I’ve learned via Google that, spiritually speaking, the number 1414 represents the power of positive thinking and the importance of having faith in oneself. But we’re here because in 1414 England’s King Henry V passed the Safe Conducts Act, creating the first official form of accepted identification, a precursor to the modern passport. Hence the name of Boston-based 1414 Ventures, a venture capital firm focused on early-stage digital identity startups.
My first thought was that this is a narrow focus. But the more I dug into it, the more I realized how big it actually is. How verifiable credentials get captured, shared, and stored is where the opportunities lie.
We all know that passwords are inherently insecure. They can be stolen, guessed, or broken by brute-force. Two-factor authentication using SMS seems to be inadvisable and is (in Facebook’s hands) another way to gather data that can be monetized.
What will replace them? Biometric data are one possibility. You can already access your phone with your face. Amazon will soon be rolling out pay-by-palm. But there are legitimate concerns beyond the Minority Report scenario.
Digital identity will play a critical role in KYC, AML, payments, cybersecurity, and in ensuring data privacy. Getting identity right could be key to everything from reducing fraud to faster onboarding to improving service delivery. It might even mean that mutual fund and brokerage companies will never again send their customers out in search of a medallion signature guarantee.
Jackie Shoback co-founded 1414 Ventures in 2020. Its portfolio consists of approximately fourteen companies such as CitizenMe, Beacon Technologies, Verified, and Cygnetise. They’ve announced one exit, which was Singular Key.
Q. Jackie, what are we talking about when we talk about digital identities? Is there a generally accepted definition?
A. Our definition is really all about transactional data for an individual, an entity, or an object that gets captured, shared, and stored to authenticate, verify, or authorize a transaction or interaction. That’s the formal definition.
Really, it’s all about the data and how that data is used to have trust and assurance that the individual or the entity really is who they say they are. It boils down to what are called “verifiable credentials”. That unlocks all these other things in the digital world.
The pandemic accelerated the adoption of all things digital and that caused our market to become much more prevalent, much more mainstream, and really the key to enabling the growth of the digital economy.
Q. What are the advantages and disadvantages of being so specialized?
A. The good news is that being so specialized we have very clear parameters regarding companies and themes that comprise digital identities. When we’re looking at a company or an opportunity, the first thing we do is look at our marketscape, which has 50 subsegments, and we look to see where it fits in. If it doesn’t fit in, it’s an easy decision to pass.
The other thing that’s really great about it is that we are super connected in this space. We have a great network in this $664 billion space that is on its way to over a $1 trillion. There are a number of big drivers of change — regulation, increasing data privacy requirements, concerns over cyber security, risk management, etc. All of that is fueling growth.
Our lens is quite unique. There is no other active fund in the digital identity space. Now, as I say that, are there people who invest in cybersecurity? Sure. Are there funds that invest in risk management? Absolutely. But the lens we bring is identity, so we are very often sought out because of our expertise, because we are so specialized, because our relationships run deep.
The pros really are that people come to us and we get access to incredible deals and investment opportunities because of the unique lens, skill set, and expertise that we bring.
On the flip side, if you’re not totally in the know — you even said at the beginning of the conversation that it feels like a niche. Yes, it’s a niche, but it’s a $664 billion niche. I’m okay with that because it weeds out the people who aren’t serious or don’t understand the opportunity.
Q. Where do you see the biggest opportunities in digital identities right now?
A. There are so many opportunities! One area we really love is data privacy. We were on the data privacy bus a couple of years back. It’s a big opportunity across all industries but financial services especially because they ask for so much information during onboarding and for KYC and AML purposes.
Look at what’s going on with Chat GPT, generative AI, and LLMs. A big area of risk everyone is concerned about is hallucinations and incorrect information. But another big area of risk is to privacy if there aren’t appropriate safeguards in place. I see that there are tools emerging, but no one is dominating just yet and that’s a huge market.
Biometrics is a big market and getting bigger. Why? Because passwords are ultimately going to go away, and folks believe that biometric multi-factor authentication is the wave of the future. Encryption is also big — anything which helps to safeguard those credentials, keeping things private, and staying compliant with regulations.
Another big one is identity wallets. You need a place to store all this information and make it frictionless to transact.
Then I’d say the other one where we see a lot of opportunity is self-sovereign identity — moving away from centralized databases. It all goes back to alternative ways to safeguard information, so PII isn’t exposed, and you are in compliance with the regulations.
Q. What are you looking for when you evaluate these early-stage companies for investment?
A. Like most venture capitalists (I hope!), we are pretty rigorous. We were not trained as traditional VCs. We are all former executives. I was in the C-suite at big companies — CEO, CMO, COO. In those roles I evaluated a lot of companies we considered partnering with or bringing on as a vendor.
The lens I bring when evaluating a potential investment is that I think about how I would get them through the vendor review process, financially, operationally, or just strategically. That means it has to have a compelling value proposition. By that I mean it has to solve a problem that would save money or drive revenue. Ideally, it does both. You want a solution that will not require a lot of technical resources to get up and running because you don’t have a lot of those at any company.
It’s almost like the buyer’s lens. What are the hurdles, what are the boxes that a company needs to check to get onboarded or bought by another company? Then, like any other VC, we have about 10 dimensions we look at, the normal dimensions such as the team, the product, the market, the competition, the business model and financials, the risks and mitigants, the exit strategy, customer traction, and technical assessment.
So we go through all of that and we have a whole evaluation process. But the other thing that’s big for us, since we’re investing at such early stages, are PPM — people, product, market, right? You could argue that people are the most important. There is something to the saying that you’re betting on the jockey, not the horse. Right? It’s true. Although you want a good horse, too. You want to invest in an area that’s poised for growth.
I’m thinking of the founder of one company in our portfolio who is not addressing a sexy market but he’s solving a real problem and he’s a phenomenal operator and phenomenal founder. He has vision, and he’s strategic, but he’s also a strong, down-in-the-details operator. You really look for that, but it doesn’t all need to be in one person. As long as you can see that there’s that range and depth on the team, that’s often what we look for.
Then, and it’s something that’s a pet peeve of mine, the founder really needs to be able to explain the problem they’re solving, why it matters, and why anybody would pay for it. They have to be able to do this in a minute or less. If they can’t articulate that, I don’t want it.
Q. At that stage, the founder is the chief salesperson, so they’ve got to be able to sell the company, whether that’s to you or to early adopters.
A. You’d be surprised how many can’t. We’ve definitely run into companies that have a technology that’s looking for a problem. This is especially true in a space like digital identities because it’s so technical.
Most of our deal flow comes through our networks, so most of our deals come to us pre-vetted, if you will. The last company we invested in, PRIVO, was referred by the founder of the first company we invested in. He’d had an exit and is now involved with them. That’s perfect. You want that.
Q. Are all the companies you invest in B2B or are some B2C?
A. They’re really all B2B but some are B2B2C. For example, one of the companies — Avanzo — a fintech out of Colombia in Latin America, is basically selling lending as a benefit. But it’s more than that. It’s a personal financial management platform. They sell into the HR departments at big companies. In Latin America, most people don’t have access to small personal loans or lines of credit because of the banking system. So, these guys are filling a void in the marketplace. The reason employers like it, is because there’s a lot of lost productivity when people can’t get necessities. It helps the company increase worker productivity and it creates goodwill and loyalty towards the company. Workers gain access to short-term loans and it’s all secured by payroll. It’s a great platform and a good example of a B2B2C.
Q. How are your investment decisions made inside the firm?
A. We have a pretty involved process, so I won’t get into the nitty-gritty, but everyone needs to have met management and the team. As I mentioned, there are about ten dimensions and some we lean into more heavily than others. Then depending on the stage of the company, we might want to talk to customers and find out what they think. If they have other investors (and a lot of times they don’t) we’ll want to talk to them.
At the end of the process, we survey each of the partners and everyone completes the survey and adds their comments, so it’s not a simple up or down. 90% of the time, if we’re doing the survey we’re going to go forward with the investment. But it allows us to manifest concerns, risks, mitigants, and it ensures everyone is on the same page.
Q. When you invest, is it always a priced round or are you using SAFEs?
A. Mostly SAFEs and convertibles. We just had a few up rounds where our SAFEs converted. (Sound of wood being knocked on.) At the stage we’re going in, SAFEs are much easier and much cheaper.
Q. What’s the average size check you want to write?
A. About $250,000.
Q. You just mentioned a portfolio company in Latin America. I know you also have several in Europe. Do you have regional investment preferences, or will geographic allocation be a residual of the attractiveness of the deals you see?
A. There are certain countries we would avoid for obvious reasons. We hatched the fund in 2020 so we did all our fundraising and made our initial investments over Zoom. I’ve only recently started to meet some of our portfolio company founders in person. So we got very comfortable doing diligence over Zoom.
What’s driven geography is, frankly, value. In some of the places we’ve invested outside the U.S., there are robust venture ecosystems, and the terms were fabulous — good pricing, good caps — very investor friendly.
Q. In general, what’s happening with early-stage deal terms and valuations for digital identity startups this year?
A. The big reset in valuations began in the public markets in the beginning of 2022-ish, and then rippled over into the private markets and rippled through the later stages and reached the earlier stages too, now. Most evidence of this is in the data around recent valuations and the supply and demand for money. I know that in our stage — let’s call it pre-seed/seed — it’s $1.50 in demand for funding for every $1.00 that’s available. It’s become an investor’s market.
In the last quarter, down rounds affected around 28% of all fundraising. So valuations have dipped, but it really varies by stage. The super-early stage, where we are, has been affected but not as much. If fact, early in the year, valuations were going up because there was a flight to quality, meaning the really good startups were getting funding.
If you go out on the curve to Series C, D, and beyond, it’s like $3.00 or $4.00 in demand for every dollar available. But where we play, we have definitely seen more favorable terms. You also have some venture funds sitting on the sidelines, I think because they have portfolios that are under water and so they’re in a different predicament than we are. We’re an emerging manager and we only have the 14 investments.
A. We did, a couple of days ago. But I can’t disclose anything.
Q. How many more investments do you expect to make from the current fund? We are looking at new investments and follow on investments opportunistically.
Also, we’re getting ready to launch a second, bigger fund.
Q. What advice are you giving portfolio companies that are running short of cash?
A. Every situation is different. Everybody needs to be tightly managing their cash. Ideally you have 18 to 24 months of runway and you’re using that time to really put what I would call the hard-core metrics on the board: revenue, ARR, CAC. Then really good unit metrics: what’s the margin, what’s the payback, when do you hit cashflow break even?
Two of our companies just reached break even and unsurprisingly, one of those was able to raise an up round. We were just talking about how there’s no money out there. To raise at all is hard, but to raise an up round is really impressive. And we have two companies that just did that.
Q. Is “identity as a service” a thing (verifying entities and individuals and providing this status to others, so others can confirm identity without having to store identity data themselves) and should banks provide it? We’ve been talking about banks managing identity for consumers for decades. Will it ever happen?
A. Interesting question. There are a lot of people who think identity as a service is a thing. Maybe I know too much.
Some people would think that identity verification — just being able to prove that you are who you say you are — is identity as a service. But there’s way more to it than just that. There’s a whole value chain.
I think it’d be hard to service the whole value chain, but we are seeing the rise of more integrated platforms that serve multiple use cases and needs in the digital identity tech stack. I think that’s very intentional. You’re okay having more than one vendor, you just don’t want a million. You’re okay going to a provider in the digital identity tech stack to get authentication, verification, and an orchestration layer that makes it easy to capture the data and secure it, but then also mine it and monetize it so you can use it for other things.
To your question about financial services, I think they are a natural provider of that type of service so they could do it. So many people are vying for it, though. Apple wants to do it, Microsoft wants to do it, Google wants to do it, banks want to do it, healthcare providers want to do it. Then there’s of course the government.
I’m not sure who will ultimately win but I do think that because the financial service providers require so much of that information and so many of us use financial services daily, and the FSIs have to take security so seriously from a regulatory standpoint, they’re definitely in a spot where they could do it.
Q. Would a digital ID issued by the government that was designed not just for a single use (say, managing your CBDC account) but was intended for broader acceptance in terms of your identity, fly in the US, or would conspiracy theorists derail it?
A. It’s unfortunate because in other parts of the world governments are doing this and doing it well.
I feel like the government could be a little bit of the invisible hand here and work with industry to make sure they set things up the right way. The interesting thing is that governments need to be involved because when it comes to payment distributions — even just to get aid to people (as during COVID) — there has to be a better mechanism by which to do that. Banks are the last mile, in a way, because they’re the ones who are getting it out. So if they came up with a better mouse trap that could be plugged into the Federal Reserve system and the Treasury, I could see that getting legs.
Q. How do we ensure that digital identity works across borders and across wildly disparate systems? Is anybody setting standards?
A. There are groups that are working to set standards. The standards I’ve been thinking more about are the FIDO standards. The FIDO Alliance is really the crowd that is working on all the protocols and general principles for eliminating passwords. They convened Google, Apple, Microsoft, and Meta — the big platforms — to agree on standards for eliminating passwords and using passkeys instead.
Q. Does the regulatory environment in the EU make companies doing business there more receptive to new digital identity solutions?
A. Yes. Europe is ahead of us in terms of ESG, digital identities, and privacy. In fact, we’re seeing it play out with generative AI. There are many more rules across Europe. Chat GPT was banned temporarily in Italy and one other European country. And GDPR is quite expansive.
Q. You are headquartered in Boston as am I. What is the Boston fintech ecosystem like in your experience? What are its strengths and weaknesses? What do we need to get to the next level?
A. I’ve been involved with the Boston fintech scene and I’ve been a speaker at Boston Fintech Week. The good news is we do have companies that start here, they hatch the idea here, but they end up moving away. That’s been a trend for like 20 years.
We do have some great VCs here so there is money. We have MIT, Harvard, Northeastern, Babson — we’ve got the schools. We have the financial services companies. We have the talent.
If you think about how a lot of these companies start out, it’s with angels who support them. There are some angel groups here, but I do feel there’s a lot more angel money if you go out West or even to New York. Here, people are more conservative.
The big financial companies and insurance companies are doing more now, but they’re also pretty conservative. It’s not that people are playing defense here and offense on the West Coast. It’s just the risk mindset here. People here are more risk averse.
Q. NSA whistleblower Edward Snowden said, “Don’t catalogue eyeballs. Don’t use biometrics for anti-fraud. In fact, don’t use biometrics for anything.” Is he wrong?
A. Yes. I think using biometrics as a way for you to access accounts, or go through security, is efficient for users and it’s happening already. I feel the risk is worth taking.
Q. Do you expect we’ll see a few winners dominate digital identity infrastructure globally, or will so many viable solutions gain traction that it becomes a question of interoperability?
A. The long game is interoperability. I think there will be a myriad of players across the value chain. And I think there will be consolidation; there always is, especially when there are big economies of scale.
We’ll probably see a few big integrated platforms, but then you start to break those down by vertical. AI is really going to change the game. I could see having interoperable integrated platforms as well as niche players by vertical purely driven by the different regulatory requirements and needs that AI will dictate by segment.
Again, thinking about risk management, data privacy, cybersecurity: it’s going to be a boon for innovators provided that they are really solving a problem that someone is willing to pay for.
Q. How does Beacon Technologies, a developer of audio-visual communication solutions, fit within your area of focus? Unusually, you invested in what is still the subsidiary of a larger company, in this case Mass Luminosity.
A. One of the main items that qualifies them within our matrix is their encryption technology. When I talked about the big drivers of growth within the big digital identity matrix — no surprise — encryption is one of them, and it’s a hot area.
They have a number of patents, and their platform is novel in the features and functionality that they deploy. That’s how we assessed them. The came to us through our network, from someone we’ve known for a long time, and the founder is a very successful previous entrepreneur. We’re part of a very small circle that has put money in.
Q. Does my refrigerator need a digital identity?
A. It depends on what your refrigerator is doing for you. If a part is getting ready to fail and you want to replace it without all your food going bad, then having a sensor that can communicate that would be worth it. It could also be an enabler of better health or reduced energy consumption.
We have a portfolio company, Tautuk, in the digital identity of things and device intelligence space. They are really cool. They’re able, though their unique technology, to identify intrusion and resiliency issues for networks. Their focus is on distributed physical infrastructure and also critical infrastructure — pipelines, and things like that. Resilience and identity for things like that really matter. You can take that thinking and extend it to other things.
Q. How did you get into venture capital?
A. I was in investment banking, then business school, and then Staples. That’s chapter one. Staples was a few hundred million in revenue, $15 billion by the time I left. I was always in the most entrepreneurial area of the company. I worked for Tom Stemberg, which was amazing. I got to launch staples.com in the U.S. and we took it to a billion in revenue in three years. And then got to do it all over again internationally. That was a great experience — thirty years of experience jammed into ten. That’s how I became an operator and learned how to scale a business.
I left Staples when I was recruited to join Fidelity, and that began 15 years in financial services, which was phenomenal. Everything from running the high-net-worth business within the retail division at Fidelity, to working at TIAA and launching a digital bank and heading up marketing for their wealth management and consumer division, and then to Boston Private where I was a division CEO and ran operations, sales, technology, and marketing.
I mention this because I did want to do something entrepreneurial. I always had it in the back of my head, but the timing was never quite right. But in 2020 it was the right timing, the right opportunity, and the right people, so I decided to take the plunge. I didn’t think that I would start a venture fund. I always thought that I would start a company or join a startup and maybe run it and grow it. But a good friend (we were angel investors together) said, “Hey, why don’t we start a fund”? Well, I’ve never run a fund; I didn’t know anything about running a fund. But he said, “Jackie, you’re smart, you’ve scaled all these businesses, I’ve been an entrepreneur and scaled businesses, we’ll figure it out. Do you think the other people doing this are any smarter than we are?” I said, “You’re probably right.”
As I thought more about it, a few things really appealed to me. One was the concept of having a portfolio of companies as opposed to just one, and the opportunity to have an impact across a portfolio of companies, as opposed to just one. The other thing that really got me was that in venture capital only 10% – 12% of the decisionmakers are women. Most of the women who are in VC are not actually making decisions about where the money goes. That really bothered me. One in ten? That’s pretty bad. And of the money invested in entrepreneurs, 2% goes to women CEOs. The irony there is, if you look at women CEOs and their performance, they outperform male CEOs.
I’m making a gross generalization, but because money for women is so much harder to come by and because there’s such a weeding out as a result, they are better than a lot of their male counterparts. It’s because so few get funded. It’s survival of the fittest — they’re going to have to be more fit. That was a big impetus for me.
I thought if not now, then when? And there are terrible numbers when you look at it from a gender lens, so if not me, then who? So I dove in.
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