Earlier this year, Spanish bank BBVA shut down its in-house venture arm, BBVA Ventures, and placed the portfolio, the cash remaining from the original $100 million allocation, and an additional $150 million into a new venture called Propel Venture Partners, in which BBVA is a limited partner.
Jay Reinemann, Tom Whiteaker, and Ryan Gilbert are Propel’s managing partners. Jay and Tom were managers of BBVA Ventures. Ryan is a long-time financial services entrepreneur and investor, well-known in the FinTech community.
Based in San Francisco and London, Propel is FinTech-focused and starts life with a portfolio that includes Earnest, Coinbase, Personal Capital, DocuSign, Prosper, Taulia, and Insikt. The firm’s initial emphasis will be on payments, credit, insurance, wealth management, e-commerce, security, and compliance.
The new arrangement gives Propel a distance from BBVA that the prior entity lacked. This will allow Propel to lead investments, take board seats, and take larger positions, all of which BBVA Ventures was unable to do.
It may also make Propel a more attractive investor. In spite of the growing presence of strategic investors in venture deals, many entrepreneurs prefer an independent institutional investor over a strategic. Their reasons include greater alignment of interests, clarity on objectives and commitment, and fear of bureaucracy. Many startups will also be concerned that when one bank, broker, or insurance carrier is an owner, other banks, brokers, or insurers will be reluctant to become clients. (I wrote about the concerns of entrepreneurs evaluating strategic investors at the end of this post.)
Named by Institutional Investor to the 2015 FinTech Finance 35, Jay previously served as Vice President, Corporate Ventures and Strategic Alliances at Visa, and he has startup experience as well. He graciously agreed to answer my questions.
Q. Jay, will Propel have additional LPs?
A. No other outside LPs for the moment. Probably not for this first iteration. There are technically going to be two funds for Propel. There’s the U.S. fund that is complete and that we are working from today. We are also working on a Europe-based fund that will invest in the rest of the world, but there won’t be an outside LP in that one, either.
Q. What kind of input will BBVA have on investments going forward?
A. They’ll have lots of influence on general strategy and high-level areas of interest, but won’t be part of the decision-making process on individual investments.
It is helpful for Propel, as it is for any other venture fund, to talk to potential customers as part of the due diligence process. So we may ask BBVA as a potential customer for feedback on what a particular company is doing. We’ll be able to gather intelligence regarding potential product/market fit or what a bank might pay for a particular product or service. This will all be done on the up-and-up, which means that the potential portfolio company would have to agree to share certain information with BBVA as part of the diligence process before we would do that.
Q. What kind of interaction can your investees expect to have with BBVA, if any? Will they get preferential access to people (for advice) or data, for example?
A. There’s no contract that says that, but if it makes sense, we will absolutely make the right connections inside the bank, which will be a significant advantage if BBVA is important to that portfolio company.
Q. Which areas of FinTech are particularly interesting to you right now?
A. We remain very interested in lending as a core part of banking that still offers plenty of opportunity for improvement. There are pieces of that business, or segments, that are all still very interesting.
Marketplace lending is getting hit pretty hard right now. Anyone who doesn’t have his or her own source of capital has been affected. But we’re not shutting the door to that. Marketplace lending still offers opportunity. This shakeup in marketplace lending is nothing that we wouldn’t have expected. There is still core value in marketplace lending. The efficiencies they are bringing to the market are missing without them. We just need to solve the funding problem.
The lending companies we are involved with have really strong underwriting practices and tremendous efficiencies in the back office. Their digital and their old-school customer acquisition skills are something banks don’t have. Their customer satisfaction ratings are much better than those of most banks. So we are comfortable that there are still opportunities in lending.
Another area we continue to be bullish about is insurance. We are still exploring all the different opportunities there. We haven’t spent too much time on the capital markets side of things, but we are intending to.
Data analytics is interesting, as it applies to both marketing and underwriting. We are also looking at the compliance side of things, both KYC and RegTech more broadly. This is something that not only the big incumbents need but startups as well.
Generally, anything that is going to help digitize the financial industry is of interest. The industry has a long way to go when it comes to bringing products and services into the digital world. Look at the banks. Everyone offers internet banking and mobile apps but we are still looking at first generation products. In some cases, the number of products that are available in those digital channels is very limited, the amount of acquisition that is done in those channels is limited, and the amount of servicing that can be done from a digital perspective is still very limited. Banking startups are often digital-only, and that’s where banking and financial services generally needs to get to.
I’m not saying that the industry needs to get rid of its physical channels, but they need to get to the point where they are offering the same or better access to products and services for their customers in the digital world.
Q. What is the future of the bank branch?
A. My own personal opinion is that branches are still relevant. People still need that personal touch. Some things are still very complicated to understand online, regardless of how elegant the UI. And some people just don’t want to read through everything online. They want someone to sit down with them, hold their hand. There is comfort, still, in that personal, human connection. It can be hard to trust a device with something as personal as your finances, which is so critical to your wellbeing. You sometimes just need that.
Now, I think the financial services industry needs to do a better job of providing all those services online for those that want them. For some it will be part of a presale or educational effort. Some will get part of the way online and finish in the branch because they need the extra level of comfort or don’t have the patience to complete the transaction online. Sometimes people get frustrated and don’t want to talk to someone on Twitter, or Facebook, or even over the phone. Sometimes those experiences aren’t satisfying from a customer perspective and talking to a human is important.
So in the future, the branch plays less of a role in the easy stuff – new checking accounts, new CDs, credit cards, all the basic stuff should be done online. The complicated stuff – someone has a difficult mortgage, or a unique insurance need – they might start online but finish in a branch.
Also, banks typically are not enabling their branches with lots of great technology. I think there is generally an upgrade in information systems and in CRM required. A view of the big picture enables customer service agents to provide a better experience and stops sales people from pushing products that may not be relevant.
Q. Do you include IoT in FinTech?
A. To some degree. Not everything, because that’s a really broad area. But when there are sensors connected to the internet that provide data that indicate that someone or something is a higher (or lower) risk, for the insurance industry there are obvious implications.
Q. Do you have a preference now as to the stage of the companies you invest in? The round you participate in? Will Propel be doing seed rounds?
A. We are focused on the A and B rounds because we think that is the right area for the size of our fund and for where we like to get involved. We have made a handful of seed investments. The preference there is late seed where there is a product in market already and some revenue. It’s more of an exception, it just has to do with portfolio allocation. With a $150 million fund, we need to focus our efforts on the 10 to 15 investments where we have made an investment of $10 million, as opposed to seed investments where we have a few hundred thousand committed.
Q. Is $10 million where you expect your average initial investment will be? Or will that be over the life of an investment?
A. Initial versus over-the-life is a good way to think about it. Initial could be anywhere between $2 million and $10 million, hopefully by the end we have $5 million to $15 million or so in the company. It’s mostly about an ownership position. The target ownership position will depend on the type of company and how much money has already been invested, how much capital we think they’ll need going forward. At an exit, if we can have a 5% ownership position in a couple-of-billion-dollar company, that’d be great.
Q. How will investment decisions be made at Propel?
A. We act as a partnership. We strive to have 100% agreement. We’re a small firm and we want to have everyone agree. We haven’t come to the point yet where we have a dissenting GP who really doesn’t want to go forward with a deal.
Our LPs aren’t part of the decision-making process. That was important for them as well as for us.
Q. I’m interested in what goes into the creation of a successful innovation ecosystem, whether it was more or less organic, as in Silicon Valley, or a concerted effort, as we’ve seen with FinTech in London. Are there cities or regions you have a preference for right now and are there cities and regions you believe will be or should be hubs of FinTech innovation in the years ahead?
A. True FinTech innovations hubs, if they are going to be sustainable, are going to have to provide financial returns for investors. Money and talent will seek the strongest financial returns. Government or corporate involvement doesn’t change that.
You also need a broad investor ecosystem where you have a strong group of seed, series A, series B, series C investors. You need the ability to exit, so public markets or trade sale opportunities with lots of buyers. You also need a strong talent pool for scaling. Not just engineering but marketing. It’s hard to do when you don’t have lots of talent to choose from.
Right now, Silicon Valley is the biggest and probably the best. There are some other markets – New York, Boston, London – that are a bit smaller. Different types of investments, different types of investors. They all should grow. In London and New York, we see a lot more capital markets opportunities, B2B opportunities. The VCs in those markets have historically come from the i-banking industry and less so from startups themselves. They may have been big-company operators but not startup operators. We do believe that having that startup experience – having that empathy for what it takes to grow a business – having some of those skill sets are needed to help your early stage companies. Later stage it doesn’t matter as much. There, the big company experience or i-banking experience is more valuable, such as in bringing in better governance. Early stage needs a different sort of farmer.
For an ecosystem to succeed, you need to have some good exits. You need people who have done something very hard to take some of the money they earned in those exits and plow it back into the local ecosystem as investors. And also participate and give advice.
Q. Do you anticipate being involved with accelerator programs and incubators?
A. First and foremost, we are helping BBVA with their innovation efforts, which is part of something now called the New Digital Business group run by Teppo Paavola, which is trying, as the name suggests, to build brand new digital businesses. And also Open Talent.
We also see lots of value in the third-party incubators like 500 Startups, Y Combinator, and Techstars. We know the folks who run them, and we’ll try to see if there are opportunities for Propel as their companies move through the programs and into demo days.
BBVA is also a direct investor in 500 Startups’ first fund, so we also have additional perspective because of that LP relationship.
Q. What do you expect the fundraising environment will be like for FinTech startups seeking their first outside capital in 2016? For companies that are raising a B or C round? How have condition changed from 2015?
A. 2015 was definitely a good year. It started to slow in Q4 as the public markets raised some issues regarding valuations.
Q1 was up and down, but still pretty strong in terms of numbers and amounts invested in the FinTech sector. There are definitely some fundamental issues, especially the recognition that valuations should be declining, and not just in FinTech. You’ve had some companies run into problems because they’ve run out of money and they need to go back out while current market conditions don’t support their previous post-money valuations. That means you see some companies shrinking, and you see some VCs saying they’re not going to continue funding some companies. When you have more issues and you spend time worrying about more of the companies in your portfolio, it slows everything down. You become more cautious and you can’t then make as many new investments.
That said, there is still a lot of money out there. There’s been record amounts of fundraising on the venture side and that money eventually needs to go to work. The best teams and ideas are still getting funded. The easiest checks to write are the early stage checks because they are small. As you get to the A and particularly the B rounds, it gets a bit harder. When someone has gotten ahead of their skis in terms of valuation versus their progress in the market, that’s where some of the problems are.
Q. Several full-stack de novo banks have started up in the UK, but we haven’t seen any in the U.S. Obviously, these are very capital-intensive undertakings with lots of regulatory risk. But, is there an opportunity here?
A. You see some people who are starting to at least think about it, but not really. From a Propel perspective, it’s probably not something we would look at. The regulatory capital required to build that kind of business is tremendous. It’s probably too capital intensive for a venture fund to be building a bank. I think our return cycle is likely a bit short of what it would take to build a very large bank.
The best examples of that are really in the UK. I think they’ve made it easier from a regulatory standpoint to get up and running, but I wouldn’t call the ones I’m familiar with “full stack.” In some cases, they’re not even owning their own technology – the technology has been outsourced. What they did do is get their own regulatory capital and bank charter or license. They own the marketing but a big chunk of the core banking is outsourced to someone else.
Q. My concern is that, when you do this, you lose control of the customer experience.
A. It’s harder, because you have to work off someone else’s systems, and that can create all sorts of issues.
From my experience, working in the U.S. with startups that have been trying to provide more banking-like services, very, very few have gotten serious about buying a bank charter or getting a new one. It’s a big turnoff.
There are more banks that are participating as partners, the introduction of APIs by some financial institutions is enabling that. BBVA is a great example but there are also others, including a couple startups that are unlocking data that traditionally was hard to access. Yodlee was one of the first, but there are other great companies like Plaid, or or Finicity, or even Intuit. There are lots of others that are using connections to banks for authentication and better payments. You don’t necessarily need that bank charter if you can find a good bank partner.
Q. What is your outlook for wealth management disruption?
A. An absolutely huge industry. Traditional financial advisors are at a disadvantage because they aren’t able to see the big picture. In the U.S., we have many different kinds of accounts – brokerage accounts, retirement savings accounts, banks accounts, insurance products with cash value – and it’s really hard to get the full picture without using technology. Most of the traditional brokerage firms don’t have very good tools for doing this.
Plus, their incentives don’t align with the needs of their customers. They are supposed to align – and our government is trying to improve this – but they don’t have the best interests of their clients 100% aligned with their own interests. So that’s broken.
That’s the exact reason we truly love what Personal Capital is doing. They’ve chosen the cheapest products for customers that can still provide the best returns and they are using technology to provide both the customer and the financial advisor a big picture view of the clients’ financial holdings. I don’t know why more financial advisors aren’t using account aggregation tools in their own practices and moving solely to AUM fees, and away from product fees on the back end.
So there is lots of opportunity here, still. Personal Capital focuses on a more affluent segment. The mass segment is vastly untouched.
Q. Often, the hardest part for a startup isn’t building the underlying technology; it’s finding the cost-effective customer acquisition strategy that scales. This can require significant capital and a lot of marketing experimentation. I suspect this challenge may be behind the robo-advisor exits we saw last year, but I think it is true more broadly in any B2C FinTech effort. Is my hypothesis reasonable?
A. I wouldn’t discount the importance of the technology. When you dig into the details of providing these services, it does really require great technologists. Often times these products and services aren’t stand-alone but require integration with other parties. Creating a fully digital process is hard.
So I don’t want to dismiss technology at all. But I agree that acquisition is really, really important as well.
Q. How does that affect the traditional players?
A. Because of the legacy of the traditional industry, where they haven’t had to rely on digital acquisition capabilities, a majority of the business is still acquired via traditional channels.
It’s hard for banks to compete for digital talent. They’ll try to find the cream of the digital marketing crop, but it’s hard for these people to go to work for a bank when their alternative is to work for a firm like a Twitter or a Facebook. Though even Facebook is finding it’s harder to attract the best talent these days; they want to go to Snapchat because its cooler.
And so you start to wonder how the incumbent industry is going to attract the digital talent it needs. They don’t have the sex appeal, or stock options, or cool brands and culture where you can wear shorts and bring your dog to work. And that’s what’s required for this generation of workers.
The industry needs to offer the kind of workplace that will bring that talent in.
Q. Don’t you also have to pay people what they can get at these other companies?
A. True. And they are worth it because of the leverage you can get from the digital channels at the end of the day.
Q. What about InsurTech?
A. We have one investment in that area, a really early-stage company in the home insurance space that’s called Hippo.
Q. Has that investment been disclosed?
A. I guess I’ve just disclosed it!
Q. You are an investor in Coinbase, a platform for buying, selling and using bitcoin as a currency or payment mechanism. What are your thoughts on the potential for digital currencies versus the opportunities for using distributed ledgers to streamline settlement of financial transactions?
A. It’s hard to separate them, and it’s been a challenging time for both. The distributed ledgers require an incentive system to work, and the currencies are currently the incentive. If we’re not going to use the digital currencies to incent miners, you’re going back to an older business model.
Companies like Coinbase are absolutely trying to bring digital currencies into the mainstream. But digital currencies battle the headwinds of regulatory confusion and the Silk Road heritage, even though customers are KYCed, transactions are highly scrutinized, and anti-fraud teams are highly skilled.
It’s hard for companies like Coinbase to compete in the financial ecosystem because it’s hard for them to even get a bank account. There’s a very short list of banks that will allow them to have an operating account, let alone a trading account. Silicon Valley Bank is the one doing the majority of the work right now in the industry.
A lot of banks are now trying to learn about digital currencies and the blockchain. There have been a lot of innovation exercises but not a critical mass of the technology being put into production. No one is saying, “Hey – we’re switching over our platform to the blockchain.”
Because of that, venture investors are understandably pulling back on investing in the technology in the absence of a clear use case and customer adoption. Better companies are still being financed but financing is being picked up more by strategic investors and less by financial investors.
Q. We know that accessing the data they need during product development is a challenge for FinTech startups. It can be costly and time consuming to procure, and if you need consumer banking data or insurance underwriting data, it might not be available at all. Do you have any thoughts on how to help startups clear this innovation hurdle?
A. I don’t think it’s as much of a problem as it was ten years ago. It’s only improving. We touched on this a bit earlier. Companies like Yodlee, and Finicity, and Intuit, and Plaid, and many others are unlocking that data. And others are opening up APIs. BBVA has an API in Spain that is sharing card transaction data that has of course been anonymized.
Q. You led BBVA’s acquisition of Simple. Are you still involved?
A. At the time of the Simple investment, I was part of the corporate development and strategy team for BBVA, looking for M&A opportunities that would advance the digital agenda of the bank. Simple was one of those things where a marriage made more sense than an investment in the company.
I’m currently a board observer, separate from my responsibilities at Propel. Propel has no vested interest in Simple. It’s not an investment of ours. It’s just a matter of trying to do what’s best for Simple and for BBVA.
Q. How would you like entrepreneurs to contact you?
A. Our email addresses are on our website. As any investor will likely tell you, sending a cold email is probably the hardest way to get a timely response. I have problems with email – I get too much – so if someone whose email address I’ll recognize can introduce you I will most likely respond earlier.
Q. Is there anything else you’d like people to know?
A. We’re a startup ourselves. We are a brand new venture fund and we are trying hard to do the right things for our portfolio companies. We come with a different perspective than a generalist investor. All of this comes with years and years of financial services experience that we think can help those companies that are focused in this area build better businesses. We think that will make a difference. We come with patience, wisdom, and perspective that we think can be valuable.
# # #
Great interview with @JayReinemann covering a range of interesting #fintech topics https://t.co/g9iGs5SszG Thanks @redphase !
Pingback: 6 Insurance Tech Startup Slide Decks