Few bits from my chats with investors so far

Sar : What do you wish was mainstream today? What needs to happen to get there anytime soon?

Monica : First, we’ve been stuck on the same payment rails (ACH, debit, credit) for too long, and that has benefitted a few outsized winners but has stymied innovation. We saw those downsides early in Covid with many stimulus application and delivery hiccups, as I wrote about in Fintech for All. Real time payments (RTP) have to become real soon — for now we’re just leveraging an ultra-low rate environment to approximate RTP, but that won’t (hopefully) last forever. Instead, we need an actual low cost, standardized, universal option — and ideally it would be programmable. That is to say, one day you could get paid in micro-increments as you work, and pay others as you consume their work online (media, music, commerce, etc). Crypto is certainly one viable path here, but we still need to find a scalable solution and make the space more approachable from a product & design perspective.

I’m also hoping that the next wave of fintech addresses the complexity of the world we live in today. No one has quite cracked it within the fintech community, even though finances are a deeply defining part of our lives. We need products that allow for information sharing, community and de-stigmatization of everyday things like student debt. We also need products that make it easier to invest responsibly, including better gateways to fractional ownership. That’s recently revolutionized trading 🎉 but I’d love to see more options around alternative assets and homes. Here, the biggest issues are around education / approachability and liquidity — the ability to build a real secondary market around these assets. That will require regulatory changes, distribution hacks like leveraging existing pools of money (ETFs, retirement, etc) and new data services to create a mark-to-market for these assets.

Finally, as I’ve mentioned, I believe remote work is firmly here to stay (in some hybrid sense, perhaps). I’d like to see remote work live up to the promise around flexibility and access, and really make it as easy to build a company in Mumbai as it is in Montreal as it is in the Bay Area. Same for getting hired. I’m hopeful that a mix of software and process will enable work to be modularized — now is the time as we form new processes around performance expectations, async communication and handoffs. That would enable people to get trained on the job and caregivers to work part time. And everyone needs a place to bond still, so – who will build Fortnite for work?

Bucky : There are three “big ideas” in computing and data infrastructure that are most exciting to me at the moment. First, I believe that as “companies” increasingly become “software companies,” the rhythm of their operations will be closely tethered to their software delivery pipeline. What this means is that more and more of the business must be re-written as code that can be versioned, tested, automated, and collaborated on in a similar vein. This has already happened with how infrastructure is provisioned (Hashicorp Terraform), as well as how business analytics are produced (DBT). Now that almost every business process is being orchestrated by software, I believe this concept will become increasingly pervasive, and lead to the rise of many valuable new companies. For example, you can imagine workflows, like how a new customer lead is captured and processed, or how compliance is enforced following a similar pattern. I’m excited about this because it requires large existing product categories to be re-architected to enable this new paradigm, presenting all kinds of interesting new opportunities for startups.

The second big idea I am excited about is the shift toward capturing, processing and analyzing business data in real-time. Consumer products like Tiktok, Instagram, and Facebook have conditioned us to expect access to the benefits of the data we create and share with them, immediately. This is far from the case in the workplace today. The internal dashboards we rely on to make decisions are typically refreshed on an hourly basis at best. The systems of record we use such as Salesforce or SAP still produce analytics on a batch basis. Why is this? Because building real-time data pipelines remains prohibitively difficult and expensive, and the volume of data we want to process this way continues to grow in size. While there is no shortage of exciting work underway to change this, I believe the rate at which we evolve toward real-time remains underestimated. The key to unlocking this will be re-thinking conventional approaches to data processing to incorporate the reality that modern business data is more dynamic than ever before. This requires the ability to understand how the answer to a specific question changes as new data is generated on a continuous basis, rather than being able to ask many different questions of the same, static data set. If I had to guess, I see this capability being delivered by startups rather than existing players, who are wed to technical approaches that did not take this “need” into account.

Finally, the third idea is this future in which developers can program “the cloud” as if it is one single computer. The simplicity this unlocks is hard to overstate, particularly when you think about how much complexity a developer must wrangle with today when working with the various cloud platforms. First, we need to make it easier for developers to access computing infrastructure and applications securely, anywhere. Then, we will need to standardize the way these applications are deployed and ultimately run. This is unfolding quickly, and coincides with the rise of Kubernetes as the predominant way that applications are being managed in the cloud-native era. The end result will be an industry landscape that cedes less power to the three major cloud providers, leaving the players whose software overlays and abstracts away this complexity in the most strategic position. This future is far more appealing to me as an investor than one where the three cloud providers have full control over how developers work.

Sar : I want to talk about the value of brands in your business. There’s two extreme ends of the spectrum. On one end, there are people who do not have their own standalone reputations but the institutional brand lends them credibility. We see this with people in their early twenties getting hired by top firms. On the other end, the individual brands overshadow the institutional brands for some people. Why do some investors pump up their own brand or act a certain way when it’s the firm’s brand that props them up?

Semil : This is one of my pet peeves and I’m sure it irks founders to no end. Here’s the situation — someone with a marginal track record is at a Top 10 fund, and instead of engaging the founder around his or her business, or instead of sharing ideas on Twitter, this person instead tries to “big man” (or “big woman”) the founder, or tries to act authoritative on social media. It’s a dumb look, and founders (and others investors) notice and talk. I can only explain “why” this happens — so much of venture is about sales, so the people who do this are trying to sell themselves in some way, often ineffectively. These folks will always be there — it’s not just inside venture firms. They’re in banks, they’re at pools of capital, they’re inside big tech companies, too. And the reality of the person inside a venture firm who does this to irk others, he or she is only judged over one potential grand slam investment. There’s a lot of talk online about a firm’s NPS, but the reality is that most firms can’t manage these interactions to perfection, especially in gray areas. So, at the end of the day, I think it’s up to founders to decide what they want to pay attention to — one day it could be a pompous VC, and the next week it could be a pompous BD person inside a key customer, or a pompous staff member. They’re all around, and inside VC firms too. Instead of getting aggravated with them — and they are aggravating! — I think the meta move is to identify them quickly and move on.

The VC marketing and boasting you’re referring to is definitely eye-rolling material. Remember, VCs are narrow-casting to specific audiences when they speak publicly - to founders, to those who feed them deals, to their colleagues, to their enemies, to the press, and their current or future LPs. And, in most cases, it works, so they’re rewarded for it. But yeah, a lot of people are not going to like it.

Sar : A lot of SV insiders lament how there’s “too much capital”. Who gets to decide what the optimal level of capital in the ecosystem is?? Are we in a new normal?

Semil : It’s a free market! Buying shares of promising technology companies is one of the greatest investment areas today. Fred Wilson famously says the only place he knows (maybe outside of crypto) where you can 100x your investment is in early-stage startups or leading the growth round of Zoom. Now with ZIRP and the digital acceleration triggered by the lockdowns, it’s pushed everyone earlier. There’s no point in lamenting how much capital is in the ecosystem though. It’s just wasted energy. Instead, limited partners and fund managers need to think about what game they want to play given the game being played on the field. I know many LPs who do lament this, only to see spectacular returns from the past decade; I know some VCs we both love on Twitter keep banging this drum, but it’s all hot air.

Fundamentals matter. Are investors connected to interesting networks of creators and startup founders? Can they meet and work with their fair share of the best ones in their networks? Can those investors write a big enough check relative to their fund size to get the ownership they need? Can those investors maintain or increase their ownership in their best companies? Can they drive a return for their limited partners? It takes a few years for that to shake out. Folks who are skeptical can hold back their capital and/or adjust their fund size or strategy. Limited partners can stop investing in certain funds. Those funds can be more disciplined in what they invest in. 2021 feels like a mega “Risk On” world, where the only downside is not taking a big swing in something interesting.

Sar : There’s two schools of thought on what being a good firm means. The lens of “good” is often “value add” unless you are already an established name and can sustain the halo effect of your association with well recognizable companies. One school of thought says there’s no need to be structured about the value you bring. The value is the individual and everything they bring. The other school of thought says there’s a need to be structured and more legible for what the value is and that often means decoupling it from an individual investor. There’s a spectrum of perspectives on what that looks like and how it is practiced. Can you tell us a bit about how you view the craft of venture through that lens and what that means for Felicis and how your role has evolved?

Dasha : I describe the Felicis mission as “success with empathy.” There are a lot of ways to make money. There are a lot of shortcuts one could take. We want to continue delivering incredible returns to our LPs while doing so with empathy for the founder journey -- it’s not just the “what” of performance, but also the “how” of our reputation. At the end of the day, it’s not about what multiple we made or how much “value” we added; it’s about whether we felt proud about what the founders we backed had to say about partnering with us.

I think about venture in chapters. Chapter one, capital wasn’t yet as plentiful, so it was a differentiator. Chapter two, services were new and exciting and were a differentiator. Now we’re in chapter three and investors are realizing that there’s something even more foundational than capital and “value add,” and it’s something that we at Felicis prioritize above all else: trust.

So we can talk about the Benchmark to a16z spectrum and debate the merits of each extreme, but we’d miss the more important point: without trust, you’re building on a crumbling foundation. Put differently, not even the most amazing services team can salvage trust if the behavior of a board member breaks it. It’s not about volume of activity; it’s first and foremost about whether a founder feels you have their back. Then we can talk about quality of impact, which can all come from a single investor or from multiple people in a firm. Either way, you do need to effectively package and distribute your message about why founders should let you onto their cap tables.

The investor-founder relationship is special. I strive to amplify and augment that relationship without creating noise or overhead for founders. Some firms over-rotate on services, probably due to thinking some things are table stakes without actually asking founders. This can create perverse second- and third-order consequences. Every person you add to your firm wants to do good work, but it can become a runaway train: all of a sudden you have tons of transactional intros, but when you step back and consider it from a CEO’s perspective, the signal of the impactful stuff has been lost in the noise. And even worse if in parallel, your board member is voting to oust the CEO.

Coming back to my role: Founder Success is analogous to Customer Success, but as we’ve discussed, there’s also some Product in there. It’s not only ensuring that we are exceeding expectations for founders we’ve already backed, but that we are taking their feedback and using it to improve the unique Felicis product. The fun part is that while we can build scalable and repeatable offerings for some portion of founder needs, I also keep a fair amount of slack in my schedule for high importance, high urgency stuff. In a large firm, you might be tempted to throw an “expert” at it. But we are small, and this constraint forces us to understand the unique nuances of each situation and creatively solve it like a novel problem...which I find leads to better and more memorable outcomes.

Sar : You guys have been active early stage fintech investors for a while. Are there any beliefs that you held 3-4 years ago that now seem to have been proven wrong? Conversely, what did you get very right in how the fintech world has played out?

Jake & Sheel : We are sure we’re wrong about something every single day, and it’s hard to compare past vs present at the moment, when everything has changed so quickly. And as we mentioned earlier, we don’t tend to hold those beliefs too firmly.

[Sheel] It might be interesting to talk through some specific misses. I’ve had a bunch of misses from my earliest days in investing as an angel (2012-2014). I was actually more curmudgeonly then, unable to imagine how big ideas could get. I actually credit moving to SF to opening me up to a lot of possibilities. I got to see that “crazy ideas” , even ones that had been tried before could get funded and work here, sometimes first-hand.

3 big misses, 2 of which pitched me at my house as an angel!

Robinhood - “There have been several free trading apps before (Zecco, Freetrade), I don’t see what will make it work this time”

What I missed: mobile, timing, execution. Those previous entrants were competing with TD and Interactive Brokers, Robinhood was bringing a whole new class of investors online. The timing was right and the team did a phenomenal job of building the right product for that audience.

Chime - At 500, we had invested in Simple and while they were able to build a huge waitlist and get people onto the app, not enough people were willing to switch their direct deposit account over, and the only way to make a lot of money is to be the primary account.

What I missed: mobile, timing, execution. Chime has done a great job of building products that make consumers want to switch their direct deposit over… and times were different with a generation of people who wanted more digitally. Simple seemed to attract people like me- digitally native but actually being served just fine by the Chase’s of the world. Chime succeeded in bringing a digital first approach to those who weren’t well-served by existing banks already.

Patreon: “This is super easy to build, it’s just a super basic payments functionality; I could build this myself in minutes on Stripe, who would pay for it?”

What I missed: Just because I could build it (the first version of Patreon) myself doesn’t mean others would. This was really stupid in hindsight.

The one thing we have been very right on is that, despite the number of unicorns in the space, fintech still needed time to mature. There hadn’t been a lot of exit activity, relative to the amount of investment activity, so many investors shied away. But we largely chalked that up to these companies being flies on an elephant’s ass relative to the size of the overall financial services market (which is gigantic at last check).

We assumed that would change in time, and that a wave of consolidation and exit activity would materialize as the sector grew up, and as the incumbents woke up to the threat. I don’t think we were expecting it to hit as hard and fast as it has lately, but we had a feeling that it was inevitable. Now we’re seeing M&A among incumbent companies, incumbents buying startups, IPOs, SPACs like crazy, and even the larger fintech companies gobbling up some newer entrants.

It’s a real investment ecosystem now, which is likely why so many new investors are starting to rush in and feel like they need to put some stakes in the ground

Sar : I have always found it interesting how far ahead countries like India, Brazil and China often feel through the lens of fintech. The computing parallel here is how they also largely skipped an entire paradigm (aka desktops) in how the majority of the population interacts with software. Being behind in terms of banking infrastructure compared to the US enabled the many of the Asian and African countries to build up the financial system with QR codes, mobile payments, faster money movement, and common data standards in a way that would be considered disruption in the US. The pandemic is bringing about some of these changes in the US this year. What are some trends you are paying attention to outside of the US?

Aditi : We should all be intently watching India and South East Asia (specifically Indonesia) right now. The Indian user skipped over desktop to mobile. The smartphone base is expected to reach 820M in the next 2 years. However, a big struggle has been trying to monetize these users because of the low GDP per capita. In the next decade India is expected to see its GDP per capita increase 2.5x. Users are starting to spend a lot more. COVID has driven-up eCommerce sales and online transactions (the boom of the fintech ecosystem in this market) in addition to increased entertainment consumption. The global markets are paying attention to this, as you see with the amount of capital being invested into the Reliance Jio platform.

South East Asia is having its moment right now too, specifically Indonesia. This could be the decade to focus on the region. Cumulatively there are 390M Internet users in the SEA region and 75% of them are in Indonesia. These countries have been dominated by super apps where many different transactions take place, from transferring money to ordering a ride to groceries etc. Now we are starting to see the unbundling of services, as entrepreneurs are creating specific user experiences such as a neobank for Indonesia, a new trading platform, or a better food delivery experience. In addition, entrepreneurs are starting to build out the infrastructure layers necessary to enable these transactions, like local payment processors and localized ID verification software. Finally, I would say it is no longer just about building consumer businesses. Many of the consumer-facing unicorns in SEA have large workforces that need productivity tools, sales tools and customer support software, all of which are being built in the region now. There is a lot to be on the lookout for in these markets and some fantastic entrepreneurs to back

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