We Study Billionaires - The Investor’s Podcast Network - TIP415: Adventures in Fintech with Logan Allin

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Logan Allen, the managing general partner and founder of Finn, a VC firm that now has 10 unicorn portfolio companies, some of which have IPOed, and over $1 billion in assets under management. In this episode, we discuss B2B SaaS tailwinds that have occurred from the pandemic, best metrics for tracking SaaS companies, the opportunity ahead for financial information migrating to the cloud. Logan's take on SOFI's stock performance since he was previously a VP there and is also an investor. Challenges ahead for the Fintech space. There's been a lot of volatility as of

Starting point is 00:00:37 late. Logan's strategic advice for Fintech founders as they plan for 2022 and a whole lot more. I think you'd be hard pressed to find someone more intimately knowledgeable on the fintech space, especially the B2B side than Logan, and he provides incredible insights here. I hope you enjoy it as much as I did. Here's my conversation with Logan Allen. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Trey Lockerbie, and today I'm speaking with the managing general partner and founder of Fenn Venture Capital. Logan Allen, welcome to the show.

Starting point is 00:01:31 Thanks, Trey. Appreciate you having me. It's fun to talk with Venture. guys because, you know, not a lot of people may know this, but a lot of billionaire types invest their money with folks like you. They're looking for diversification. And a lot of people think of Warren Buffett who's just buying companies or investing in stocks, but that's not how all billionaires operated.

Starting point is 00:01:50 And a lot of times they're looking to place their money in lots of different nooks and crannies, including the venture world. And I'm eager to talk to you about your experience. But before we do that, I understand that you are a big fan of chess. And one underlying theme I also find with billionaires and especially investors is this passion for games. It's a common framework to apply game-like probabilities to investing. So games like poker, bridge, and blackjack are often favorites. And less often, but still common, you find billionaires with a passion for games like chess.

Starting point is 00:02:23 So I want to know what lessons from chess you've learned that you've been able to apply to your investing practice. Yeah, I know it's great to be here. and I've been a big chess fan. I'll call myself a chess nerd since high school. And my dad taught me chess when I was in grade school. But I was captain and founder of the Duke Chess Team and undergrad and ended up building out Duke's chess team and helping the university provide consideration for chess,

Starting point is 00:02:51 which I'm really excited about. But the lessons from that are, one, a growth mindset. I've studied Dweck, as I think a lot of your listeners have. And Dweck always talks about a growth versus a faith. mindset. And in chess, there is just habitual learning, particularly with the advent of computers and that becoming more and more prominent as I continued to play, which is you need to continue to study openings. You need to continue to study your middle game and basically look for and review master competition games from all around the world. And that drove me to understanding

Starting point is 00:03:25 that you can really learn and dive into any subject and learn it and study it and grow significantly and your knowledge base around it. Number two is pattern recognition. So in chess, you see patterns emerging in terms of positions and how things evolved. That definitely applies to venture capital where you have your gut instinct or your pattern recognition in terms of investing in a company, monitoring a company in its growth trajectory, monitoring a situation where there might be a board question or an issue with a founder or the like. And there's a lot of pattern around that and things that have happened before that you can take into consideration. So those two absolutely map, in my view, to games generally but particularly chess, which is a growth mindset and this

Starting point is 00:04:06 idea of pattern recognition. That last point to me raises this question around sizing people up. You hear about Warren Buffett's ability to walk in a room meet someone for the first time and like within a handshake, kind of know if there's going to be a deal or not, just sizing people up. And I'm remembering, you know, the Queen's Gambit where you sit down across from your competitor and you're kind of getting that first initial feel for people. Is there something there that you feel is a skill you've learned just from reading people? I think so. And it also applies to poker. I play poker occasionally as well. And I think sizing people up and reading the person is a huge part of chess as well, particularly in Blitz, which is accelerated chess. So typically, you only have five minutes per person or ten minutes total to make all your moves. In those situations, you can read a lot about the person. You can also read about how they open, much like a founder opens up a meeting. And so I think there's a lot to say about founder judgment and evaluating founders. We as a firm,

Starting point is 00:05:01 for example, only invest in repeat entrepreneurs, preferably repeat founders. We do not invest in first-time entrepreneurs. We'll invest in first-time CEOs, but we will not invest in first-time entrepreneurs. And so our profile is very much somebody who's been in a startup environment, been in an entrepreneurial environment, walked thousands of miles in those shoes, and now is starting their new company or possibly their next company. And that's been an evaluation of the data, but also in sizing people up. if this is your first entrepreneurial gig, there's been fairly binary outcomes in those regards.

Starting point is 00:05:37 Is the fact that they've maybe failed in their prior business of concern to you? I know in Silicon Valley that you hear all the time that they almost praise failure and it's looked upon in a very different light. Is that something that matters to you as far as the previous company was successful or not? We prefer, obviously, to see success and the right trajectory. We have a top 50 index that we track on. We use a platform called Lighthouse, lighthouse.a.I., which we leverage to source companies and source founders. And we run an algorithm on that visa be founder DNA. And prior entrepreneurial experience is absolutely part of that. And part of the scoring is whether the prior company succeeded or

Starting point is 00:06:14 not. But they still get credit for having that entrepreneurial experience. And so they pass that at least threshold in terms of our minds in the sense that they have the founder DNA to start something new. they've learned those lessons and so forth. For example, I know we're going to chat a little bit about the company Pipe, which you'll hear a lot about from Jason Callagannis and Schmoth and others. Pipe is one of their favorite topics as well. We led the seed in March of 2020. And the prior exit from the founders, as they are one to admit, was not that exciting.

Starting point is 00:06:45 They sold their first business to fare, but it was what they learned as part of selling that business. And afterwards, in terms of the gaps they saw in the market that helped them come up with the business idea for pipe and then execute against that. So you can absolutely rise from failure as well, and that's an important outcome. But as it relates to our kind of criteria, we would have certainly have preferred, you know, you knowing what success looks like to be able to, you know, better replicate that in your new venture. So, Logan, what sparked your passion, specifically for investing, having come out of the banking world initially? And what was the

Starting point is 00:07:20 appeal of venture capital? So I started my career in management consulting and I fell into it as I've publicly commented on in the past. I did an internship at Citigroup in my junior year at Duke and coming out of Duke, I really wasn't sure what I wanted to do. And so I decided to go into consulting, which is largely what everybody does when they're not sure exactly what they want to do because it provides this really interesting breadth and depth of opportunity sets. And they looked at my resume as I was going into Cap Gemini and they said, oh, he did a internship in Citigroup. He must be an expert in financial services. Let's put them in the financial services group. And so that's literally how I got into FinTech. From there, I fell in love with the space.

Starting point is 00:08:02 And that was because it plays such a massive foundational role in the markets as it relates to running of banks, running of asset management, insurers, hedge funds, private equity firms and so forth. There is a technology layer and enablement aspect to all of those businesses. I ultimately went from consulting into the industry side, working at City National Bank, focusing on digitization and customer experience in that platform. And then I went and did the same job, but more with a global purview at Vesco. Before I got this very strong entrepreneurial itch and went back to Silicon Valley, I went to high school in the valley. And a lot of my friends, while I was running around in a suit,

Starting point is 00:08:43 were running around in hoodies and flip-flops and visiting with them and my role I live in BESCO, where I was actively looking for innovation opportunities and partnerships in the Valley. I decided to leave Invesco and join SOFi as an early team member. And that really changed my trajectory. And from there, I really saw what was happening in both the entrepreneurial ecosystem and company building, but also in the VCs that were providing them capital. And in looking at venture capital, what I saw was a portfolio approach to working with

Starting point is 00:09:17 entrepreneurs. And I had been taking a portfolio approach in my consulting life to working with a number of large institutional enterprises. And so it felt familiar to me. And then secondly, I started to really gravitate in my early days after so by towards enterprise, back towards enterprise software, which is where I had focused initially in my consulting career and recognize that instead of licensing that technology and implementing it, I could be investing in it. And that felt like a dream job to me. And so I got great advice from a number of VCs, guys like Roll Off at Sequoia, guys like Brian Sigerman at Founders Fund. And they all said, you need to go keep operating.

Starting point is 00:09:58 And so I did that for a number of years. And it was great advice. And I always tell people who are at investment banks in consulting or at business school that they should be getting operating experience before they go into venture capital. And that's fundamental to that pattern recognition comment I made, having credibility sitting across from an entrepreneur that you're looking to a business. invest in, frankly, being able to add operating value beyond capital as you've worked with that entrepreneur. And so for me, I think this is the greatest job in the world, being able to

Starting point is 00:10:27 leave an impact on a legacy on a massive industry, be able to work with entrepreneurs to help them execute on their visions every day. And I don't feel like I should be getting paid for what I do. So that is a very good sign. So you've been running Finn now for over three years, and I'm sure those are very interesting years, having gone through the environment we're all in. But you now have 10 unicorns in the portfolio and over a billion dollars now in assets under management. With incredible numbers like that, I'm assuming, and I could be mistaken, that there were some tailwinds perhaps and perhaps related to the pandemic. But was that the case? And if so, what were the tailwinds? I would say COVID for all of the unfortunate repercussions and everything,

Starting point is 00:11:12 we all live through did serve as a tailwind and a digitization catalyst. And I think, you know, this is pretty well trodden territory at this point from a data perspective. But, you know, we couldn't go into bank branches. People couldn't go into call centers. And the customers that our companies serve, those being banks, asset managers, insurers, I'll call them the larger fintechs, like PayPal and to it, so forth. And then corporates, both retailers and big tech, they recognized that whether they were already financial services businesses and they needed to vertically integrate digital capabilities on an accelerated basis,

Starting point is 00:11:55 or they were corporates that were trying to vertically integrate financial services and maintain their digital distribution models, they needed to move really quickly. And so, you know, people have talked about six years of digital movement taking place in six months. I'm not sure what the order magnitude is, but it happened quickly and certainly more quickly than we all expected. And so we had massive tailwinds in our portfolio as a result of that. Our investment box entails that we are investing full life cycle from preseed through

Starting point is 00:12:25 to taking companies public out of our SPACs. But we solely focus on B2B SaaS. These are capital-light businesses, no balance sheet, no credit risk, typically not regulated or lightly regulated and just very capital efficient high gross and margin businesses, which thankfully were fairly insulated in COVID and are fairly insulated from inflation, rate environments, and then supply chains. And so we sat back and looked at our portfolios had some of their best years and months on record, and so felt very humbled and fortunate by that.

Starting point is 00:12:58 And now we're in a place where, you know, Omicron, obviously, fully being short and accelerated here, you know, we're going to see some return normalization, but I think that digital adoption curve and that rate of adoption is still here to stay. Now, I imagine when you're focused on an industry such as fintech, you are looking to build an ecosystem, so to speak. So with every company you're kind of looking at, you're like, okay, that space hasn't been explored yet, but it works over here nicely with this company. Do you find a lot of synergies interacting between the portfolio companies?

Starting point is 00:13:33 And if so, could you give us an example of that? Absolutely. So we have a very top-down thesis orientation to where we think the white space exists in Vintech. Again, within that Venn diagram of B2B SaaS. And we have identified six sub-sectors today that are on our website. We're very public about where we're constructive that we think represent the largest areas of white space and then very specific feces within those. And so what we do is we go out and proactively market map companies back to those subsectors and those thesees and look to select one category winner within those. What that results in is no overlap in companies. We don't want conflicts in the portfolio, but a significant amount of potential synergy in portfolio

Starting point is 00:14:24 companies working together. And so just in short, on those six subsectors, we are the most excited about embedded finance, the CFO tech stack or anything that touches the treasury function, asset management and capital markets, insureTech, blockchain from an enterprise application perspective. And then lastly, what we call infrastructure and enabling technologies, that's things like regulatory technology, big data analytics, this massive cloud migration problem leveraging quantum computing, et cetera. So those six sub-sectors are where we focus proactively and going out and sourcing.

Starting point is 00:15:00 And that's really where we've pointed lighthouse from a data science perspective on a bottom's up basis. And so just as an example on the portfolio, we have a company called Natomi. They are a customer success platform driving Omni Channel customer automation through email, which shockingly is still about 80% of customer service traffic, a text message, social, agent assisted. And what that allows companies to do and publicly, you know, they have customers like Brex and Newbank and other. where they're supporting that customer service automation, it improves customer success,

Starting point is 00:15:36 improves the customer experience, eliminates call center reliance pretty significantly, which is a massive problem in COVID. So as you can imagine, across our portfolio, anybody who is touching consumers, but increasingly anybody who's touching SMBs or SMEs, they need triaging support

Starting point is 00:15:51 and the ability to have customer self-serve and be supported on a timely basis. So there's a lot of overlap with Natomi. And then secondly, our portfolio company is Sintera, which is a banking as a service company, Sintara sits in between banks, the fintechs and corporates, all of whom need banking infrastructure, compliance, and in fintech applications. They're helping serve as that middleman or that glue between all those areas. As you can imagine, they are able to partner across our portfolio as well in enabling

Starting point is 00:16:23 those capabilities. So we love connecting our portfolio companies. We've built a community around the lighthouse around the events and programming we do across what we call the thin family. And that's been really fundamental. And the stat that we're the most proud of that speaks to this is that we have a 95% net promoter score across our portfolio. And we've been between a 90 to 95% since inception and we're now at 70 portfolio companies. So that's the biggest litmus test and number I look at to make sure that we're scaling appropriately and in the right way.

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Starting point is 00:21:14 mentioned that only 10% of quote unquote financial information is currently stored on the cloud. So what does that mean and walk us through the potential opportunity that this is speaking to? So Gartner puts out a survey every year where they look at budgets in terms of how much the banks are spending. Financial institutions in 2022 will spend, let's call it roughly $1.25 trillion on technology. That sounds like a big number because it is. They're the number one spenders on technology in the world beyond any government or other industry. And then they put out kind of the lead table around cloud adoption. And they are consistently and dead last around cloud adoption.

Starting point is 00:21:58 So what is the disconnect? They're the largest vendors on technology, dead last and cloud adoption. Which means, by the way, their license enterprise SaaS, which is cloud native or multi-tenant. And the industry calls this a massive lift and shift problem. So how do I take data and functionality out of legacy mainframe technology? that's probably on premise and how do I shift that into public clouds, private clouds, multi-tenant clouds, whatever the structure might be, which lowers the cost of ownership dramatically, allows you far more scale, allows you to tap into more functionality and all the other

Starting point is 00:22:34 benefits of the cloud. It is actually not a legal issue. It is not a regulatory issue. It is not a privacy issue. The OCC actually does not care where your data exists if you're a bank. They just want to make sure that it is appropriately risk-managed, compliant, cybersecure, etc. And I can tell you that a AWS or a Google Cloud or an Azure Cloud is far more secure than having a server farm in the middle of the Midwest. And so it's amazing that this transition has not taken place on a more rapid basis. And it is principally because of the legacy mainframe technology and how difficult it is from a technical problem perspective to abstract that data, that functionality, and actually

Starting point is 00:23:17 migrate to the cloud. These projects typically entail hundreds and hundreds of Accenture and or IBM consultants. Literally, it's subtracting this data using effectively flat file formats and then trying to figure out how to parse it together, putting it in places like data lakes and so forth before they migrated ultimately to the cloud. So it is a massive industry issue, and I think we'll continue to be. And then I think, you know, the second piece is mainly internal policy. And a lot of CTOs at large banks very much still have the mindset that they should be building everything. And I always tell bank CTOs, when I have the opportunity to sit down with them and many of them are OPs of ours, that they shouldn't be building anything.

Starting point is 00:24:01 There is an API and a solution, third party for everything out there who is spending all of their time, money, and effort on that very specific piece of IP and R&D. and that is not your core competency. Focused on the customer experience, whether that's retail or commercial customers, own that, make it incredible, make sure it's stitched all together in a very seamless way. Don't focus on building the middleware

Starting point is 00:24:24 or the back office or any of that functionality. So I think you're slowly starting to see that adoption. J.P. Morgan announced that they're taking their entire core banking system and moving it into the cloud with thought machine, which is a UK-based company. That's an incredible milestone. And going back to the Gardner research coming full circle, Gardner also shows you a breakdown percentage of spend by the banks.

Starting point is 00:24:47 Percentage of spend on internal applications versus third party. 2022 will be the very first year where third party spend will eclipse internal spent. So there's hope. Wow. Now, is that just a means of the big banks trying to stay relevant, so to speak? I mean, they're trying to stay innovative, but they don't maybe have the R&D centers in-house to do so. so they're outsourcing this more and more?

Starting point is 00:25:11 Correct. The banks are absolutely competing with the neobanks, and they're also competing with the robo advisors, and any of these other players that are focused on the consumer or the SMB, and those players have presented effectively a less friction, better customer experience with ease of use, more transparency and branding and positioning that says, hey, we're on your side. I obviously spent a lot of my career at SOFI going to millennials.

Starting point is 00:25:41 We have a portfolio company called Greenlight that has targeted families and very specifically Gen Zers is part of that family finance offering. And they're winning customers and winning share. And so the banks look at that and they say, okay, we've got these fintechs nipping at our heels. And I say that very specifically because on a total asset basis, it's still, you know, a fly on an elephant. And they take a long view and they recognize they need to innovate and do. so quickly. And then they also look at net interest income, which is their primary revenue driver. And that has been basically zilch for many, many years, thanks to the Fed's policies. And they look at

Starting point is 00:26:17 OPEX. So a big part of this is, yes, keeping up with the neobanks. But the bigger part of this is the OPEX concerns and the weight that that has on their bottom line and recognizing that they need to skinny that down and reduce the amount of IT professionals they have and the amount of warehouse keeping the lights on costs they have in their IT budgets. Now, as a VC, are you penciling this out to a certain strategic when you're looking at an investment? For example, I work in beverage. And so it's very common that you hear, okay, does Coke or Pepsi want to buy this, for example? Because, you know, those are the two major strategics in this industry. With fintech, are you basically looking at J.P. Morgan,

Starting point is 00:26:57 when you're going down and say, okay, whose portfolio is this company going to fit into? Will they be interested if we just execute on X, Y, and Z? We are from a commercialization and distribution partnership perspective, but we're not from an exit perspective. So the most likely exit outcomes for our portfolio are IPOs or SPACs or strategic exits, and the number of strategic acquirers for B-to-B-B-to-B-B-to-S and B-B-S and B-N-B-S-MB-Oriented business models. So that includes the legacy or old-school FinTech.

Starting point is 00:27:32 as I call them, FIS, Vicer, PayPal, Intuit Square, right? So they're all being hugely acquisitive. PayPal has a budget of $5 billion per year per Dan Schulman that he's looking to spend on making acquisitions. You can put Visa and MasterCard in that category as well, who have also been hugely acquisitive. Secondly, you increasingly have big tech. Salesforce, Amazon, Google, Facebook, Apple, all have made acquisitions within the FinTech and Web3 space. spaces in the last several years and we'll continue to do so. Third, you do have, I'll call it the exchanges and the fund admins, groups like SS&C, NASDAQ, et cetera, have been hugely acquisitive in the space. And then you have asset managers and insurers. And then lastly,

Starting point is 00:28:19 you may have the banks. The challenge for the banks in acquiring a B2B SaaS business is they become a sole customer to that company and the revenue opportunity becomes less interesting. And so, you know, our companies very much try to stay Switzerland when they look for a strategic exit to maximize the TAM and the opportunity set that they have to go after. And if they only work with one customer, then that's not a hugely interesting outcome over time. And so that's how we think about the exit profiles. But from a commercialization distribution perspective, we have strategic LPs in the asset management world and the insurance world and the bank world and in the wealth management world. So we're absolutely looking at that matchmaking opportunity as we evaluate businesses. from a pipeline perspective.

Starting point is 00:29:01 Let's cover the appeal of B2B SaaS specifically. I've heard you mention that SaaS pricing is broken and that SaaS revenue recognition is broken. So talk to us a little bit about what you mean there and the opportunity. Sure. So the number one issue that we find in, call it CED Series A company, is as they go to market, is their pricing model is almost inevitably broken. And we look at average contract values or ACBs,

Starting point is 00:29:29 as a SaaS investor, you want to see ACVs over 100K and in kind of a top decile type SaaS company, generally 200, 250K plus. And early days, our companies are mispricing or pricing their IP and their offerings way too low. And then they're getting stuck at that ACV. So they're pricing it somewhere in the 25 to 50K ACV range. And then when they go to renegotiate, it's hugely problematic. They have MFN clauses in their contracts, creates long-term, long-term issues.

Starting point is 00:30:01 And so we've built pricing models and best practices in our operating playbook, which we share with our portfolio companies. So that's one big part of the issue. The other big part of the issue is calling Vanity Metrics and SaaS. So we all remember the WeWork example in terms of adjusted EBITDA and all these games that are being played. Well, the same thing's happening in the SaaS world. So my favorite is contracted AAR.

Starting point is 00:30:27 Well, what does that mean? So it's in the bank. Well, no, it's not in the bank. It's something where the contract is almost done. Okay, it's almost done. It's not signed. It's in your pipeline. So pipeline revenue versus bookings, meaning the contract is signed and the revenue hasn't

Starting point is 00:30:45 hit your bank account yet versus realized ARR versus gross revenue versus net revenue. There are so many areas of gap earnings that get. misconstrued in the SaaS world that it's comical. And so we'll get these investor pitch decks where they're talking about, you know, 50 million of ARR and then you dig into the numbers and it's absolutely nowhere close to 50 million. And so I think, you know, the more has to be done around guidance in this space. Certainly FASB and others have provided, you know, some views on how they define all these things. So we actually have a Microsoft document that we sent out in PDF.

Starting point is 00:31:24 or Microsoft Word to all of our finance teams and our CFOs that says, this is how this is calculated. This is what the definition is. This is what you should be reporting. Nothing else. Because if you're reporting anything else, it's definitely, it's probably non-gap already. But if you go into non-gap territory, the amount of wiggle room that's provided today is pretty massive.

Starting point is 00:31:44 We want our companies to be representing themselves in the right way because specificated investors are going to dig into the P&L and the balance sheet ultimately and figure it out. So I do think this is an emerging problem. And frankly, now you're seeing the public market pullback around a number of fintech companies and SaaS companies. And people are starting to ask questions about how sticky is this revenue? One of my favorite metrics that I like to use in the SaaS world is net dollar retention. So that is how much revenue you're making from a customer today and then how much additional

Starting point is 00:32:14 revenue you got out of them over a period of time. So the top 10 percent, this is actually the number one indicator of enterprise value. you in a SaaS company or their multiple, I should say. And the quality of that multiple and the sustainability that I multiple is net dollar retention. And 120% plus is the kind of top 5% decile, top decile returns from a SaaS benchmarking perspective. And so we look at that very carefully. And that comes down to, okay, the customer loves your product so much.

Starting point is 00:32:49 They've actually added usage, if it's on a usage basis, or added seats, if it's it's on a seat basis, and they're finding so much value, they're rolling it out across the rest of the company. That means they're going to be sick here. That 120 percent, the next year turns into 100 percent revenue and then you start over again. You've got to continue to deepen that relationship, which is where customer success really comes into play.

Starting point is 00:33:12 So we could spend all day on SaaS metrics, but we talk to our companies all the time about this and we really try to be prescriptive with how they should be thinking about it. Now, I find it fascinating. And for those listening who are like, okay, this isn't relevant for me. I only invests in public companies. I'm not, you know, I have enough money to put into venture, et cetera. I just want to highlight something you said earlier, which is a lot of your companies are, the exit is IPO, mainly once you start getting that unicorn status.

Starting point is 00:33:38 I mean, you're over a billion dollars. I mean, acquisitions become tougher and tougher and the universe gets smaller. So IPO is maybe the most common path from that point. But also some of your companies, especially one you were, worked at previously, SoFi is public, and there are others, maybe even going public soon. So I want to talk a little bit about SOFI, given that you have more than intimate knowledge, just having worked there. What's your take on SOFi as a company? I just want to highlight also that it went public in 2020, and billionaires such as Bill Miller, Chamoth, and Dan Loeb have been holding the stock,

Starting point is 00:34:12 although I believe Bill has sold and Chamath has recently reduced. But that could be because, or why, I don't know the correlation causation here, but the stock has been highly volatile with three near 50% corrections in the last year alone. So for investors listening, how does A, the company make money and B, what is your take on today's evaluation based on maybe the metrics you mentioned earlier? Good question. And we have four to six IPOs conservatively this year, which I'm pretty excited about, those coming out of our growth portfolio and then our SPAC, which we listed in October.

Starting point is 00:34:49 October of last year, it trades under XFIN, and we're out in the market having discussions around that SPAC today. And we will be serial SPAC sponsors. And SOFI was really the first major fintech company to go to the SPAC route. They decided to go to the SPAC route, and this was what they positioned publicly because of the quality of the sponsor and Hedo Sophia in Social Capital, which Chamath is at the helm of. And we think very highly both parties, and we felt like with SOFIS consumer orientation, they would be great partners and help take the company into the public markets and support them with both growth capital, as well as, obviously, the advantages of being a public company, particularly with a balance sheet and lowering cost

Starting point is 00:35:33 of capital, being able to recruit more, increasing their brand value, and so forth. And so we were very supportive of the timing of the IPO and that trajectory. But as you said, the stock is traded in a highly volatile way. I would say that's the case in the last, you know, call it two to three months for the entire fintech space. And what you've seen is that the fintechs that have had the most volatility are consumer-oriented, right, highly regulated, have interest rate sensitivity, may have some inflationary sensitivity as well if they're touching the consumer and the consumer basket. And, you know, I've had in some cases some pretty significant issues with regulators, a la Robin Hood. to Coinbase and so forth. And in SoFi's case, they took a very interesting approach to bolstering their business model in advance of going public by acquiring Galileo. Galileo is a B2B

Starting point is 00:36:29 software platform that help companies issue debit and credit cards and is a banking as a service platform. So that was SoFi's ecosystem play and not only vertically integrating their own tech stack to be able to leverage Galileo, but also leveraging Galileo's capability. in servicing the rest of the fintech market with players that include chime and Robin Hood. So I think that was a brilliant acquisition. It looked expensive at the time, but based on Galileo's growth weight rate and their contribution margin to the overall SOFi enterprise, I think it has been a big part of reducing volatility in the name. Our view also is that SOFI has been hit by the extension in the CARES Act.

Starting point is 00:37:14 So Biden came out and said, you know, earlier last year he said, we're going to extend the CARES Act through the first part of Q1. He then updated that in December to say we're going to accelerate, we're going to continue that through March. And the CARES Act aspect of this is simply consideration for student loans and allowing people to effectively getting their student loans written off. And a big part of SOFI's business is student loan refinancing, ergo less loans in play to potentially refi public markets,

Starting point is 00:37:47 view that fairly negatively. But, you know, it's traded down to $12.13 today, which is an all-time flow for the stock, apropossts back. And I would say that, you know, interest rate concerns is absolutely a big part of that. But that's hit the overall NASDAQ, and I think we'll continue to be a headwind. So I don't think you're going to see any relief in all these fintech names until earnings here in mid-February. And I think Q4 earnings, you know, should be fairly attracted. for names like SoFi and others, but it's going to take several strong earnings showings from Sofi and others in order for them to get out of this cycle, unfortunately. I want to double click on that because the SaaS Capital Index has doubled from a low of

Starting point is 00:38:33 8.1 times ARR in March of 2020 to now a high of almost 17x by the end of last year. So this is obviously an extreme boost in valuation. I'm kind of curious. You mentioned sort of this sensitivity to interest rates and starting in the public markets. I'm wondering if you see this potentially trickling down into the private markets where the multiples we're seeing on these highly valued SaaS companies could take a hit as well. What's your take on the market and possibly being overheated by these metrics? So I think on the SaaS side, you've seen less multiple compression than you have in the consumer and SB-oriented spaces. I'm speaking more about this intersection of FinTech, obviously.

Starting point is 00:39:19 And I think that's because public market investors look at a consumer business or an SUV business. They see a balance sheet. They see credit risk. They see regulatory issues. And they think tangible book value, right? Versus in a SaaS company where there's true IP, ARR, some level of churn assumptions, typically, you know, sub 10% for the top decile, 120% plus net dollar retentions for the highest

Starting point is 00:39:43 quality names. and they get more comfortable that that revenue into the future is sustainable and real, regardless of growth rate. And there's a gross margin that's helping protect that at, you know, 70, 80% versus consumer and S&B-oriented names where those gross margins tend to be in the 20% to 30% plus range. And so that's why I think you've seen flight to quality in SaaS, and that will continue. And so we're, and frankly, there's more insulation if you think about the three big, I'll call it four big macro issues right now, impact of COVID and new strains, impact of

Starting point is 00:40:20 interest rate hikes, and obviously the Fed's starting to taper sooner than expected. Third is inflationary pressures and cost of inputs and impact on the consumer basket, and then for the supply chain issues, right? So those four issues effectively, depending on obviously who the SaaS company is selling into. So like a Kupa, for example, it's going to be a little bit more sensitive to that supply chain issue because they're selling into companies that may have complex supply chains. Trade shift in our portfolio has a similar type business model. And so you have to look at, obviously, to the end customers, but writ large, those four areas aren't as big of a concern

Starting point is 00:41:02 for SaaS companies as they are for the broader market. So that's why I think you've seen less compression. So my favorite example on this multiple story is DocuSign. They were trading at 100x trailing sales at the end of October. 100x. That's a crazy multiple on any dimension. And as we all saw, they got really hit hard through year end. Well, they bottomed out at 15 times trailing sales, which is still a significantly healthy multiple.

Starting point is 00:41:31 And so, again, I think you're going to see more insulation in the SaaS names, less of a hit on their multiples, less of a hit on EV as a consequence. And they're going to be the first to really bounce. back as hopefully we get some recovery here in Q1, Q2. But to your point, that has and always will have a knock-on effect to pre-IPO rounds. I think pre-IPO rounds, specs are certainly giving significant forward revenue credit and the terminal value equation that we all do is happening on, you know, next year's forward revenue or multiple years out, and that will continue. But your discount rates absolutely change, and that's going to have some multiple compression in these

Starting point is 00:42:12 pre-IPO rounds, but the flight to quality, the insulation, et cetera, that I've spoken to are all still going to be there for SaaS-oriented businesses. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI power. platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA

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Starting point is 00:45:49 how would you advise FinTech startup founders in today's climate, meaning are we in a growth at all costs type of environment in full speed ahead, or are we kind of battened down the hatches and getting profitable climate? I think we, you know, we saw this in Q1 of 2020. Sequoia came out and said batten down the hatches, index to profitability, trim OPEX, raise as much capital as you possibly can, increase your debt lines. So those five things were the big pieces of advice from Sequoia and many of us in Q1 of 2020 under a great degree of uncertainty.

Starting point is 00:46:26 I think in Q1 of this year, you're starting to see some of those same recommendations coming back. I don't think we're in anywhere near as bad of a climate as we were in Q1 of 2020. And I think the hopefully Omicron, just, you know, looking at the data coming out of South Africa, is a bit overblown in terms of the potential longer term impact. And we'll get through that quickly. But I think the uncertainty around other strains and this being something we're going to have to live with into perpetuity. Good news is, you know, the biomedical field is coming out now with pill forms on being able to take in more antibodies. and I think they'll continue to be innovation around that, which is great.

Starting point is 00:47:07 And so I think that first issue I raised in terms of COVID uncertainty will dissipate. But those founders that have in the fintech world, and many of them do, balance sheet, credit, interest rate concerns, and or impact from an inflation or supply chain perspective, need to consider edging and moving more towards profitability, reducing, ratcheting down growth, improving gross margins, doing all the things. to make sure that they're insulated. And I think you're going to see down rounds, flat rounds, increasing venture debt, et cetera, and certain types of business models.

Starting point is 00:47:43 For certain SaaS companies, particularly those that have had headwinds from adoption perspective that we spoke about earlier, they're going to be able to take advantage and continue to accelerate their growth and invest while others are fearful, a classic Buffett recommendation. And so there's going to be a very strong have-nots and halves, kind of type of divisiveness in the market as a result, and it's really dependent on where you are in a space as to how you're allocating dollars and whether you're outraising capital. Now, there is a significant amount of capital on the sidelines.

Starting point is 00:48:16 If you're able to take in capital without taking on, you know, massive dilution, it's absolutely something we're recommending to our companies, so that they have optionality and the ability to continue investing in growth, continue hiring the best people and to probably lengthen the period of time between fundraising rounds so they can hit more meaningful milestones that have to be absolutely solid before they hit their next series. So I think all of those things are top of mind for us at board levels in these companies and certainly the case for CEOs out there. So in an effort to take on more capital with less dilution, as you put it, you know,

Starting point is 00:48:59 you're talking about higher and higher valuations and that has some pitfalls as well. I think for a founder and everyone needs to understand that when you're raising and setting the bar really high valuation-wise, trying to, you have to live up to that at some point, at least your investors do. They're looking to double-triple their money off of that valuation. So talk to us a little bit about the risks of raising at those levels of valuations, especially when you're getting up into the billions. Absolutely. And there's been quite a bit of, I would say, articles and thoughts written, I think, readily so, that venture capital, dollars can be a dangerous drug.

Starting point is 00:49:32 And so if you're a CEO and you're continuing to take on more and more capital, particularly in quick succession, without really having the metrics to support those rounds, and there are very specific benchmarks that we lay out for our companies through our operating playbook for seed all the way through to pre-IPO, I think public market investors and research providers have done an awesome job on SaaS metrics for pre-IPO companies and public companies. They haven't really provided much data down from there from a company. timeline perspective. And so we've tried to fill that gap and providing data out. Happy to share that out with anybody that's interested in seeing those. And those valuations

Starting point is 00:50:12 in these, you said there's a lot of round preemption going on now, particularly around the series B where growth equity investors are coming down market and saying, hey, this is a company I would have invested in the series C probably two to three years from now. I'm going to invest in them today, even though they don't have the metrics I would traditionally look for, they're going to get there because they're on that trajectory. And I want my ownership now. And I want to have bulk control. So that is a massive trend line that's obviously been occurring for the last several years. We're seeing it more and more,

Starting point is 00:50:38 particularly around our Series B companies. And I think it's a trend that's here to stay as more crossover investors who were in the public markets went to late stage and are now moving down from growth equity into expansion stage and into early stage. And so it's really important that CEOs understand you're taking

Starting point is 00:50:55 evaluation on that you need to be able to grow into and grow into quickly. Otherwise, you're going to put yourself in a position where that investor who is really happy with you and excited to give you the capital at that early point, they don't see your forecast be recognized. You're going to suffer the consequences

Starting point is 00:51:14 in terms of either a down round or a flat round, which is going to accrue to more dilution for those founders. And I think that is one of the biggest dangers right now in venture capital is what I call channel stepping. So these funds, Andresen just raised $9 billion. dollars. You're seeing fund sizes increase, more products out there. That has resulted in those investors needing to invest the most amount of dollars they possibly can in the most attractive

Starting point is 00:51:42 companies from their perspective. And in some cases, the founders don't want those dollars, or they don't want as big of a round, but they're being forced to take that capital vis-a-vis the term sheets. And as a result, valuations have gone up. And that works until it doesn't, to your point. And I think for us, and we really try to be thoughtful about the step function that our companies are taking, particularly in that series A, B, C, as the companies scale through those rounds. And then I do think pre-IPO rounds will start to contract from a size and multiple perspective as a knock-on effect from the public rounds. And in many cases, we're seeing pre-IPO companies not decide to take on a pre-IP round, given those dilution dynamic, given the kicking the can down the road on the IPO timing, but rather to decide to go the SPAC route. And that's our bet, having launched our initial SPAC and planning to be serial sponsors,

Starting point is 00:52:37 is that SPACs are not practically a different route or an alternative to a traditional IPO path, but rather an alternative to a pre-IPO round where you don't take on that dilutive capital, you get public more quickly, the benefits of that, and you still get certainly around how much growth capital you're going to be able to raise to work on the growth side without leaving any money on the table. And so we think that's going to be an interesting dynamic for higher quality sponsors going forward. Let's talk about Andreessen really quick. They're now managing something like 20 to 25 billion, I think. I mean, at that size, they're a behemoth now. And is there possibility for them themselves to go public? And do you think that'll be a trend

Starting point is 00:53:24 as these VC firms grow and meet yourself included. You're growing fast over a billion and TPG and some others are doing something similar. Is that going to be a trend we continue to see? I think you look at Sequoia and their asset base and certainly others like Andreessen that I've obviously grown asset center management really dramatically. I think the challenge for asset management businesses is they don't tend to trade well in public markets. You're certainly seeing that trend from going. from an exempt reporting entity under the venture capital rules to an RIA,

Starting point is 00:54:00 I don't know that you'll see a ton of venture firms deciding to go public, mainly because, again, they don't tend to trade very well on an asset basis. Their enterprise value is right around 10% of their AUM, right? So if you're valued at 10% of AUM and you have pretty thin margins, it's a tough, I would say, outcome for the founders versus staying private, being able to leverage either exempt reporting laws or the RIA laws to execute on the investment strategy that you want to, support your founders, provide values of fiduciary, H3LPs. Public market listing could be a pretty significant distraction,

Starting point is 00:54:41 and I don't think a very interesting outcome ultimately, just in terms of how those businesses are getting valued. But we have a lot of respect for the generalist VCs and what they've built. We work very closely with a number of the generalist VCs across our portfolio. I think for us, we've chosen to be stage disciplined and size disciplined, and that's why we have four separate fund strategies across our four verticals from pre-seed to early stage to growth to late. And we plan to continue to do that.

Starting point is 00:55:17 And at the end of the day, you look at the quantitative data around venture returns, if you go above $400 million in size and a venture strategy, you get massive drag on performance. And that's Kauffman Foundation data. Cambridge Associates has looked at this. Everybody's pretty much decided that you shouldn't raise a venture fund. That's more than $400 million because that will be a detriment, just purely from fund math.

Starting point is 00:55:43 and the historical return math, and yet everybody's still doing it, right? And Andreessen raised a $500 million seed fund, as did Greylock. And so I'm not sure, you know, how they're thinking about deploying that and allocating it. There's some really smart people around the table at those firms. But for us, we look at that historical math, we look at the portfolio construction, and then we look at bandwidth in terms of serving our companies and obviously being good fiduciaries to LPs and wanting to make them a 3x net, which is obviously all of our hurdles and it becomes a much more difficult problem versus, you know, separating all these funds out and having fund cycles that, you know, are on a measured basis so that you continue to

Starting point is 00:56:24 show progress. Now, you mentioned you've created a SPAC and there's, I think, now over 500 spacks, but when you point out the amount of unicorns that are at play, like CB Insights reported that there's almost 960 unicorns at the moment. I mean, that's a decent pool of opportunity to go public. Is that the thesis, is that kind of the metric you look at and say, okay, there's a lot of opportunity. That's why we want to get into the SPAC game or is there another reason? Well, we think SPACs are a structure that are here to stay, that the flight to quality will be in PEBC sponsors where this is a natural extension of what we do every day. And third, there is going to be a massive amount of runoff in the SPAC market this year.

Starting point is 00:57:09 You've already started to see a lot of it. And many of the SPACs that have taken FinTech companies public, Money Lion and others being great examples, are now trading at way below their par value. I think Dave is a good example of something that went public last week. And, you know, these are companies that were probably not ready to go public. They are, they tend to be consumer oriented businesses, which, as we've talked about, have not been favored by financial investors, just given the makeup of those businesses from a metric perspective. And that's been, you know, really, bad signal to the market overall. And then you've had lower quality sponsors, retired executives,

Starting point is 00:57:48 politicians, celebrities, and athletes going out and raising SPACs just because they wanted to raise a SPAC and not having the platform or the capabilities to really execute on that. And so our view is that for us, we have a dedicated team. That's all they do every single day is focused on our SPACs. We only have one in the market today. We plan to only have one in the market on an annualized basis. And that gives us the ability to really focus on our own portfolio companies, first and foremost, supporting our growth equity companies that might view us back as an alternative to a pre-IPO round.

Starting point is 00:58:24 Or we're thinking about going public the traditional IPO path, but would rather work with us as a sponsor because we'll be their quarterback into the public markets versus working with an underwriter where they may not have a very strong relationship with those underwriters. And they've also seen the IPO pop effect and potentially leaving money on the table. And that is obviously a huge concern for them. And so we plan to execute this first fact this year and continue to sponsor them as it merits because we think it's a superior structure to a traditional IPO path. We think it's certainly a superior structure to a dilutive pre-IPO financing. And if you're solely focused on the enterprise SaaS space, and you see those high-quality,

Starting point is 00:59:08 unicorns that are able to sustain those and grow those valuations in the public markets, then that can be a really positive outcome. We also don't view it as an exit event. It is simply a stepping stone into the public markets. It almost is like the clock resets from our perspective because we may be already invested in the private markets and then help take the company public. And then we stay on the board and really support that company into its next phase of growth, taking them from an enterprise value of maybe a billion dollars to five to ten billion.

Starting point is 00:59:40 What does that journey look like? So for the CEO, that's really strong messaging because we may have been with that CEO since the very beginning in the seed stage. And if we can support them now into the public markets, they have a trusted partner that will support them into that journey. And for our LPs, anybody who wants to sell in the private markets through secondary certainly can. If they want to transfer their position to a public market holder, they can do that as well. But for us, we don't want to be sellers if the company is going to continue to compound extremely well and start to generate free cash flow and be a long-term success story. Why would we sell that position?

Starting point is 01:00:21 So I think the SPAC allows for that full lifecycle continuity and is a huge benefit to the investor base and the company and the ecosystem. That's interesting. So, you know, speaking of selling, Chimath, who I know is in on some of your deals, are similar, like, pipe and some others, they're expressing a little bit more bearishness. I think Chimoth was saying he had sold out of all but one of his pipes, and he greatly liquidated going into November, October, similar to when Elon was selling on Tesla and some others, I'm not getting the same sense from you as far as any kind of outlook or bearish outlook. And I'm kind of curious if you think, you know, if you look at it like a cycle and you think if we're late, in this stage or still kind of fairly early or somewhere in between? I definitely think we are in a period of caution, but as an enterprise software investor, I would rather be playing my hand today than, you know, people who have been heavily investing in consumer and are over exposed to consumer. And Chimot's specs were all heavily invested

Starting point is 01:01:28 in consumer, certainly one with Virgin Galactic lesser so, but I'm certainly a long-tail consumer in that case. And so, you know, he chose to go down the consumer route. And that was obviously where his bread butter was from his Facebook career and writ large. And that's great. And he felt like you could add value and have ball control there. For us, our differentiation, our ability to have pattern recognition and to underwrite businesses is very much in this enterprise SaaS space and the intersection of FinTech where we have an edge.

Starting point is 01:01:59 And so where we feel like we have an edge and can get comfortable on a long-term view of a business, we're very happy to take that long-term position from the early stages all the way through to taking the company public and holding onto that position into perpetuity. And so, you know, very much like Warren Buffett and others, having that long view, understanding the compounding effect of those dollars and ultimately dividends and so forth, that's a much better position from my perspective to be in. In terms of outlook, bearish versus bullish, I mean, I think we're short-term bearish and have been really since Q4 of last year, given the Fed speak and everything else we were seeing from the markets in terms of inflation, in terms of supply chain, in terms of the Omicron emergence and so forth.

Starting point is 01:02:48 But I think that second half of this year, going into next year, for fintech stocks in particular, you're going to see meaningful recovery as you get more certainty around the interest rate picture. Hopefully, you get some more clarity around how we're going to handle Omicron and future variants, and you get more certainty around the inflation picture and then the supply chain picture. For us, again, we're fairly insulated from those four factors and continue to be very constructive on this acceleration of digitization trend that, you know, took hold in 2020 and we think we'll continue to be the story and headline going forward for FinTech and adjacent.

Starting point is 01:03:30 Logan, this has been fantastic. Before I let you go, I want to give you an opportunity to hand off to our audience. Any resources you feel like you want to share, it could be related to Finn, it could just be general investment advice. What would you like to leave for our audience before you go? Sure. On the venture capital world, only have one book recommendation. Bradfeld's Venture Deals, he's on volume four.

Starting point is 01:03:52 It's the only book that when anybody asks me how they should learn about venture capital, that's number one. Number two is Paul Graham's blog. That blog is probably 20 years old at this point in some cases, not the age of all, but that is an awesome resource for any founder that's looking to learn more about building a company. And he obviously built YC, which continues to be a prolific producer of companies. So those two resources I would absolutely point to. And then we really try as a firm to put out thought leadership.

Starting point is 01:04:24 And you can follow us on LinkedIn and Twitter. And then our website, FinVC. post slash news. We really try to put out content looking to be open about what we're seeing in the markets and be transparent with our own IP because we think it will benefit the broader fintech ecosystem and community. Fantastic. Well, Logan, really appreciate this and all your time today and really enjoyed the discussion.

Starting point is 01:04:47 I hope we could do it again soon. Thank you, Trey. I appreciate the time. This is awesome. All right, everybody, that's all we had for you this week. If you want to see if any billionaires you love are invested in any of these fintech companies, you can go to the Investorspodcast.com and check out the TIP finance tool. We really love your feedback.

Starting point is 01:05:03 So if you get a chance, hit me up on Twitter at Trey Lockerby. And be sure to follow us on your favorite podcast app. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - TIP415: Adventures in Fintech with Logan Allin

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