Building, Investing and Fundraising in a Crisis with Rob Moffat
Rebank co-host Aman Ghei of Finch Capital is joined by Rob Moffat, back on Rebank for a second appearance.
Rob is a partner at Balderton, a leading European VC, with investments including Revolut, Nutmeg, Wagestream, Zego, GoCardless, ComplyAdvantage and many more.
In this conversation, Aman and Rob discuss the state of the venture market, fundraising during a crisis, the most interesting new business opportunities in fintech and much more.
To subscribe to the Rebank newsletter, including insights, essays and written transcripts of all new episodes, please visit rebank.substack.com.
Thank you very much for joining us today. Please welcome, Aman Ghei and Rob Moffat.
Full transcript:
Aman Ghei:
Rob, welcome to Rebank.
Rob Moffat:
Hi there.
Aman Ghei:
Great to have you here, and I'm really looking forward to this conversation. And talking about you, and what Balderton's been up to. I would love to start off by understanding how you guys are reacting to the period we've just been through, and are still going through, in terms of deals. I mean, what have you seen happening to your portfolio, what are you telling your founders, and what's the general outlook like for Balderton right now?
Rob Moffat:
Yes, I think we're definitely still in a very strange period for the industry, and there's a lot of uncertainty, and I think we have to take a sort of scenario based approach to planning for all our companies. I think what we saw in March, end of March, was how do we stabilize balance sheets, how do make sure we have cash runway, how are we ready for the worst case? And it's been apparent sort of since March that we probably aren't heading to the worst case for the moment, but there's still a possibility of a bad second wave, and a large recession. So we very much have to think of these sort of two or three different scenarios. The scenario where things bounce back very quickly, and the resilience of the stock market continues, and we see that across all markets. And there's also a scenario where we have a bad second wave, and a significant recession, and the stock market plunges again, and we have to be ready for that as well.
Rob Moffat:
So I think if you look at the phases, yeah, certainly at end of March, April, our focus was on the portfolio, and making sure that the portfolio was well funded, and had the right burn rate, and therefore had lots of cash runway, and funded well into next year, or ideally to the end of the next year. So we went through that process, a number of our companies did cost cutting, we raised more internally, and in a number of cases pulled on debt lines, et cetera. Now we're definitely in the sort of first phase, and now most of our companies seeing demand bouncing back, seeing actually good growth in the last two month of Q2. We're now looking to how do we take advantage of that, and seizing opportunities in front of our companies.
Rob Moffat:
We're still bearing in mind that kind of, yeah, being ready for a potential worst case scenario as well.
Aman Ghei:
I think that makes a lot of sense. I think there's obviously a lot of talk about this focus on unit economics now, right, and whether that should have happened before or not, I think that's a big question. I mean, what are you telling your founders, in terms of how quickly you need to reach there? Does that need to happen? There are probably certain categories of companies that have already reached there, but for those who haven't, are you basically saying this needs to happen before the end of the year for you to be in a good place? What's the messaging around burn? I think I've heard the magic, kind of don't have burn more than £500k a month, because then you just need to raise a massive round to keep going. What are some of those dynamics you're seeing?
Rob Moffat:
So I think unit economics is really important, and I think to have positive unit economics, and I think we've always had that opinion. So whether you're a consumer business, and it's about CAC and LTV, or sort of 12-month value of a customer, so can you get to 12-month payback on your customer acquisition? Or enterprise, can you get a 12-month payback on your sales and marketing costs? We've always had the opinion that that's really important. Maybe we've been a bit unfashionable at times, when other investors were throwing money at unprofitable businesses, but we've always believed in going after businesses with real unit economics.
Rob Moffat:
Yes, there is a group of businesses which are kind of consumer only, to start with, and then growing virally, but then you have a business model, and we've done some of those as well, but that's the minority. The majority of our companies have had strong unit economics from day one. And the question is, how big do you let your fixed costs get, your central costs? And what's the right burn rate overall, and how quickly should you aim to pay back your central costs? And yeah, I think, yeah we probably, as an industry, allowed some of these central costs to get a little bit bloated. In an era of when capital was easily available. And we've seen a number of our companies sort of cut central costs, and be very happy about it. And they're like, "We should have done this, whatever the economy was doing. And actually, we've come out as a better organization as a result."
Aman Ghei:
Yeah, that's an interesting point. And I think on capital availability is also an interesting question, in terms of I think funds in general are well capitalized to help kind of existing portfolio companies. I guess, what are you seeing in terms of when the market opens up to external investors, for some of these companies? Or are you already seeing, it's opening up, are you telling founders go to market now if you want to close a round by December? Do you feel that balances there, or you still think it's kind of a couple of months away, people want to see what happens with the second wave to actually commit to an external round?
Rob Moffat:
So I think there is plenty of money out there. There's plenty of big funds that continue to raise funds, and there's lots of people sitting on a lot of capital. And we've seen some our portfolio doing, yeah, very good external rounds. Aircall, Contentful, Kaia Health have all raised sort of big rounds in the last month or two. But it seems quite selective, and I think waiting for strong inbound from investors seems to be the right approach at the moment. So yeah, we're seeing, for those companies, they had people chasing them, and they reacted to being chased, and were able to raise successfully.
Rob Moffat:
I think going out with a roadshow right now doesn't seem a sensible thing to do, but there is plenty of capital out there. I think people have certain sectors they want to deploy in, or companies they find attractive, and they're pursuing those opportunities at the moment.
Aman Ghei:
Interesting. Fantastic, Rob. Well, I want to dive into Fintech, which is why we're here. And obviously I know you spent a lot of time in the industry, have invested in probably some of the best names in Europe. What are you seeing that you're really excited about in the short term right now, in this vertical?
Rob Moffat:
So yeah, we've obviously been very active in Fintech, and I think 15 investments over the last few years. And we've been quite broad in what we've done with Fintech, everything from insurance, to compliance software, to credit benchmarks, payments, to investments, a full range. And obviously Revolut in digital banking. I'm certainly very interested in the payments sector at the moment, there's a lot of change going in payments. We've made an investment in Primer recently. We'd love to do more in payments, I can talk more about that later. I've been going on about insurance for many years now, and continue to believe that Insurtech is a really ripe opportunity for innovation, and just looking for more opportunities to invest beyond our existing investment in Zego.
Rob Moffat:
And I also think, yeah, there's always been interesting opportunities in the software layer, both for insurance and for banking. We've made a couple of investments in that space, but I'd love to continue doing more there.
Aman Ghei:
Do you feel like there's something in the Fintech's broader space, right, so including insurance and software, that can ride this wave right now? Do you see that there are, obviously I think there are certain industries in Fintech that are probably a little bit heavily impacted, because of this situation we're in, versus others. But I think generally there's this trend towards kind of officeless, branchless, which was happening anyway, but I can imagine the big banks now don't want to have massive call centers anymore, and need kind of some kind of software to coordinate all their efforts.
Rob Moffat:
Yeah, so I think short term has not been bolstered too much, but I think medium term, there's a big opportunity in that, yeah, as you say, that branchless approach. How do you verify someone's identity fully, in a fully online way, which the newer banks have done from day one, but the traditional banks have always struggled to do. So yeah, I think that benefits the likes of Revolut, it also benefits, say, a software provider like iVantage, enabling this kind of completely online approach to the customer.
Rob Moffat:
And then I look sort of, yeah, what are the industries that also might benefit? So we saw with the last recession that banks pulled out from business lending, and that created an opportunity for companies like Funding Circle, and they also pulled out of consumer lending, creating opportunities for like the peer to peer lenders, such as Zopa. And I think we'll see that again. I think banks will pull back from lending, insurance rates in commercial insurance will harden, and that will create opportunities for startups. Where they're able to secure the capital, and the balance sheets, they can continue to lend in a selective way, the segments where banks are pulling back from.
Aman Ghei:
Interesting. And on that topic of lending, particularly on the consumer side, I mean, we've seen a lot of effort by the government to help consumers, whether it's repayment holidays, or debt forgiveness, and so on. Do you see like this big financial wellness trend emerge outside of this COVID-19 landscape? There are certain industries that are obviously going to be more impacted, if you're working in travel and hospitality, you're going to want more financial wellness than maybe in another industry. I know you guys are in Wagestream. And how do you see this evolving in the next couple of months, if not even years?
Rob Moffat:
Financial wellness is a really important topic that not a lot of people have paid attention to. At the moment, yeah, there's a lot of government stimulus, but that will stop very soon, and that's going to leave a lot of people in trouble financially. And so I think it's really important for employers to take that very seriously, and also for consumer facing apps to really help people to address that. So yeah, on the employer side, Wagestream, we invested in last year, just raised another 20 million pounds, so another kind of post lockdown good fundraise, from ourselves and also in QED. And they are all about how do you help employers bring financial wellness to their employees? For you as the employer, how do you help your employees avoid getting into expensive debt? And the first sort of plank of that is allowing people real time access to their salary, so if you need money, and you've earned it, you should be able to access it, rather than waiting for month end and subsidizing your employer.
Rob Moffat:
So that's the sort of first feature. Then on top of that, we build really strong financial education for employees. We have something there yet, it's not good enough. We can do so much smarter stuff around financial education. You build in the savings products, over time you can build investing, and many other sort of products on top of that, so I think you look back, and yeah, sort of 19th century employers took a lot of responsibility for the financial wellness of their employees, and they sort of abdicated that responsibility over the last couple of decades. I think it's sort of fallen back on them to make sure that they do provide a good financial lifeline to their employees.
Rob Moffat:
And then on the consumer side, yeah, so we're investors in Cleo, which is all around helping individuals bring their own financial wellness, and how do you have a conversation with someone to help them get control of their money, and reduce their spending, meet budgets, avoid overdraft fees, avoid late fees, cut out unnecessary spend, and yeah, ensure that what you are spending is making you happy. So Cleo's doing very well, particularly in the US amongst young people, sort of making finance something that people talk about, and participate in.
Aman Ghei:
Super interesting. And yeah, I can definitely imagine this vertical being extremely important mentally and financially for a number of consumers. Rob, switching gears a little bit, and I know we initially spoke about payments, but I'd love to dive into the topic of payments, because Europe has been quite interesting in this space. We've seen billion dollars PSPs, in the likes of Adyen, and Checkout.com here in the UK, obviously. And yet, I think people are still trying to find what is the next innovation in this payments stack? Is it going to be another PSB, slicker user interface, or better API connectivity? Or is it going to be something else? And would love to get your thoughts on how you see the payments stack innovation, particularly from Europe's perspective, because I think payments in Europe is probably, from an innovation perspective, I would say at an advantage, maybe, to the US, where things are a little bit more homogenized.
Rob Moffat:
Yeah, no I completely agree with that. I think payments in Europe is much more interesting than payments in the US, which is very sort of stuck in the past in many ways. Yeah, I agree. Payments in China is more interesting, but that's-
Aman Ghei:
Fair.
Rob Moffat:
Not as good for us. So when I see innovation payments, I think we've seen over the last few years is Stripe and Adyen, in particular, building $20 billion plus size companies by going to merchants and saying, "Give payments to us, and we'll solve it for you." And I think they've shown the size of the industry, their market shares are still tiny, right? They're low single digit market shares. And yet, they're able to build these massive, $20 billion businesses, serving a few percent of the market.
Rob Moffat:
So I think that shows the scale of the pain that merchants have felt from the sort of first wave of PSPs, and Worldpay, et cetera, if someone can give them a better solution, they're really open to that. But sort of the deal they're making is they're going all in with one provider. And I think all we're seeing now is merchants are not sure about that. They're not sure they want to go all in with Adyen. They want to have flexibility, they want to have multiple providers. They want to have some commercial power, but they also want to have the best of all worlds. They don't want to go to Stripe, and Stripe to tell them to use their own direct debit product, and the merchant would rather use GoCardless' better direct debit product. But Stripe won't let them.
Rob Moffat:
So they want that flexibility, and own more of the payments layer. That was behind our investment in Primer, so primer abstracts the payments layer, and allows the merchants to use the best possible payment methods, but consolidate those in one place, have consistent reporting, consistent loyalty, be able to more easily add different payment methods, adapt to local payment methods, et cetera. So I think it's an interesting part of the stack for us, and then, yeah, then we see alternative payment methods, particularly PSD2 payments. And I think that's a really interesting trend in Europe at the moment, is where do we go with PSD2 payments, so PISP in the UK, and equivalent schemes across Europe.
Rob Moffat:
So they're still very early days on that, because it's a pairing with your bank, rather than going via a card rails is one I find really interesting, and I think could be very disruptive.
Aman Ghei:
It's great for the merchant, right? I mean, it's a no-brainer to have your consumers pay bypassing the card rails because of all the fees you can-
Rob Moffat:
Yeah, and not just fees, but you get the money quicker as well.
Aman Ghei:
Sure.
Rob Moffat:
I mean, you have less of a charge back issue, and yeah, a lot of benefits.
Aman Ghei:
I guess the big question there, I think it's a very interesting space, the big question there is what's going to be consumer adoption, right? Because you're effectively kind of asking consumers to change their behavior slightly, moving away from their traditional credit cards, what impact that has on conversion. It's interesting you mentioned payment methods, because I think we've kind of seen a resurgence, so to speak, if you can call it that, of the likes of Klarna, and offering kind of customers an alternative way to pay, but still using kind of the existing payment rails. So it'll be interesting to see what happens. I don't know if you have a view on what the consumer side of the PSD2 payment problem is?
Rob Moffat:
It has to be a great experience for the consumer, and yeah, I think Klarna shows that convenience wins. We actually had a previous investment company called PayWithMyBank in the US trying to get people to pay with bank accounts in the US, and they could never quite win that convenience game, and getting people to really love it, from a consumer's perspective. So yeah, the jury's still out. I think on a mobile, if you have your banking app on your mobile, it can actually be a really friction free experience. Not quite as friction free, maybe, as Apple Pay, but certainly much more so than trying to type in your card number, or take a photo of your card. And obviously much cheaper than Apple Pay. So I think it can be convenient enough, but I think merchants will need to support this, and they'll need to take some of the margin they're saving by going away from payments, and giving that back in terms of extra loyalty benefits or incentives.
Rob Moffat:
We're in a bit of a chicken and egg issue at the moment. The technology is out there, it's been reasonably stable for maybe six months, but merchants aren't diving on it at the moment. I think it's a little bit of wait and see. Someone needs to embrace and really go for it.
Aman Ghei:
Makes a lot of sense. I think kind of tying it to loyalty is a key component. Going back to kind of the payment complexity part you mentioned, Rob, how do you think of it in terms of the types of businesses that have this payment complexity, right? Obviously if you're a small business, maybe going all in with Adyen or Stripe makes sense to you, because you don't have the payment analyst to really understand whether you're saving money by switching acquiring banks or so on. Do you feel like this is a problem, the bigger the merchant is, the bigger the problem is? Or do you feel like some of the small businesses as well kind of maybe deserve to have this automated kind of functionality of understanding where to save money and how to reduce complexity in their payment stack?
Rob Moffat:
So I think the immediate opportunity is with the midsize and larger merchants. If you think of Primer, that's who they're talking to. I think, yes, small businesses should also have good choice, and I think you look at the market cap of Stripe and of Square, that reflects them taking a big economic chunk out of small business, because that's really what drives their profits, is the monitors they make on small businesses, and small businesses paying two or 3% for card payments is pretty outrageous. So yeah, I'd love to see more innovation in that market, but it is a really tough market to get going in. [inaudible 00:18:47] Square, but colossal amounts of money to get to where it is today.
Aman Ghei:
Yeah.
Rob Moffat:
So there's not a lot of companies that are going to be able to do the same.
Aman Ghei:
Yeah, that makes a lot of sense. And Rob, switching to, I guess, insurance, I know you've spent a lot of time in this space, you're very closely involved with Zego. We've seen over the last maybe five years or so, this massive wave of MGAs, particularly here in the UK, where people don't know MGAs, managing general agent, where an insurance front end works closely with a carrier to provide a better user experience for customers, but how have you seen that impact kind of the current insurance landscape, and what do you see happening in the future? Do you see that changing a little bit, or do you see that more of the same, in terms of this growth of MGA?
Rob Moffat:
So I think MGA overall is a really good thing, because it allows innovation in insurance. You can get going as a startup, you can use someone else's capacity, get your broker license, and you're able to start selling a different volume of insurance, with a different pricing approach. You're taking on some of the risk yourself, you have some profit share. It allows you to really innovate and use your experience, without the kind of expensive and long process of getting an insurance license yourself. So I think it's a real positive for innovation. The question is, yeah, how far can you go as an MGA? And I think what we've seen in the past is there is a bit of a cap on how far you can go by just being an MGA.
Rob Moffat:
In the end, you are reliant on either a panel of insurers, but then you're probably more restricted in how innovative you can be, or you go all in with a big partnership with a big insurer, but then you're very tied into that one insurer. And if they change strategy, then you're subject to that. So I think as companies rescale, it becomes more important to have their own insurance license, and therefore have control of their own destiny, to a greater extent. So that's why we saw Zego got their own insurance license last year, the big Insurtechs in the US, there's Lemonade, Root, et cetera, getting their own insurance license. [inaudible 00:20:59] in Germany. So I think we're seeing more of this trend happening, that it's important to get your own insurance license as you rescale.
Rob Moffat:
And that's kind of the model I like. I like the idea of sort of proving product market fit early, in a capital efficient way, but then backward integrating and getting control of your destiny.
Aman Ghei:
Makes sense. I want to piggyback on Lemonade, because obviously there's a lot of news and talk about them going public, and what they've done in the US, which is its own animal, so to speak. How do you see that maybe translating into Europe, and what kind of companies do you feel emerge, look at Lemonade and will start to emerge, that really kind of truly disrupt insurance?
Rob Moffat:
So I think there's a huge amount of skepticism, particularly in Europe, about Lemonade, early on. And there are a lot of smart people from the sector going around saying, "This company doesn't innovate insurance at all, it's just pricing it unsustainably low levels, and it won't go anywhere." So I think them firstly showing sort of really strong improvement in results they've shown, over the last two years, and then having a very successful IPO, and a successful share price performance since then, is a reminder, I think, to the skeptics that if you build a really strong brand, you build an experience people like, and you price fairly, that can rapidly create a lot of shareholder value, and you can build the beginning of something that can have a real impact on the industry.
Rob Moffat:
And yes, there's still plenty of unknowns for Lemonade, but there's also a really big prize that they're going after. So yeah, I hope that in Europe, that means more great founders starting B2C insurance businesses, more appetite from big insurers to support that with capacity, and more appetite from funders.
Aman Ghei:
Do you see insurance becoming a little bit more collaborative, so to speak? I guess there are, maybe as opposed to banking, where I think, I don't want to say easier, but maybe structurally a little bit easier to go after the consumer without having an incumbent. Do you feel like in insurance, because of that need for an insurer, reinsurer to provide a capacity, people are, founders in particular early on, are kind of saying, "Hey, you know what? I'd rather work with the insurer and build a more collaborative approach, whether that's B2C, but I was thinking more kind of along enterprise software companies, that are basically opening up the insurers to become more digitized, particularly in this environment where handling claims is an issue, fraud is an issue. There's satellite data out there, so they can use different functions of understanding property valuations, commercial insurance. How are you seeing that element from a more B2C, B2B type approach in insurance?
Rob Moffat:
Yes, I think you have to collaborate with industry, whether you're dealing with insurance, you need to collaborate from early on, so I think that is important. And even if you do get your own insurance license, you still, in Zego's case, you do most of your business still as an MGA, and you have big reinsurance relationships, so you're always going to be collaborating strongly with industry. Similarly to Lemonade, or whoever. So yeah, I think it's really important to have that collaborative approach, and make sure that you have great relationships.
Rob Moffat:
On the B2B side, yeah, there's huge B2B opportunity in insurance. The challenge has been the sales cycles, which have been unbelievable. And yes, insurers are incredibly slow to buy enterprise software. If you get it right, like Guidewire have, you can build a massive software business in insurance. But I think the hard thing for me is that, as a VC in the sector, is working out which company get through their sales cycles. Because I've also seen companies really stall, because they're not able to generate new sales, and their existing clients drag on interminably. So that's sort of the challenge on the enterprise side, is how do you find something that can get through those sales cycles, and insurers can buy relatively quickly, and therefore you can continue to grow fast.
Aman Ghei:
Very interesting. Finally, Rob, I wanted to maybe circle back to the first topic we talked about in terms of the VC landscape, and get your thoughts on maybe what fundamentally has changed in venture, looking at valuations, structure, deal sizes, and some of those aspects. I guess if you're a founder going out to market right now, what should you expect from a valuation perspective, from pure structuring, that maybe is different to kind of pre-pandemic days?
Rob Moffat:
So I mean, I've been a VC for 10 years now, and I think I've seen the market improve, overall, every year. I think this is a long term, particularly in Europe, a relatively improving trend of more money available with very sort of clean terms investing around from a greater diversity of venture capital firms. I think what we've also seen is a bit of sort of haves and have nots scenario, where if you're in the right place at the right time, you can raise lots of money at very high valuations, with very easy terms. But if you're not, then it can be a real struggle to raise money at all. Saying before we recorded, about yeah, there's similar amounts of money flowing into deals, but into much smaller number of deals, so there's less companies getting funded. And we see that at every stage. We see some really high profile series As, like Hopin, for example, raising huge amounts of money at insane valuations. But equally, we're seeing a lot of companies struggle to raise.
Rob Moffat:
I think even the seeders are seeing that. I think particularly seed, I think you're seeing some seed funds, you've got good size seed funds, and are investing reactively, but you're also seeing a lot of agent investors, and sort of EIS type of investors who've been burnt, and have really stepped back from investing. So there's less diversity of funding, I think, at seed stage, and so either you get funding from one of the bigger seed funds, or otherwise it can be a real battle to raise.
Aman Ghei:
Interesting. Are you seeing valuations fairly consistent? I guess what I've heard in the market is maybe for early stage, they're fairly similar, but for some of the growth deals, obviously it's a function, maybe a little bit of supply and demand, but for a lot of the growth stage deals, and by growth I mean late stage, actually, so the Ds and Es, we're seeing kind of flat, round pricing. I mean, there was obviously a lot of talk about Monzo here in the UK, is that something you're seeing consistent across the board?
Rob Moffat:
No, definitely not. It's all over the place, honestly. I find, yeah, valuations at the moment are very unpredictable. As you say, I think the late stage market is probably getting more and more focused around economics of work, or yeah, or you look at Lemonade's S1, and they have two and half to three at payback times on user acquisition. So that's hardly the economics people sort of ask of startups. And they were able to successfully IPO with that kind of unit economics. So there's a bit of a push on that, but it doesn't feel like that's consistent either. And then, yeah, at the growth stages, I think it's really supply and demand. I think we've seen some very successful, high priced growth rounds in Fintechs, and we've seen similar sort of good but not perfect businesses doing flat or down rounds, or not able to raise.
Rob Moffat:
So yeah, I find it very unpredictable at the moment. And so yeah, my advice to companies is if you get a good offer, take it, at the moment. And so, yeah, where you get the right stars aligning, and you get a little bit of competition in the process, and people get excited, and herd mentality kicks in, then you can raise great rounds and great valuations. But if you try and force it, then often you can [inaudible 00:29:04] into loss.
Aman Ghei:
Fantastic. Rob, what's the best way for people to reach you?
Rob Moffat:
Yeah, by email. From the website, it's rmoffat@balderton.com.
Aman Ghei:
Fantastic. Well, it's been a pleasure having you here, and really interesting conversation. Thanks again for joining us.
Rob Moffat:
Fantastic. Thank you.
