The Rise of FinTech: Introducing the Matrix FinTech Index

The full overview of the Matrix FinTech Index is available on TechCrunch here.


Over the course of the last few years, FinTech as a category has really taken off. Five years ago the term ‘FinTech’ was not something most people had heard of other than a few early players in the startup ecosystem.

Today, FinTech is ubiquitous. In fact, the term has become synonymous with innovation in financial services — it’s hard to imagine a world without PaypalVenmoSquare and many others. The Google Trends chart below describes this explosion in FinTech interest best.

Definition: Matrix considers “FinTechs” to be (a) technology-first companies that leverage software to compete with traditional financial services institutions (e.g. banks, credit card networks, insurers, etc.) in the delivery of traditional financial services (e.g. lending, payments, investing, etc.) or (b) software tools that better enable traditional finance functions (e.g. accounting, point-of-sales systems, payments, etc.)


Methodology and Results

With an eye towards tracking the progress of disruption in the financial services space, we’re excited to release the Matrix U.S. FinTech Index today.

This market-cap weighted index tracks the progress of a portfolio of the 10 leading public FinTech companies over the course of the last year (beginning in December of 2016). For comparison, we have also included another portfolio of the 10 largest financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

As seen below, the Matrix FinTech Index shows a clear win for the FinTechs, who have collectively delivered 89% returns in the last 12 months. This is 60 percentage points higher than the 29% returns delivered by the incumbent portfolio and well above the S&P 500 Index.


Additional Data Now Available

Our hope in the coming months is to provide periodic updates to this Index. In addition, we are releasing a data package that anyone can download here that has a range of other helpful information on both the FinTechs and the incumbents. More specifically, the package includes:

  1. Market cap and stock price data over the last year for the companies in the index
  2. Comp sheets that include financial metrics on the public companies
  3. Summary data on private FinTech companies valued at over $1B

Finally, this index is dynamic — we fully anticipate that it will be tweaked and refined in the coming months. Please feel free to send us your thoughts and feedback as we refine the process and methodology.

Both Sides of the Table with Ashley Johnson the CFO/COO of Wealthfront (episode 2)

In this second episode of Focus on the Founder, I sat down with Ashley Johnson the COO/ CFO of Wealthfront. Ashley has a really interesting career as both an investor and operator. The first part of her career was spent largely as an investor at Morgan Stanley and then at General Atlantic, where she sourced investments in ServiceSource and RenRen. Both of these companies are now publicly traded. Ashley then ended up joining ServiceSource, where she held the CFO and CCO roles, before joining Wealthfront as COO/ CFO.

Ashley F Johnson CFO COO Wealthfront

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Wealthfront’s Growth Trajectory

Wealthfront has been on a very solid growth trajectory since its founding nearly a decade ago. The rob-advisor, which was founded by Andy Rachleff and Dan Carroll in 2008, now manages over $7B in AUM and has well over 100,000 accounts. And they are very well funded, having raised a total of $130M with a valuation (from 2014) of $700M.

Wealthfront AUM.JPG

During this conversation, Ashley discusses: the arc of her career, her initial priorities as the new CFO at Wealthfront back in 2015, the recruiting strategies the company employs and much more. The full podcast episode is available on SoundCloud, iTunes & Google Play.

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Key Thoughts from Ashley on the…

Qualities she was looking for in potential investment opportunities

Two of Ashley’s more notable investments were ServiceSource and RenRen. In both cases the companies’ combined three key elements that she (and General Atlantic) really valued in potential investment opportunities: (1) extremely passionate founders, (2) clear product-market fit and (3) a highly defensible business model with high gross margins.

The capital General Atlantic provided then went towards very specific uses that accelerated growth and allowed for great outcomes. In the case of ServiceSource, the capital went to building out a sales team. In the case of RenRen, the capital injection was used to do a number of small acquisitions.

Areas where she was able to add value as an investor

The key value General Atlantic was able to bring to ServiceSource was expertise in understanding how to build out a really strong Sales team. This included bringing Jim Madden, a global leader in inside sales, customer success and growth, onto the board of the company.

At RenRen, the company’s leadership in China was able to benefit from the lessons learned by General Atlantic’s knowledge of the US social media market. General Atlantic was also able to help RenRen navigate regulatory hurdles — namely ensuring licenses were current with the various ministries in China, which provided the company with a big competitive advantage over other early players in the space.

Transition from investor to operator

Ashley compares the transition as going from an individual sport (investing) to a team sport (operating). One of the first lessons she learned, while trying to determine sales comp as ServiceSource (which she joined after General Atlantic’s investment) is that you can’t operate in a vacuum when running a business as you might be able to do to do as an investor. Instead, you need to apply a 360 degree approach around communication across teams. Otherwise the outcome, as she experienced first hand (and elaborates on in the podcast), isn’t great.

Key priorities for her when she first assumed the CFO role at Wealthfront

When Ashley joined Wealthfront in 2015, the company had just blown by $1B in AUM and was growing quickly but lacked the key processes and structures of a more mature company. Her first order of business was to build out a team for the finance organization. The second priority was to turn their venture funding ($100M on the balance sheet at that point) into a strategic asset and put in real structures in place around how to think through the uses of that cash and how to best allocate it across the organization.

Recruiting during periods of rapid growth

At Wealthfront, recruiting is viewed as a strategic function and they have invested heavily in building out a strong internal recruiting team. When evaluating candidates, the #1 most important criteria is excitement and passion for the Wealthfront mission.

The five operating principles they have maintained at Wealthfront, enabling them to maintain a strong culture during this period of hyper-growth, include:

1. Work with a sense of urgency

2. Ensure that decisions, even if tough, are made quickly

3. Debate and disagree initially but commit to a single path in the end

4. When disagreeing, do so respectfully

5. Always assume the best intent

Competing with the incumbents in wealth management

Wealthfront knows that it can always be outspent by the incumbents from a paid-marketing perspective. Moreover, one of the key metrics they look to adhere to is a 2-year payback period, which makes excessive marketing impossible. Instead they focus on leveraging millennial’s disdain for the incumbent brands, a superior product and a better overall customer experience to win against the incumbents.

Cryptocurrency market and Wealthfront’s position from a product perspective

If you’re hoping to add bitcoin to your Wealthfront portfolio, you will be waiting for quite some time. While many of Wealthfront’s customers are invested in crypto currencies, the firm is largely bearish on these assets in the long run. So don’t expect any exposure to crypto currencies from them anytime soon.

The gender gap in saving and investing

Women, especially in the 18–33 demographic, are less likely to save and invest than their male counterparts. In fact, Ashley wrote an article in Fortune a few years back encouraging more women to start taking saving seriously.

Her belief is that the lower savings rate is driven by 3 components: (1) lack of awareness, (2) lower confidence in finance related topics and (3) patronizing messaging in the industry. Wealthfront aims to be more inclusive by making their messaging universally relatable and accessible.

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The conversation we had around Wealthfront and FinTech more broadly was certainly enriched by Ashley’s wealth of experiences on both sides of the table. A big thank you to Ashley for joining us — we look forward to seeing what’s in store from Wealthfront in the coming year. Happy listening!

Announcing our new Podcast Series ‘Focus on the Founder’ with our first guest – Ryan Williams of Cadre

Over the years, we’ve heard from our founders here at Matrix that some of the best learning opportunities they’ve had has come from 1:1 conversations with other entrepreneurs. And while there is no shortage of resources for entrepreneurs (including content we have built at Viewpoints and forEntrepreneurs), there are very few public forums where successful founders and operators speak candidly about their career journeys and discuss what has/ has not worked for them as they’ve scaled their businesses.

That is why we are excited to announce ‘Focus on the Founder’ – a podcast series that will do exactly what it sounds like—bring the focus back on the founder. In the coming months, we will be releasing a series of episodes where we ask successful founders and operators questions about their journey into entrepreneurship, how they’ve gone about making critical decisions (e.g. hiring, fundraising, etc.) and what they would do differently looking back.

The initial focus will be on founders and senior execs in FinTech—though this may evolve over time. We will keep the episodes short, informal and frank. The very first episode is with Ryan Williams the CEO and co-founder of Cadre. You can find the podcast episode on SoundCloud, iTunes & Google Play.

In this episode you will learn about…

  • How Ryan went from selling headbands at age 13 to flipping houses in college to launching Cadre. Or as he puts it “Headbands to Houses to High Rises”
  • When the real “Aha” moment came for Ryan that led him to believe that there was a big opportunity in real estate technology
  • What Ryan believes is the single most important characteristic behind the success of companies like Amazon, Airbnb and Fidelity and how Cadre has embraced that characteristic
  • How Ryan works with his investors and the value they have provided to him beyond the obvious capital injection
  • The crucial metrics and KPIs that Cadre tracks and measures
  • What other areas Ryan is excited about and would explore if he were not building Cadre…hint some of them are pretty controversial in the venture world today

Money 2020: 12 lessons from this year’s conference

Earlier this week I attended Money2020 in Las Vegas. In just over 5 years, Money2020 has become the leading industry conference for everything to do with FinTech. It’s a jam-packed but valuable 4 days of expert panels, startup pitches, networking events and keynotes from industry leaders. I was there for just under 24 hours, which meant the experience was even more of a blur. This post is my attempt to capture twelve of the biggest learnings from the conference.

Lesson 1: Money is still the #1 biggest stressor for most Americans, understandably so. Dan Wernikoff from Intuit was one of the keynote speakers Tuesday morning and some of the data points he surfaced on consumer behaviors around money are sobering:

  1. 44% of Americans cannot come up with $400 for an emergency.
  2. 49% of Mint users spend more than they make.
  3. Intuit customers on average paid $1,700 a year in interest.

Lesson 2: Most financial institutions are not adequately meeting the needs of their customers. Despite the potential opportunity created by the high stress around money, banks and other financial institutions really struggle to provide the experience their customers need. This is in part because most financial institutions are product centric not customer centric. The result has been notoriously low NPS scores and a disenchanted end user. Even more alarmingly, most customers of the leading banking brands distrust their banks:

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Lesson 3: Among an already pretty unhappy customer base, millennials are the most disenfranchised of all. As Philippe Dintrans, Chief Digital Officer at Cognizant put it, most financial institutions are totally missing the mark with millennials. That is in part because millennials exhibit fundamentally different behaviors than earlier generations around things like savings. 63% of millennials are focused on saving towards desired life goals (e.g. getting out of student debt, purchasing a home, etc.) as compared to 45% of gen Xers and baby boomers. 55% of gen Xers and baby boomers are focused on developing savings towards retirement, where only 37% of millennials are planning for retirement

Lesson 4: FinTech startups have capitalized on the failures of incumbents by addressing specific pain-points with carefully designed products. The examples are smattered across financial services but a few examples that stand-out:

  • Wealth management was traditionally a confusing and fee-heavy landscape to navigate. Betterment created a beautiful and educational product that reduced fees and enabled a better user experience.
  • Peer-to-peer money transfers traditionally required a manual process that took days and trips to the bank. Venmo made it simple, quick and fun to do P2P payments.
  • SMBs used to have to use clunky check-out payment methods that locked them into a set location and required back-end processing to reconcile the books. Stripe enabled any merchant anywhere to accept payments with ease using an iPad.
  • Applying for, managing and refinancing loans was historically a painful process for most students. SoFi provided students with an easy way to apply for and refinance their loans all with the promise of a lower interest rate.

Lesson 5: Barriers to entry have never been lower to starting a FinTech business. It’s not just that the cost of starting a business in tech has been dramatically reduced (which has been well documented). In FinTech, there are also important industry-specific enablers allowing startups to enter and compete with the incumbents:

  • Insurgents don’t need a large balance sheet to open business. For example, marketplaces like LendingClub and Prosper connect borrowers and lenders without underwriting any of the loans.
  • Regulatory hurdles, for almost every sub-category within FinTech (with the exception of Blockchain / crypto assets), have been removed thanks to early pioneers like PayPal.
  • Platforms and developer tools like Stripe and Shopify have reduced development costs and time-to-market dramatically enabling SMB merchants to sell with the same ease as larger enterprises.

Lesson 6: Large and enduring companies have been and will continue to be built in FinTech. In two decades, PayPal, the “original” FinTech startup has reached a market cap of $84B. By comparison AMEX, which was founded a 167 years ago, has a market cap of $82B. Many more enduring companies will be built in FinTech in the years to come.

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Lesson 7: There is no shortage of venture money. As of today there are 36 FinTech unicorns globally – that number represents 17% of the total share of unicorns. The venture market has realized the breadth of opportunity in FinTech and more money has poured into FinTech than ever before. In 2008, the number of FinTech companies funded was just over 200. In 2016, the number of FinTech companies receiving venture capital exceeded 5,000. In the same time period, venture funding from a dollar perspective climbed from <$1B to close to $60B.

Lesson 8: Great companies are being built across categories. With this increase in FinTech funding, great new companies are being built and entire sub-categories, from payments to insurance, are being served in new ways. Some of the really big winners of today either didn’t exist or were in their infancy 10 years ago. A few examples include publicly traded companies (LendingClub, Square, etc.), unicorns (Stripe, Sofi, GreenSky, CreditKarma, AvidXchange, Gusto, etc,) and several others that are well on their way (Betterment, Affirm, Plaid, etc.)

Lesson 9: Many think that the big area of opportunity for FinTech is in Blockchain/ crypto assets but that may not necessarily be true. Blockchain/ crypto assets are certainly getting all the attention right now but there are plenty of other areas that are just as interesting on both the B2C and B2B sides of the table. Some areas that are particularly exciting include:

  • Consumer: (1) personal financial management, (2) insurance, (3) real estate and (4) investing / wealth management
  • Enterprise: (1) institutional investing, (2) infrastructure apps, (3) SMB tools, (4) commercial insurance and (5) security & fraud detection

Lesson 10: Blockchain – lots of noise but few clear signals. Bitcoin today is trading at $5,500+ per coin and the total market cap of all cryptocurrencies is $170B. ICOs meanwhile have raised $8B in 2017 to-date. In the midst of this some things are clearer than others. What is clear today is that crypto assets have a definite use case as a store of value. What’s less clear is how we get from there to the end goal of software with no central operator, which is the big promise behind blockchain. The big advantage to blockchain, as Adam Ludwin from Chain put it, is “censorship resistance” (access is unfettered and transactions are unstoppable) but we have yet to see killer applications that can cannibalize existing practices.

Lesson 11: It’s not all about the U.S. ~1/3 of today’s FinTech unicorns are outside the U.S. (Asia + Europe). U.S. FinTech companies can likely learn a bit from their peers in other geographies. Behavioral and cultural differences certainly exist but there are a few clear examples of this that came up during one of the payment-focused panels. For example, in China, WeChat is using messaging capability to allow social payments. Stan Chudnovsky, the Head of Product for Facebook’s Messenger, revealed during one of the payments sessions that Facebook is developing this and expects it to be a key use case in the next 18-24 months. But in this space we are certainly followers not leaders.

Lesson 12: The FinTech community grows more vibrant and robust each year. Money 2020 was founded 5 years ago and since its launch then has grown into the leading FinTech conference globally. There are now 11,000+ attendees, more than 1,700 CEOs & Presidents and 85 countries represented. Still a lot of opportunity ahead but the numbers speak clearly to the vibrancy and enthusiasm in the community. Many thanks to the founders of Money2020 Anil Aggarwal, Simran Aggarwal and Jonathan Weiner for another great conference. Looking forward to next year!

California, I’m coming home

After a decade on the east coast, I’m excited to announce that I’ve returned back to the west coast as an early stage investor with Matrix Partners in the Bay Area. I’m beyond excited to be joining this incredible team to help invest and support the next wave of bold entrepreneurs.

The last ten years in Ithaca and then NYC have been transformative. I’m lucky to have had the opportunity to learn at a couple of great schools and then learn some more at the first few stops on my career journey. Most recently, while working in the High-Tech and Fast Growth Tech practices as McKinsey, I worked with a dozen companies on everything from marketing & sales to customer success to go-to-market strategy. It was rapid-fire exposure to many of the key challenges founders and management teams face in the early stages and as they scale.

While I enjoyed this experience immensely, I found myself wanting to work with founders earlier in their journey and over much longer periods of time. Being there with the entrepreneur as an advocate through both good times and bad is what makes a successful outcome all the more rewarding. So when the opportunity at Matrix opened up, I knew I had to go for it.

Matrix Partners has been quietly but consistently racking up wins for four decades over ten funds—a deep track record that few firms in the venture business can claim to have. In the early days, Matrix invested in the likes of Apple, SanDisk and FedEx. More recent investments include: Acacia Communications, HubSpot, Oculus and Zendesk. And there are some great companies in the portfolio well on their way like Lever, Namely, Quora and Activehours, among many others. The firm is also very well positioned internationally with presences in both India and China.

More important than this track record though, the team at Matrix is full of high quality people. The group has a diverse set of skills and a wide range of expertise (check them out here), but they share one thing in common: a deep commitment to supporting the visionary entrepreneurs who join the Matrix family all the way. And they do this with integrity, class and style.

I’m pumped to be joining this team, making the move back to CA and beginning to meet the founders and operators building the companies of tomorrow. If you’re embarking on this journey – let’s chat!

You can find me on LinkedIn, Twitter and Quora. I also actively write about technology, startups and investing on my personal blog here

Cyber-security: a renewed sense of urgency for enterprises

Security has been a chief concern for enterprises since the early days of computing. As software has evolved to enable businesses to be more productive, hackers have also evolved to take advantage of vulnerabilities in the tech stack. The DDoS attack on Dyn last October, which resulted in much of the American internet being unavailable for the majority of the day, unveiled a pretty scary weapon available to hackers called the Mirai botnet. And while the malware was eventually contained, cyber attacks remain a very real threat to enterprises.

I’ve noticed at McKinsey, where we pride ourselves on client confidentiality, that we have begun to approach enterprise security with a renewed sense of urgency. The firm has conducted a massive cyber security campaign including: mandatory courses for new hires, periodic phishing tests (unfortunately, yours truly has failed a few!) and the addition of a new cyber solutions group to support the firm internally as well as engage with many of our enterprise clients. All this is encouraging and I’m glad the firm is investing in this area. But still it’s tough to feel at ease if for no other reason than the fact that it’s tough to deciphere the world of cyber security jargon.

So what exactly is shaping the nebulous world of cyber security and what can we expect in the near term? There’s a lot of literature on the various types of attacks and the underlying technology being used in these attacks. In layman’s terms, however, it boils down to two (almost opposing) trends:

  • (1) Commodification and automation of basic attacks: Known vulnerabilities are being included in attack scripts and being made available to less skilled attackers. In addition, networks of attack robots are running attack scripts against any device connected to a network.
  • (2) Professionalization and specialization of attackers: Attackers are acquiring the skills to plan and launch long-term campaigns and advanced persistent threats (APTs). In addition, electronic platforms, e.g., “ExploitHub”, connect attack experts globally and allow for trading specific skills. Finally, better educated attackers are entering the scene, e.g. secret services building up cyber security capabilities.

While the development of these themes (particularly the second one) is alarming, the good news is that there are a number of industry stalwarts who have long been building and re-building software to fight these attacks. In addition, there are a range of emerging players who are also building meaningful security products.

Cyber security companies can be grouped into 5 categories: (1) endpoint security, (2) network security, (3) web/ messaging security, (4) identity and access management (IAM) and (5) security and vulnerability management (SVM). Below I have provided a view by category of each of these categories and some of the existing and emerging players:

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So where’s the opportunity for new entrants? All five of these categories have real opportunity and one could credibly build a company around each. But right now IAM and SVM are particularly relevant to large enterprises, many of which have little institutional knowledge of these categories. IAM is crucial because corporate data, and especially customer data, is often an enterprise’s most valuable asset – to suffer identity fraud could be catastrophic. SVM is important as well becasue most large enterprises don’t have a clear sense of their risk levels or ways to track vulnerability. Diagnosing and then monitoring risk levels helps enterprises understand where they are vulnerable and what they can do to shield themselves from attack.

I hope we see more companies built around these two areas because we’re going to need high quality software tools to protect against the attacks we are seeing from a new, and very sophisticated, generation of hackers.

Metrics that Matter in SaaS

Today, software entrepreneurs are very fortunate to have a wealth of information available on the indicators and metrics to focus on when running a SaaS business. There is so much out there that it can be a bit overwhelming to absorb. With that in mind, I’ve put together a one page summary of the core areas every SaaS founder should focus on when first starting and running a SaaS business.

This is not meant to be an exhaustive list of every KPI but rather an 80/20 “boil-it-down-to-what-matters-most” view of the qualitative and quantitative indicators of the overall health of a SaaS business. This also doubles as a checklist when going out to raise an institutional round of capital (most VCs will ask for these metrics as part of their diligence process.)

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The way to think about it is in 4 categories.

  • (1) Qualitative: Indicators in this category, while not as quantitative as the rest on this list, are likely to be the most important for early stage companies. They include a sharp focus on the team and the founder(s). The product/ service itself and early customer feedback are likewise very important.
  • (2) Market Metrics: Venture investors care a lot about the market in which a business is focused on (and entrepreneurs should as well to ensure they are solving a worthy problem!) Key metrics here include the overall TAM and growth (or stagnation/decline) of the industry. In addition the competitive landscape, both the number of competitors and share of each competitor, is key.
  • (3) Financial Metrics: Metrics in this category tend to be a bit more objective – but even here much is dependent on the idiosyncrasies of a particular business, what stage it is in and the market opportunity ahead of it. Here, most financial metrics boil down to 3 things:
    • Top-line revenue and growth: CMRR/CARR is the most accurate predictor here
    • Margin profile: some combination of gross and operating margin
    • Cash position:both burn rate and runway
  • (4) Operating Metrics: Operating metrics tend to be a bit more unique in SaaS than in other business models. A good way to think about operating metrics is through three sub-categories:
    • Customer willingness to pay: a combination of ACV, NPS, expansion revenue, etc. combined with the pricing model employed can help determine overall WTP
    • Sales efficiency: magic number (developed by Scale Venture Partners) is a great metric as are payback period and sales cycle length
    • Churn: gross revenue churn is closely tied to growth but cohort analysis and the quick ratio (developed by Social Capital) are also good metrics to track

As mentioned earlier, there is a wealth of information on all of 4 of these areas as well as best-in-class metrics based on revenue, stage, etc. Some of the best material out there for further reading includes: Byron Deeter’s State of the Cloud report, David Skok’s For Entrepreneurs blog and Jason Lemkin’s content on SaaStr.