech specifically, which your listeners most likely care most about, my view is you do it right from the first time. The compliance and regulatory regime is obviously evolving and we all have to be very cognizant of things can change in an instant, just like we’ve seen even with ICOs having their own challenges now with are they securities or not. The bottom line is a regulatory compliance culture inside a startup is critical in fintech from the very beginning. Cutting corners early leads to bad outcomes, so I’d say as it relates to fintech specifically, a high degree of trust and ethics may sound so obvious, but we all have seen the stories where that is not always the case.
So growth, high gross margin are the basics, the high ethics and the sort of regulatory awareness and adherences is absolutely critical that runs through the culture. The idea of a big, super big idea, we don’t just invest in companies that are multi-billion dollar markets. Quite honestly, we’re okay if there’s a $500 million or a billion dollar market where we believe we can build a $50 million or $100 million company. That’s all about getting in at the right price and being capital efficient so capital efficiency still in my world has its merits in a pretty big way.
So I’d say, generally speaking, you’ll see us take on opportunities that may feel or look a little bit more niche, but related to partnering with an entrepreneur. If you’re in at the right price and you sell your company for $200 to 300 million, everyone can make a lot of money in that situation. One of the issues with the current cycle is it’s billion dollars or bust and this whole unicorn term has created what I call vanity metrics and I’m sort of on the soapbox for whoever will listen. Vanity metrics being how much money I raised and what my last post money valuation was as opposed to how much revenue do I have, how consumers are actively using this solution, what is my customer acquisition cost to lifetime value ratio and does my business model actually work.
So entrepreneurs that really know their business model and the gears that make their model come together, those are the ones we like to spend time with because they’re the ones who are theoretically and practically scalable, if you will.
Peter: Okay, right. So last question, what are some of the interesting trends that you’re looking at now that you think will really make an impact on fintech over the next couple of years.
Chris: Yeah, one that’s probably been now a little longer, has a little longer run for Edison because we’ve made a couple of investments over the last two funds. The compliance space continues to have an interesting opportunity for us and whether you combine that with regulatory compliance and transparency…to us that’s an interesting area, we’ve seen sort of KYC and AML solutions really take off in an era where you’ve got to have active monitoring as opposed to sort of passive, if you will. So we continue to think that the compliance space has some significant runway in it.
The second one, and I could go on with three or four more of these, but the second one in the interest of your time, if you will, and your listeners’ time is sort of we all talk about big data; I’d rather talk about the right data, but alternative data and data-driven decisioning that goes from trading, that goes to insurance, that goes to underwriting as we already touched on in the lending space, I think we’re just at the very early days of alternative data and call it the right data that’s really going to revolutionize places where decisions are being made, whether it be credit for consumers, credit for businesses or insurance underwriting, etc. there’s a long, long way to go.
We touched on MoneyLion many times in this podcast, but the point is the data that consumers can bring to the table to allow us to make better credit decisions. The credit bureaus are evolving, and need to evolve even faster, but this availability of data where we don’t just underwrite a customer, either at BFS or MoneyLion, based on a credit pull from one of the bureaus but we have our own dataset to help us make those decisions. We think the whole credit space is really interesting and we actually have a couple of investments in that space.
One that’s really interesting is a company called PreData and PreData is an alternative data provider for both government intelligence, if you will, but also for the financial technology relative to trading using alternative data to understand government risk, political risk. They have something they’ve called PVIX, the Political Volatility Index, really unique, Bloomberg publishes it. So you could trade the PVIX, but more importantly, you could use the PVIX to guide you to know where your supply chain might be at risk or where oil prices might go or other commodities might go. So we think the data space…and again, I hesitate to use the word big data, it’s much more the right data, if you would, to really address some of these opportunities.
Peter: Okay, fascinating. Well we’ll have to leave it there, Chris, I really appreciate you coming on the show today.
Chris: Peter, likewise, I really appreciate you making the time for me and it was a pleasure to talk to you.
Peter: Okay, see you.
Chris: Have a good day. Bye.
Peter: Bye.
You know, I too am a big fan of alternative data and data science, in general. I feel like it’s an area that is just getting going. We’re already making tremendous strides, but I look to see down the line the impact of having all this phenomenal, not just access to data, but the ways to analyze it with machine learning and artificial intelligence. I feel like this is an area that is going to go a long way and I feel like we’re going to expand access to credit, we are going to be able to combat fraud and many other things, some of which I’ve written about in the past. I feel very excited when I look at the strides that we’re making in the sort of data analysis/data science space.
Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.
Today’s show was sponsored by LendIt Fintech Europe 2018, Europe’s leading event for innovation in financial services. It’s happening November 19th and 20th at the Business Design Centre in London. Registration is now open as well as speaker applications. Find out more by going to lendit.com/europe.[/expand]
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