Anchoring Oak’s efforts out West

**This post was originally published on the Oak HC/FT website here**


Last month, I joined Oak HC/FT’s San Francisco team. I could not be more excited to help identify and partner with the next generation of entrepreneurs in FinTech, building on Oak HC/FT’s strong legacy of investors and operators who have built enduring companies for decades.

Over the course of the last ten years, FinTech has really begun to hit its stride. There are now nearly 40 FinTech unicorns globally (more than any other vertical) worth an aggregate value of nearly $150B. Not bad for a sector that didn’t have a ton of buzz when Oak first started investing in the space in 2002.

FinTech_CBInsights
Source: CB Insights

And this is just the beginning, there will be much more to come in the next 10 years. As I look to the next decade to come, I’m first and foremost eager to learn from the founders and entrepreneurs building at the fore-front of our industry. That said here are a few themes I have been thinking about deeply in recent months and am particularly excited about:

Vertical payments: We have already seen a few successful versions of this playbook including: Toast (restaurants), Flywire (travel & education) and PayIt (government.) But many more verticals could benefit from a bespoke, vertical-specific payments solution including pharma, logistics, manufacturing and more.

Next-generation commerce: Innovation in commerce in recent years has largely come in the form of new payments options (like Square, Affirm and Afterpay.) The next wave of innovation will enhance in-store commerce, logistics/ delivery/ returns, international commerce and buying via new mediums like voice, computer vision and mixed reality.

Intersection of FinTech + AI: Machine learning is already being used in financial services. Our portfolio company, Feedzai, uses machine learning to help banks and merchants fight fraud. In the years to come machine learning will stretch beyond risk and into underwriting, product discovery, predictive intelligence and a number of other use cases.

Middleware tools for developers: Stripe and Plaid have shown us that developers are the next big consumers of financial data and they require tools to access and use that data: be it payments meta-data, account information or piping infrastructure to connect with other financial institutions. As microservices and APIs continue to proliferate, developers will require more tooling to serve end customers.

Banking Applications: Many financial services incumbents suffer from manual-heavy tasks for workflows that have struggled to make the transition to digital. Our portfolio companies Kryon (robotic process automation) and Ocrolus (digitizing financial documents) are two examples of the new wave of companies focused on automation, software-enabled workflows and refined banking applications.

Back-office application software for SMBs: The software stack for most functions (e.g. marketing, sales, customer support, etc.) within an SMB certainly looks a lot better than it did 5 years ago when Oak first invested in Freshbooks. But the finance and accounting functions remain underserved. As SMBs demand better software for their back offices, new entrants will rise to the occasion, providing these businesses with a better way to close their books, pay their vendors and manage payroll.

Financial services for the underserved: Banking services have improved for many of us but there remain many demographics that are underserved. Oak has a history of investing in this category, dating back to NetSpend, which went public in 2010. I’m excited to see founders focus more on low-income Americans, immigrants, freelancers/1099s, older (and younger) generations, those with large sums of student debt, etc.

Future of real estate: Almost everything about commercial and residential real estate stands to be improved for both buyers and sellers. Moreover, the ecosystem players around them (e.g. brokers, agents, lenders, inspectors, etc.) are still mid-transition to cloud-based tools. New entrants in real estate will find ways to improve workflows for these ecosystem players or generate more economic value for buyers and sellers.

If any of this resonates with you, let’s get in touch. I’m focused on opportunities on the west coast (and that certainly includes more than just the Bay Area!) But even if you are outside the west coast, I still want to hear from you. Looking forward to finding ways to collaborate!

Matrix FinTech Index: 2018 Edition

The full overview of the Matrix FinTech Index 2018 edition is available on TechCrunch here.

At the end of 2017 we published the Matrix FinTech Index for the very first time. In what we hope will become an annual tradition, we are excited today to publish an updated index and set of supporting data.

There is no doubt that this has been another stellar year for fintech. In last year’s version of the Matrix FinTech Index, we predicted the crypto enthusiasm would be short lived and that the fintechs would be the more relevant disruptors in 2018. By most metrics this seems to have turned out to be true. A comparison of search interest in “fintech” vs. “crypto” is one clear indicator of this:

Figure 1.jpg

Definition: Matrix Partners considers “fintechs” to be venture-backed organizations that are (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, etc.)

Methodology & Results

As a refresher, the Matrix FinTech Index is a market-cap weighted index that tracks the progress of a portfolio of the 10 leading U.S. public fintech companies over the course of the last two years (beginning in December of 2016). For comparison, we have also included another portfolio of 10 large financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

With two years of data now in, the results are pretty clear — the fintechs continue to outperform both the incumbents and the S&P 500. 2 year-returns for the fintechs were 133% compared to 34% for the incumbents and 24% for the S&P 500.

Figure 2.jpeg

Updated Data Now Available

As we did last year, we are releasing an updated data package that anyone can download here and which has a range of other helpful information on both the U.S. fintechs and the incumbents. The updated package has much of what we had last year plus a few newer elements:

  1. Market cap and stock price data for the fintechs and incumbents
  2. Comp sheets with financial metrics
  3. Data on the 20 fintech unicorns
  4. Information on the fintech “Brink list” — companies that have raised over $100M in equity financing
  5. M&A & IPO activity in fintech this past year

As always we appreciate your feedback and thoughts on the process and methodology. And we look forward to sharing our thoughts again in 2019!

Enterprise Payments: The next frontier for payments innovation

Towards the end of 2017, we discussed the rise of the FinTechs and briefly alluded to payments as being a key area for further innovation. The payments ecosystem is an ever-evolving space froth with opportunity and plenty of buyers with deep pockets (see Paypal’s announcement a few weeks back). Furthermore, it is a deeply intricate ecosystem with challenging technical problems, shifting regulatory components and a variety of consumer and enterprise use cases. For all these reasons, it is worth a “double click” to explore further.

We have already seen huge amounts of innovation in payments over the last few decades. In the U.S., this innovation was enabled by a few important advances. The establishment (and operation) of ACH by the Federal Reserve Banks and EPN created a much needed electronic network for financial transactions. NFC technology and POS hardware enabled mobile payments. More recently, pay-out APIs and fraud management systems have allowed developers and those working in risk to manage feature build-out while also keeping an eye out for bad actors. And we are just beginning to see some applications of crypto in the payments space — such as this.

Despite these advances, most of the innovation has been focused on two areas: consumer-to-consumer payments (e.g. Venmo), business-to-consumer payments (e.g. Square) or new entrants that facilitate one of the two (e.g. Stripe). A third category, business-to-business payments, has not benefited from innovation to the same degree as the other two categories. This is particularly interesting given that the market size of B2B payments is 5–10x that of C2C or B2C payments. And yet, technology has been slower to transform the B2B payments world. Case in point, B2B payments made by the good ol’ check, as a share of overall transactions, leveled off around 2013 at a point significantly higher than C2C and have actually gone up slightly to ~51%.

Figure 1.jpeg

Existing Challenges

In the early days of C2C and B2C payments, there were many intricacies from a technical and regulatory perspective that had to be navigated very carefully. After all, real consumer money was at play so the stakes were high. The same is true in the B2B world, with a few additional challenges that make things even more hairy:

  • Transaction values are significantly higher: While the volume of B2B payments is much lower (some say in the 9:1 range compared to B2B + C2C), the value of these payments per transaction is much larger. This makes enterprise transactions prime targets for hackers, front-runners and a host of others with bad intentions. Beyond the actual financial risk, enterprises also risk having the banking information of their suppliers and customers exposed.
  • There is greater complexity: In the enterprise payments context there is significantly more complexity. Let’s take the simple example of someone in procurement trying to pay a supplier. Post RFP, legal review, etc., the buyer will need to first work with the various business units and other internal stakeholder to issue a purchase order. The supplier must do the same in order to provide an invoice to the buyer. The buyer must then send a request to the card issuing bank (via p-card or some other mechanism.) The buyer’s bank must then handle settlement with the supplier’s bank. This may happen via check, credit, debit, ACH or even cash. Post-settlement, the buyer and seller must ensure that both their internal financial systems and/or ERP systems are accurately updated. Imagine the complexity involved when doing this hundreds or thousands of times per day across many different payment types (one-off, recurring, up-for renewal, etc.)
  • Many people are involved with any given transaction: As a result of the greater complexity, many heads are involved on both sides of the transaction. Procurement, legal, finance and the BU may all be involved at various stages. B2B payments affect the workflows of a much broader set of people than C2C or B2C payments.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The U.S. is not well structured for top-down fixes to B2B payments: When Europe moved to the Euro, all the participating countries did a significant overhaul of their banking systems allowing them to make significant upgrades to the tech stack. In the process, they solved a number of the pain points above (including significant reduction/ elimination of checks). But in the U.S., the Fed does not have the authority to mandate unified standards. Lack of standardization is particularly tough in the U.S. as we have many more banks than Europe (including regional and community players) — creating a major interoperability problem with few bank-agnostic solutions. Meanwhile, the U.S. banks themselves have made little attempt to create a common solution to fix the antiquated system.

Key Opportunities

While these challenges are daunting (they most certainly are not for the faint of heart!), the good news for new entrants is that the banks and other FIs are unlikely to be the ones to fix enterprise payments. We believe FinTech startups are best positioned to make progress here, bottoms-up. More specifically, there is an enormous opportunity to capture value in enterprise payments($2.1T in payment revenue by 2026) across 5 specific subcategories: (1) capital markets, (2) procurement, (3) treasury management, (4) payment dev-tools and (5) blockchain.

Figure 2.jpeg

  • Capital Markets: Many parts of capital markets (e.g. HFT, commercial lending, etc.) send/receive very large transactions each day. Most of the time these payments are slow, expensive and require manual reviews to ensure they are valid. In the HFT world, for example, every minute matters when making a trade and fees add up. Payments solutions that focus on speed and automation, without sacrificing security will do well here.
  • Procurement: In procurement, enterprises and their suppliers face the problem of trying to integrate procurement software tools, with ERP systems and antiquated payment processes. This problem is particularly challenging with services and in the “long-tail” spend, where some enterprises have to pay tens of thousands of suppliers each year. Solutions that integrate with existing software solutions, simplify the enterprise’s workflow and get the money to the supplier faster (e.g. lower DSO) will have the most success here.
  • Treasury Management: Initiating and managing ACH payments to other businesses, auditing those payments and then closing the books at the end of the month is still not straightforward. Software tools that provide solutions for both the finance and the tech team to navigate this process have a shot at building a must-have for anyone trying to get a grip on treasury management. Particularly for SMBs who don’t have the luxury of simply throwing more people at the problem.
  • Payment Dev Tools: Companies like Stripe and Plaid have created great APIs and financial plumbing tools. But they are largely focused on C2C and B2C payments. B2B developer tools / APIs that work for the IT and risk departments of enterprises and address the complexity therein will do well. Certainly a hairy problem to figure out but there is a lot of spend here for the right solution.
  • Blockchain: In the short run, blockchains have enough technical issues (e.g. scaling, interoperability, etc.) to work through. But in the long-run distributed ledger technology can provide a single database of truth between two enterprises, eliminating the need for ledgers on both sides and making verification/ security a bit more manageable. The real question from a B2B payments perspective is not “if” but “when.”

At Matrix Partners we are deeply interested in backing the next generation of enterprise payments companies. We focus primarily on Seed/ Series A investing here in the U.S. Please let us know if you are building something interesting here — would be great to meet up and learn more!

Tumblr: Innovation in Advertising

I have had something of a difficult time getting into the groove with Tumblr. I have nothing really against the product. Tumblr has a unique microblogging / social networking platform that clearly adds value value to its largely teen and college user segments. In 2011Tumblr boasted an 85% retention rate (compared to, for example, 40% at Twitter). It’s just that my current social media toolkit provides me with a range of options for all my needs. I have…

  • Twitter – for my status updates or thought of the day
  • Pinterest – for my photos / video “blogging”
  • WordPress – for my longer, more thoughtful posts
  • Facebook – for my day to day social interaction
  • Quora – for the questions I have that my current network can’t answer

With all these tools, I’m not really sure where Tumblr will fit into my current computer-mediated-communication (CmC) tool-box. However, there is one thing about Tumblr that I thing is truly innovative and something to look out for: their advertising structure.

The founder of Tumblr, David Karp, has long been a critic of traditional banner or adsense advertising. It can be invasive / annoying for users and costly / ineffective for advertisers. Recently, Tumblr has been toying with some new advertising models that seem to be headed in the right direction.

For example there is the Highlighted Post option. Users or advertisers can pay $1-$5 and have their post get a special sticker to make it standout from the rest in the dashboard. To draw a parallel to one of my favorite sites 4-5 years ago (Digg), it’s like you are paying for “diggs” so that your post ranks higher and therefore gets more views. Sticker options include words such as “On sale now” or “Today only.” These paid blog posts stay at the top of Tumblr home pages of users who are already following those blogs. Users can also click “dismiss” to remove the adds. Furthermore, advertisers are only allowed to link to pages that appear on their own Tumblr blogs.The combined effect of these features is a less invasive experience for users and a more effective, targetted add for advertisers.  It is therefore no surprise that advertisers are lining up to access the 60 million blogs on Tumblr.

Website Basics 101

I’ve recently gotten a few questions from friends about how to build a website, so I thought I’d do a post with an overview of the basics behind building websites. I am by no means an expert on this subject myself, but when I first started coding the summer before my freshman year of college, I had no prior programming experience and spent a fair amount of time just hunting around for good guides to learn from before I built up a basic working knowledge of the various components of a website. I hope this overview will provide a foundation from which I can delve more deeply into specific topics in future entries.

1) Client-Server Architecture
When you type in the url of a website and hit enter, you are sending a request from your device (laptop, desktop, mobile, etc.,) through your browser (Firefox, Safari, Chrome, etc.,) to a remote server asking for the server to load the page of the website for you. The web server receives the HTTP request and then processes it as a static file (html) or as a dynamic file (PHP, Python, Ruby, etc.,). If the file is dynamic, it may require interaction with a database. If this is the case, then as the server is running the script on the file, it will query a database (such as MySQL) and return important data back to the server. The server then serves up the page and sends it back to you through your browser. What you then view is the front end of the website. All of this generally happens in under a second. Below is a diagram of the process:

Diagram Courtesy of ProgrammerPlusPlus.

Let’s unpack these interactions a little more.

2) The Front End
The front end of a website refers to what you see when you view a page. You may see text, figures, color, layout, etc., The front end of a site is generally divided into two categories: content and design. The content refers to the actual words, images and other features on the page. Content is coded using the hyper-text markup language or HTML for short. The design, layout (color, alignment, text size, etc.,) is all coded using cascading style sheets or CSS for short. CSS and HTML work together to make the front end of the site visually appealing. Front end designers often add in things like javascript, flash and AJAX to make the site more visually appealing, but the fundamentals behind the front end are HTML and CSS.

3) Going Dynamic -> Programming Languages
If you want to create something that goes beyond a static page and actually allows user to interact with the site and with each other, you will probably need to use a programming language to create functions and to filter and place content provided by users into data stored in a database. This will require a programming language such as PHP, Python, ASP.NET, Ruby, Perl, etc., If you are just starting out, I highly recommend the PHP framework as the support, documentation and resources out there on PHP are incredible. There’s a reason why many of the heavy hitters out there like facebook, wikipedia and wordpress use PHP. It is an incredibly robust language and easy to scale if you plan well.

4) Building in a Back End
Most major websites and startups these days work with data provided to them by users. For example right at sign up, facebook collects data in the form of: first name, last name, email, password, gender and birthday (and that’s just barely the tip of the iceberg in terms of data they collect and store on users). In order to store and retrieve data, you need a database to house all that data. There are a number of databases that are known to do this well, but MySQL is a database that has long been at the forefront of data storage. In order to place, retrieve and manipulate data, you will need to know the Structured Query Language or SQL.

If you’re new to the coding scene, this may seem like quite a bit to digest at first glance, but luckily the Internet has a tremendous amount of resources on each of these topics. I’d highly recommend Codeacademy – it’s a great way to visually learn how to write code. I also recommend the W3C markup validator to make sure your code is bug free. Finally be sure to test your code across browsers (Firefox, IE7, Safari, Chrome, etc.,) as minor differences is display across browsers can occasionally be a nuisance for users. Good luck and happy hacking.

Mobile Corner: Some Themes

Mobile has been the one of the big buzz themes in startup land for the last year or so. Companies like Foursquare, Spotify and Flipboard are pushing the limit of what our cellular devices can do and generating incredible innovation in areas like social networking, news delivery, digital entertainment, gaming and peer-to-peer communication. Yet despite these successes the market is still quite raw and much remains unknown about what makes a good mobile app successful. Even less certain is the revenue model. Should mobile startups today go with in-app or separate app freemiums? Virtual currency? Subscriptions? A 100% ad based model?

What does seem clear, however, is that, as with web 2.0, it’s all about creating traffic. If you can create a tool that provides value to users and makes something about their lives simpler or more engaging, you may have something that could garner attention in the mobile market. So here are a few of my thoughts on what might make a mobile startup successful:

1) Be light-weight and simple

I doubt that users of mobile apps are looking to get the same experience that they get on their laptop or home computer. The hours spent on facebook on your couch at home are less likely to happen when you’re up and about. When it comes to mobile, people want things that are simple, fast and easy to use. They want to be connected on the go and are focused more on 1:1 connections rather than large social interactions. Kik for example has pushed the frontier of texting, making it an incredibly fast (we’re talking real time) and light weight platform that goes cross-platforms (Phone, Android, Windows Phone 7, Symbian, and BlackBerry)

2) Consider Gaming

The great thing about mobile devices is that they can be taken anywhere. Most people spend a fair amount of time traveling each day (whether on a bus to school, train to work, etc.,) With that commute comes the time to play games on platforms like Zynga. Games have traditionally been a single player human-to-computer interaction but, increasingly it’s becoming more interactive allowing people to connect with existing friends and play peer-to-peer. There are some “gaming” apps that are a bit more serious in nature. Everest for example is a mobile platform for framing and achieving goals. The app lets you create specific goals, break them down into incremental steps and then focus on achieving these goals with the emotional support of friends. This will be an interesting startup to follow as it moves out of beta.

3) Style. Style. Style.

One of the most important keys to the success of a mobile device is its “elegance” factor. Appearances and first impressions matter in the competitive and still developing world of mobile. Apps should follow basic principles of design and usability; they should also mimic the desktop interface closely (or at the very least follow similar conventions). A thoughtfully and creatively designed product stands a much greater chance of being successful in the mobile world. Here’s a link to some mobile apps that were knockouts in terms of style in 2011:

http://mashable.com/2011/12/27/best-mobile-apps-2011/

Migrating to a New Spot

I recently decided to mash things up and move over to this new blogging platform and design template. I was a little frustrated with having my blog entries sort of scattered on a few different platforms and figured that wordpress had the best toolkit to synthesize everything and then continue to build.

There are a couple reasons why I really like the wordpress publishing framework:

  • Unlike other “free” and “open source” solutions that have hidden agendas, WordPress is completely free.  It doesn’t start charging when you hit a certain size, nor does it close off any of its code to you.
  • Plenty of platforms out there offer plugin functionality, but WordPress is by far the smoothest and easiest to use.
  • WordPress has the best SEO in the self-publishing market. It also has great data analytics and all the features for tagging, ranking and categorizing.
  • Because it is such a popular toolkit, there is a large base of community support. It is possible to find blogs, forums, and tutorials to answer pretty much any question.

I hope that this will be a much more permanent home for all my thoughts on startups, technology, education and anything else I feel like blogging about.