Nov 13, 2023
In today’s episode, Kailee Costello hosts David Haber, General Partner at Andreessen Horowitz.
In the episode, Kailee and David discuss:
- The outlook for FinTech: challenges and opportunities
David: There’s still a tremendous amount of opportunity for FinTech across a lot of different categories. Obviously, with this current rate environment, FinTech companies that are more balance sheet intensive or more rate dependent are going to have a more challenging time as the unit economics get squeezed by higher costs of capital.
At the same time, I think there’s a tremendous amount of opportunity for FinTech companies that lead with what I would call software or a network, really that are solving workflow problems across different industries and finding opportunities to layer in financial products to drive modernization, retention, and engagement.
I’m really excited about the intersection of FinTech and lots of different industry categories. I’m sure we’ll get into this in more detail, but the other place that we’ve been spending quite a bit of time is on companies that are solving workflow challenges for large financial institutions. It’s been really interesting just to see the culture of these institutions change and their willingness to adopt new, third party technologies. It’s creating a really interesting moment for lots of FinTech companies to sell into big financial institutions.
- David’s current investing theses
David: One of my lines that I often repeat, but I genuinely believe, which is why I say it often, is that opportunities live between fields of expertise. I really enjoy exploring those intersections. In some ways, I sort of view this as a metaphor for my career, having sort of lived between being an entrepreneur and an operator and an investor. But in many ways, it also extends to fintech because, really, I’ve always viewed FinTech much more as a horizontal than a vertical.
FinTech is in many ways becoming kind of a business model that’s embedded everywhere. So I spent a lot of time kind of investing at the intersections of FinTech and other categories. It has been, I would say, a particularly fun way to invest here at Andreessen Horowitz where we have such deep domain experts across different industry verticals. So for example, Julie Yoo, who leads our HealthTech practice, and I have been spending quite a bit of time exploring the intersection of Healthcare and FinTech. I think there’s a tremendous amount of problems and a lot of opportunity at that intersection. I have also made investments at the intersection of FinTech and gaming, which is kind of an unusual one, with my partner, Jon Lai, who leads our gaming fund in vertical software and FinTech. And I collaborate often with Kristina Shen, who does much of our SaaS investing.
Then I would say I spend a lot of time as I was sort of just describing in, for lack of a better word, wonkier, kind of very financial services specific opportunities, especially those in capital markets, or where an understanding of and a network in and across large financial institutions are quite helpful. I would say my bias for fintech investing, are those that lead with software; lead with what I would call a network. It’s hard to find, but I think many of the most interesting fintech companies of the past decade are those that have true network effects or really have become platform businesses. And so we seek to try to find those opportunities across different industry categories.
- Investments a16z have made at the intersection of FinTech and Gaming
David: Jon and I invested in a business called Carry1st, which is both really a gaming and payments business based in South Africa. And the analogous business that maybe some folks in the audience may know is there’s a pretty large technology company in Southeast Asia called Sea
Carry1st is sort of following a similar playbook to Sea. So Sea started out as a games publisher and they famously licensed the game League of Legends in Southeast Asia, which is one of the most popular games in the world. They ended up creating their own game called Free Fire, which I think became one of the most profitable games on the planet. They used that user base and those cash flows to sort of channel into building a payments business called SeaMoney and a large marketplace business called Shopee, which has become a competitor to, for example, Mercado Libre in Brazil. So, Carry1st is executing a similar strategy by initially being a games publisher. They license intellectual property from leading game studios around the world. They’re also in the process of building their own games and commercializing those on the continent in Africa. To do that, they had to build a pretty sophisticated sort of payments orchestration system that integrates across all the disparate payment methods across the 54 countries in Africa; it’s a pretty fragmented payments ecosystem. And then again, they’re channeling this user base into the payments business and building a commerce business over time as well. So again, kind of an unusual business, but has this reinforcing loop between gaming and payments and commerce that is quite interesting. Cordel and Lucy are the two founders. Cordell has an amazing story, he’s from Sierra Leone, moved to the US, ended up going to Stanford and worked for the founder of Carlyle to launch their first private equity fund in Africa and then quit his fancy private equity job to go build this company four or five years ago and has just been an amazing kind of capital allocator and CEO of this business. Really excited for the company, and it was a good example of a collaboration between Jon and I. Jon is a deep expert in the gaming space, was a PM at Riot, had led a lot of the investing activities for Tencent in the US. It was interesting because he had seen a prior round of the company and I don’t think I had joined the firm yet. And I believe he had passed because he’s like, “I don’t really understand this payments thing.” I honestly think if I would have seen it alone, I might not have understood the gaming thing. And yet by locking arms, it made for a really exciting opportunity. I think we’ve been able to deliver hopefully unique value to the business by bringing both of our areas of expertise together.
- How seeing the world from the perspective of an operator, an entrepreneur, and an investor has shaped David’s investing today
David: First, it has given me a lot of empathy for all sides of the table. I started investing in fintech back in 2011. I was a 23-year-old analyst or associate at Spark Capital back then. I’m really grateful for that opportunity because it was basically seven general partners in me. And so, while I may not have had an equal vote, I tried to have an equal voice sitting around the table and we’d see every investment and debate the merits of any deal. I think I learned a lot of the pattern recognition of investing in what makes a good company from that experience and big credit to them and their amazing firm and great pickers. It’s really where I started going down the fintech rabbit hole. One of the companies that I ended up helping source and seed with a partner there named Mo Koyfman was a company called Plaid. I don’t think we understood the kind of impact that Plaid would ultimately have on catalyzing the last decade of fintech company creation. But that company in particular has definitely informed a lot of my investing and what I look for in companies going forward.
I always thought of myself more as an entrepreneur than as an investor. And so I ended up leaving back in 2013 to start a fintech company with my friend Peyton who had been a few years older than me at school and had studied computer science. He had worked at D.E. Shaw for a few years and then ultimately was running engineering at Venmo. They ended up getting acquired by Braintree and then PayPal at the end of 2013. I ended up pulling him out of there to go start a fintech company called Bond Street, which was in the small business lending space. The catalyst for Bond Street was simply that I was running around New York, often bumping into fast growing physical products businesses or services companies that weren’t a right fit for venture capital necessarily, but in many cases were doing millions of dollars a year in revenue, were profitable, were growing, but couldn’t raise bank financing. And then as you dug into the problem space of small business lending, it really hadn’t changed for these banks for 50 years. And yet in that moment in 2013, a lot of the data that we thought we would need to understand the financial health of these small businesses was just becoming available online via API. So Intuit had just launched the QuickBooks API. We knew we could write integrations into the credit bureaus. The IRS had just started accepting e-signature so we could get what was called a 4506-T tax transcript programmatically from the government. And then as I mentioned, we had just seeded Plaid so you could get access to bank transaction data and be able to validate actual cash transactions against self-reported financials and tax filings. Ultimately, the hope is to be able to deliver a better customer experience to the entrepreneur and make credit decisions much more quickly and efficiently. We never raised a ton of equity for that business. We raised something like $11.5 million in equity, but $900 million in debt capacity — so a tremendous amount of debt capital. We built an amazing team, which is what I’m most proud of by far, many of whom are now actually fintech entrepreneurs themselves, which is just incredible to see.
We ultimately ended up selling that business to Goldman Sachs in 2017, and got merged into what became Marcus, which was the consumer business at Goldman at the time. Peyton, my co-founder had, what I would call a real job; he inherited, I think, 70 engineers or something to manage. I had a more amorphous kind of strategy M&A role and really kind of took it as an opportunity to explore the firm. I didn’t have much fear and I just started firing off emails to all the people. So I think it was Marty Chavez who was the CFO at the time, the heads of investment banking, the heads of asset management, just being like, “hey, I’m here, would love to be helpful, like what do you need?” I ended up starting kind of sourcing deals for different pockets of capital around the firm. We put a bunch of money into Carta, out of the balance sheet, strategic pool of capital. We helped Seema, who’s now on our team, lead the Series B in a fintech company in Argentina called Ualá. And ultimately, I spent the last few years there in kind of a firm-wide strategy seat, working closely with a woman named Stephanie Cohen, who was the Chief Strategy Officer at the time, and she was reporting to the CEO, David Solomon.
It was just a really unique kind of bird’s eye view into the inner sanctum of Goldman Sachs. We produced every board deck. We knew what was happening across every division. It was an interesting opportunity to understand (a) what leadership looks like in a big company — how do you actually get shit done?; and also (b) what are they uniquely good at and what are the things that they’re not so good at? Where are there opportunities for fintech companies to compete or opportunities to solve real problems that have yet to be solved inside of a large institution like Goldman Sachs, which on a relative basis is very progressive and has a lot of resources, but there’s a lot of other large financial institutions around the world who have far fewer resources and lack that talent base, where I think software and technology and fintech can play a very significant role.
- Whether David’s starting to see more large financial institutions bring in FinTech
David: 100%. And this was something I’ve certainly observed inside of Goldman, where the culture of these institutions were changing. Even in just those three years, there used to be a very strong culture, especially at Goldman Sachs, where everything kind of had to be built in-house. Just to poke at it a little bit, they still use their own email client that they’ve developed in-house. They don’t use Outlook or Gmail, which is kind of amazing. So I think they’ve sort of learned the lessons like, “hey, we probably don’t need to build our own word processing and email clients.” However, there’s a lot of other areas where they recognize that they can leverage third party technology to drive efficiencies, to deliver better customer experiences, and to simplify the organization for their clients.
But I think the challenge is often connecting the dots between FinTech and these large financial institutions. I felt this certainly as a founder, and then I saw this certainly inside of Goldman Sachs. I think for too long, FinTech and traditional finance were these parallel universes that didn’t talk to each other enough. And I honestly think it’s such a missed opportunity on both sides because, as I mentioned earlier, we’re increasingly investing in companies that aren’t necessarily trying to compete with all the financial institutions for Balance Sheet or cost of capital. They’re trying to solve real technology and workflow problems and sell into these institutions. And then conversely, these institutions have amazing scale, significant reach and credibility with their clients and can be great partners if they find the right people. And so one of the big areas of focus here at Andreessen is really trying to be a bridge between those two universes. And in many ways, being in New York City, I try to physically be the bridge between Silicon Valley and New York or Wall Street in particular. So we spent a lot of time building kind of deep connectivity and what I would call authentic non-transactional relationships with all the senior decision makers at basically every major financial institution in America. And so on a regular basis now we’re hosting dinners with the CEOs of these large institutions. They’ll bring their executive leadership team, often the division heads across these different firms, and we’ll curate a group of a dozen to two dozen portfolio and non-portfolio companies that align with their strategic priorities and just have an informal dinner where, again, a seed stage founder can be seated next to the division head and conversely the leaders at these institutions can understand what’s happening on the frontier. We’re just trying to be sort of this clearinghouse in some ways between those relationships and helpful to both sides. It has been a tremendous success, and we’ve had very high NPS, let’s say, from both sides of the coin.
- David’s learnings from Bond Street about the importance of “leading with software”
David: Many lessons learned from building that business. We were offering term loans, so we were trying to help small businesses with growth financing. So, Joe Coffee in New York wanted to open a new location — we were providing several hundred thousand dollars of financing to help them open up a new storefront and our, our loans were called at one to three years in duration, $150,000 on average and in the low teens interest rates. The challenge with that product was it was a very infrequent transaction. How often does the entrepreneur need to open a new location or seek out growth financing? Maybe once, maybe twice a year if you’re really growing quickly. And so the opportunity to identify the entrepreneur at that transactional point of the intent, the window essentially to sell our product, was very narrow. You had to find Jonathan Rubinstein, the owner of Joe Coffee in New York, in the week before, the month before that he was ready to sign a lease for a new space. And ultimately, the cost of acquiring that customer in that very narrow window of time was high. So what I always wished I had was sort of a unique distribution or avenues to essentially find that entrepreneur at that transactional point of intent and understand ideally the approvability of that customer and the risk. And so what do I mean by that? Ideally, you had some sort of piece of software that small business owners were using to run the financials of their business. We ultimately, I think too late, built a software product called Beacon, that you can think of sort of as like a Mint.com for small business owners. It was essentially a PFM that you could sync all of your business accounts into, and we would give you a good understanding of how your business was performing, and you could use our tools to sort of set budgets and manage your cash flow. Now, strategically, the opportunity for that was how do we widen the top of the funnel? How do we sort of build a user base and then nurture that user base into becoming a transactional customer over time? And how do I have visibility into their financials to really be able to push a loan instead of waiting for them to apply and sort of pull a loan from us. And I think it would have, had we launched it earlier, or had we had a different go-to-market,leading with software, I think would have allowed us ideally to acquire that customer much more efficiently and be able to push financial products to the highest quality customers who maybe were the lowest risk or where we could identify the risk much more efficiently than trying to acquire a customer kind of in the ether, which is what we were doing.
There’s a lot of opportunities and analogous businesses that we’ve already invested in that are aligned with this thesis. One in my portfolio is a company called Adaptive here in New York City, which is building, essentially billing software for general contractors in the home building space. You can think of them as almost like a mini pro-core. They basically help general contractors better manage invoices and payments with their network of subcontractors. So today it’s a SaaS business — they built essentially an accounting, invoicing and reconciliation product for GCs, and they pay them on a monthly basis with a SaaS fee for doing so. However, they’re constantly paying these subcontractors and the subcontractors are waiting to be paid, so there’s an opportunity to accelerate payments or factor those receivables or extend credit to the subcontractors. But importantly, you’re seeing the cash flows in the network. You’re not just going to the subcontractor in a vacuum and extending credit. You now know the relationship that they have with the general contractor. That just has a dramatic impact on the quality of a lending business and the quality of the risk that you might be willing to extend.
Juniper is a similar business in the healthcare space, but between healthcare providers and insurance companies. They have built software to essentially submit insurance claims programmatically to the insurance providers. They get paid 3–5% for doing what’s called revenue cycle management for these highly recurring health care providers. But again, importantly, they understand the statistical probability of a timing of the repayments and reimbursements from the insurance company. So if they chose, they could extend working capital back to the providers and essentially factor this health care receivable. So again, it’s about ideally leading with software and understanding this network versus just advancing alone in the ether to a customer without sort of any context of their financial health.
- How David’s lessons from Bond Street and his time at Goldman Sachs have influenced what he looks for in an investment and a founding team
David: From the Bond Street experience, your company is really only as valuable or successful as the quality of your team. My colleague Alex’s sort of pithy line for what he looks for in entrepreneurs is, “can they materialize labor and capital?” That’s ultimately kind of the job of the founder, and it’s definitely a quality we look for. Can they recruit incredibly talented people to join them? And it’s often indicative in the founding team. Do they have founder-market fit? Have they gone through what we call the “idea maze”? How deeply have they thought about this problem space? Do they have respect for every kind of past attempt? Because likely you’re not the first person to try this problem. Do you understand why each past attempt has failed and what you’re going to do differently? So that’s certainly something that is, from my own lived experience, something we look for in the founders we back.
And then, again, I mentioned this earlier, but it just was shocking to me how manual so much of the back office of these large financial institutions still are. There are thousands and thousands of folks sitting in Salt Lake City and Dallas and in places around the world, manually reconciling trades, helping onboard vendors, dealing with compliance issues, managing balance sheet or risk. And I think there’s a tremendous amount of opportunity for software and certainly for AI to have a big impact across those different kind of operational workflows. And again, maybe less visible to many entrepreneurs because it’s sort of within the belly of the beast, but I think tremendous opportunity to build tools that can help drive massive efficiencies and cost savings for these institutions and ultimately build very significant enterprise software companies in doing so.
- David’s rationale for leaving his VC role at Spark Capital to found a startup
David: I think I had always thought of myself as an entrepreneur. I’d started companies as a kid. It was always very easy for me. It has always been easy for me to come up with business ideas. I think it’s always been much harder to figure out which ones to pursue. My time at Spark was amazing, and again, I’m incredibly grateful for that experience. But I would often meet amazing entrepreneurs like Zach and Will from Plaid. And I’m just like, “Holy shit, I just want to go build this thing with you. You guys are amazing, I just want to jump in”. And I think once I found something that I was particularly passionate about myself, it never felt like risk. It was just very obvious to me that I needed to go leave and do that and actually all the credit to my wife, who was my girlfriend at the time, for really kind of seeing this in me and recognizing that while there was a path to stay as an investor, I think she understood that I probably wouldn’t be fulfilled or happy unless I actually tried.
The reality is, it is very challenging to build a company and it’s one of the most painful experiences that I’ve ever gone through. And yet it’s also by far and away the most rewarding period in my career. I think you learn a tremendous amount about yourself — what you’re really good at, what you’re bad at, your leadership, your capabilities — and I just really loved building a team, a brand, a culture, a product. At some point the company itself became the product, and that was also just a really interesting experience. And again, I try to kind of impart that wisdom or at least share all the mistakes that I made to the founders that I now work with today in hopes that they can avoid a lot of the same mistakes that I had.
- The “mother-in-law test” David uses when thinking about how confident he is in a startup idea
David: I was pretty confident [in the idea]. I think, in retrospect, it was a challenging business, so you learn a lot being in it versus the theory. But I think the question I was sort of asking often was, “Why are Peyton and I uniquely qualified to go build this business? Why are we the right founders to go do this?” I think both my experience in venture and just meeting with lots of entrepreneurs and seeing the kind of problem up close and personal was real. And then Peyton’s experience having been a super talented engineer and leading a real FinTech organization and working with a lot of these APIs that were emerging. Peyton was running engineering at Venmo. Venmo became one of Plaid’s first customers after we introduced them to them and they ripped out Yodlee and inserted Plaid. And so anyway, we felt like we were uniquely positioned in 2013 to understand the changing landscape of FinTech and be able to apply these new technologies to this problem space of small businesses. I was very passionate about the opportunity to build a brand in Bond Street. And we hoped to build the brand through the lens of our customers and sort of tell their stories. In many ways, we sort of took the lessons from venture capital and tried to apply it to this weird world of small business lending to really build an aspirational brand that people would want to be associated with. People want to raise venture capital from places like Andreessen, not just for the dollars, but to hopefully be part of the extended organization and family. I think that’s not the relationship that most small business owners have with their banks. There was an opportunity both to provide more fair rates and a much better customer experience, but also ideally build a brand that people cared about and would tell their friends about.
One other litmus test that I use, and I often tell people for how to determine “are you ready to go leave and start this particular company with this particular idea”, was I sort of had this “mother-in-law test”. Literally this happened where, again, it was always easy for me to come up with business ideas, harder to figure out which ones to pursue. Would I be willing to pitch my mother-in-law to invest in the company? Am I that committed? Not your parents. My parents weren’t really in a position really to put a ton of capital in the business, and they love you anyway. An investor, it’s their job professionally to take risk and invest in your business. But who is somebody that would otherwise be a very awkward conversation to ask for money? It could be a professor, maybe at Wharton, could be your mother-in-law. But if you’re willing to pitch your mother-in-law on the idea, you’re probably going to be willing to pitch everybody else. And that’s what you’re going to spend 95% of your time as a founder doing — selling your vision to investors, to your co-founders, to prospective customers, to employees, to the press. And so if you can sell your mother-in-law, you can probably sell anybody else. If that’s still uncomfortable and you’re not willing to pound the table in that conversation, then you’re probably not there yet.
- What David liked and disliked about his roles in VC compared to his role as founder and CEO at Bond Street
David: They’re both amazing, and again, grateful to have had both experiences. The reality is being a founder is just all-consuming. You’re on 24/7, especially being the CEO. It’s all on you in a lot of ways. You are the collection of your team, but there are some things that only the CEO can do. The CEO needs to be the one to raise capital, to sell the business, to in large part hire and fire the leadership team, to manage the board and their expectations. So there’s a lot of pressure in being the founder. At the same time, again, it was for me one of the most creative processes of my life. And I remember feeling like this thing was just this tiny little kernel of an idea the year before. And then you look around the room and there’s like a dozen people sitting around the table who are investing their careers in your idea. It’s just a tremendous responsibility, and I just felt tremendous gratitude by looking around the company often and seeing all these folks who believed in me and in this idea and were willing to build a company together. So I think that process of building a team, building a culture, building a product, it’s just a very creative one and it taps a very different part of my brain in large part than the investing side. Conversely, investing is such an interesting opportunity to meet so many passionate entrepreneurs across lots of different industry categories, and it’s an amazing way to learn because you’re learning from people who are far deeper in all these different areas than you are. They’re so passionate about their ideas. They’re willing to quit their jobs and go 100% on this thing. And I find that incredibly invigorating.
I think for me, the reality though is I actually like being somewhere in the middle. I feel best somewhere between being an investor and an entrepreneur. It’s one of the reasons why I ultimately decided to join a16z, which was this notion of wanting to build a firm more than run a fund. It’s how I express that feeling of wanting to be between being an investor and an entrepreneur. My definition of a fund, the objective function of a fund is basically, “how do I generate the most carry with the fewest people in the shortest amount of time possible?” A firm is “how do I deliver exceptional returns”, which is sort of a prerequisite for building a successful fund or building a successful firm. The second variable is a little bit the harder challenge, or at least maybe more creative challenge, which is how do I build enduring enterprise value or a source of compounding competitive advantage as a firm, basically like a moat in the way that an entrepreneur would think of building a moat. A lot of fund managers, in my experience, don’t spend any time thinking about the latter. I think firms are often those run by entrepreneurs first. If you ask Marc and Ben, “are you an entrepreneur or an investor?”, 100% they would say, we are entrepreneurs who happen to be running an investment firm. And I think there’s sort of a relentlessness and entrepreneurial spirit and drive in the way that this firm operates. We’re not unique in this, but I think that they were sort of the archetype in my mind for doing this and many of the general partners were successful entrepreneurs. And so I’ve been really enjoying sort of both working with amazing founders and kind of investing, which feels very familiar, but also channeling some of that kind of builder energy into building the firm. And again, I think that starts first and foremost with Marc and Ben being entrepreneurs. And it’s really part of the culture of the organization, which is something I really, really like.
- What’s next for the lending sector
David: I think there’s a tremendous amount of opportunity for lending to be embedded within an existing software product or the workflows we were talking about. And I think what you saw in small business lending was kind of that play out, candidly, largely in the large payment companies. You had companies like Square or Intuit or PayPal begin using their distribution and the insights that they had on their customers financials to extend credit programmatically and be able to push a loan to the Square small business owners as opposed to waiting for the small business owner to apply. And I think that uniquely positions them. I think we’ll see that play out in lots of different industry categories. There’s lots of different roles in the process of lending, both for the lender to help, for example, project out cash flows and net income much more systematically than human underwriter might do. I think at the same time, that product that we described, Beacon, was really that. It was sort of a Mint.com or PFM for the small business center. And the hope was, how do we abstract away the complexity for the entrepreneur in managing the financial part of their business and their lives. Because most small business owners, the reality is they start their company because they’re passionate about their product or their service or their craft, not to be the CFO. And so we tried solving their problems on the capital side, but if we could help them better understand their accounts payable, their accounts receivable, their working capital issues … I think AI is a tremendous opportunity to help entrepreneurs anticipate those challenges much more proactively and programmatically and really give them kind of the toolkits or put a CFO in their pocket in some ways, which I think could have tremendous, transformative, impacts on small businesses and hopefully our economy. So those are just a few examples in the small business context, but I think that extends probably across lots of different asset classes within lending.
The content here is for informational purposes only, and should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. For more details, please see a16z.com/disclosures
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About David Haber
David is a General Partner at Andreessen Horowitz where he focuses on technology investments in financial services. David was previously a senior executive in Firmwide Strategy at Goldman Sachs where he helped lead partnerships, new ventures and M&A. Before joining the firm, David was the Founder and CEO of Bond Street, which aimed to transform small business lending through technology, data, and design. Bond Street was acquired by Goldman Sachs in 2017.
About the Author
Kailee Costello is an MBA Candidate at The Wharton School, where she leads the Wharton FinTech Podcast team. She’s most passionate about how FinTech is breaking down barriers to make financial products and services more accessible — particularly in the personal finance space. Don’t hesitate to reach out with questions, comments, feedback, and opportunities at [email protected].
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