How do you define fin-tech? From your standpoint, what are the major categories in the field?
I think of it as everything that touches finances and has a digital component. This can be many things – first, new consumer brands, targeting customers with innovative financial services; second, companies selling technology to banks, as they spend millions of dollars each year on building fin-tech infrastructure. Generally, you can break them down into disruptors and enablers. Within each category, there are subcategories. Within disruptors, there are companies dealing with insurance, lending, payments, wealth management, capital markets, personal finance management. In the enablers category, you have AI, marketing technologies for banks, etc.
What is the most fin-tech startup you have come across recently?
I have a pretty deep portfolio, so it is hard to pick a favourite. I love all of them! Let me tell you about three companies, that are interesting, that I have invested in. One, a company called ethic., which does ethical and sustainable investments. They are not consumer-focused, but are cleaning portfolios of not-ethical and not-sustainable investments from large institutions, such as family offices and foundations. It is a very exciting company, because they have the ability to take on a lot of capital and actually make a change via stakeholder consent. They feed into my cheesy thesis of making the world a better place. I believe deeply in financial inclusion. Another one in the financial inclusion space is called Finova Financial. They provide loans to people, who are having difficulties taking on a loan, who would otherwise go to pay-day loan companies, which charge extremely high interest rates – in the range of 500-600 per cent. What Finova does is, provide loans to those consumers, but at significantly more reasonable rates. For example, if you own your car outright, Finova will give you a loan against you car. In the future, you might be able to take out a loan against your laptop, say.
The third company, which I want to talk about, is a new home-owners insurance company. It started with a frustration, which I had. I bought a home in San Francisco a few years ago and getting insurance for my home was very difficult. I had to answer around 40 pages of questions. I posted on Facebook about it, asking some entrepreneurs to fix this. This is how a startup came out – a bunch of friends of mine created it. The software accesses information from public data records, so the consumer doesn’t have to answer any questions when taking out a home insurance. They work in interesting regions, e.g. Florida and Texas, regions that have a lot of flooding and hurricanes. Thus, they serve a lot of consumers that have a difficult time getting home insurance, because of where their home is.
How does fin-tech change societies then?
It’s a massive opportunity to change societies and benefit people. This is where I started in fin-tech – on the not-for-profit side. My company was called Kiva. It was a website, which allowes every individual from the developed world to lend money to people in the developing world at no cost. We have done almost 1 billion dollars in loans, at zero percent interest rate. We have given loans to more than 50 countries – all throughout Africa, Southeast Asia, Eastern Europe.
I really believe that there is a huge opportunity with fin-tech, not only to make the world a better place, but to make a lot of money. Traditional financial institutions have really failed at reaching people from the developing world, sometimes for very legitimate reasons. When I first started working in micro-finance 10 years ago, to service a client I would have to ride in a bus, then get at the back of a motorcycle and then walk through a desert. That took a long time, whereas now there are 2.5 billion people with smartphones. In five years, there will be 5 billion people with smartphones. These 2.5 billion people that don’t have smartphones are largely unbanked. These are the people that can be best reached through fin-tech.
Have you measured the impact of this model of lending?
It’s different in different countries, but in general, Kiva helps people start businesses and enables anybody, anywhere to be a venture capitalist. The kinds of people that we have lent money to are small scale entrepreneurs – people, who needed 500 dollars to buy a motorcycle and become a motorcycle taxi driver, or to open a grocery store, etc.
Do you loan primarily to women? Studies show that female heads of households tend to be more financially responsible, investing in healthcare and education at a greater frequency than men.
Indeed, you are correct. We do loan primarily to women. Men tend to drink the money away. Women have better repayment history and it makes greater financial sense to lend to women.
What will it take for Silicon-Valley investors to begin investing in emerging markets?
They almost never do. Part of what gets me excited about startups is the opportunity to build infrastructures of entrepreneurship all over the world. In many countries, we were the first Silicon-Valley investors. It has gone really well for us. Especially now when you see the growth of South-East Asia – we were the first investors there. Now, we own the market. Everybody loves us. We would like to see that continue elsewhere in the world. There are great entrepreneurs everywhere, but opportunity is not everywhere. We would love to help build these opportunities. We actively try to bring other investors to these regions. We organize this thing called “gigs on a plane” – we take venture capitalists from the US primarily, all around the world. We did one in Africa last month. For two weeks, we took a bunch of venture capitalists to explore Africa and see that these people are actually doing really interesting things. It’s a fun trip, but at the same time you see entrepreneurs, who are trying to achieve things you may want to invest in.
What about Eastern Europe?
I think Eastern Europe is interesting, because there is clearly a lot of talent on the tech side. As you know, so many companies from the Bay area have offices in Eastern Europe, there are so many offices in Eastern Europe. There is clearly opportunity there. But what’s missing is capital and some success stories. You need some big successes, and as they come, you will build ecosystems and attract more interest from Silicon Valley.
Are you looking at any fin-tech businesses from Eastern Europe at the moment?
Not yet. I am sure I will find many when I come to DigitalK.
About your business, FeeFighters, what was it doing in fin-tech and how did that lead to an exit?
FeeFighters started out by solving a common problem, which was getting a merchant account, a credit-card processor. In my first business, I realized that I overpaid significantly for credit card processing. I could have saved a lot of money. A co-founder in the business started a very successful company and he realized that he overpaid in credit card processing more than his profits were in his first year. He first started blogging about how you can get a better rate, then he thought “Let me start a company that does this”. The idea behind FeeFighters is that the processors bid down against one another for your business. First, you tell them a little bit about what you do and then they engage in reverse auctions. It worked really well. Thousands of merchants saved money through us.
We wanted to start the company to help small businesses, but it ended being that most of our clients were technology businesses. So, we eneded up building a payment gateway. A system to instantly provide you with a merchant account, called Samurai. We were based in Chicago, as was at the same time, the rising star of startups – Groupon. We were starting a financing round and they said they were interested in investing in our company. We met with Groupon, on the second meeting they said they wanted to acquire us. While we weren’t really thinking about that at all, we accepted their offer pretty quickly. A bunch of the original team stayed on with Groupon. I started another company shortly after that.
What are the major elements you are looking for in a fin-tech company you are considering investing in?
I invest primarily at the seed stage. This is why I don’t ask for discounted cash flows or spreadsheets, because they don’t matter at the seed stage. The main thing I am looking for is the team. I want to know if the founder can lead a 100 people organization. This is more of a gut feeling, but also I want to know if they are experienced in fin-tech. In addition, I ask myself if the market opportunity is big enough. In summary, team, market opportunity, well-serving product, and traction.
Why are you coming to DigitalK?
I have not been to Eastern Europe as a venture capitalist, so I am excited to come and see what’s out there. I think there are strong founders everywhere and I am excited to see what’s happening in Bulgaria.