Fintech & Crypto Seed Investing with Jared Franklin of Costanoa
Jared Franklin is an investor at Costanoa Ventures.
Costanoa is a seed-stage VC focused on fintech, data and developer infrastructure, applied AI and security, specifically B2B. The firm has $1.5b under management across seed and growth funds, including its $225m fourth seed fund.
Prior to joining Costanoa, Jared worked in product across fintech and crypto for BillMeLater, PayPal and BlockFi.
In this conversation, we discuss Jared's experience transitioning from operating to investing, the learning curve as a new investor, Costanoa’s approach to identifying and supporting companies at the seed stage, and 7 investment themes Jared is focused on in 2023.
Full transcript:
Will Beeson
Jared Franklin, welcome to Rebank.
Jared Franklin
Thanks, Thanks for having me.
Will Beeson
Yeah, it's great to connect with you. We had the pleasure of first speaking relatively recently on some fintech related subject matter of mutual interest and I just enjoyed the perspective that you brought to that conversation and figured that it could be fun to unpack some of that in a more extended conversation which we can share more broadly. So, maybe just to kick off and and provide the context, you want to introduce yourself quickly and talk about your work at Costanoa
Jared Franklin
So thanks for having me again. I'm really excited to do this Jared Franklin, I joined Costanoa this time last year exactly actually. Before this I spent about 12-13 years in product management at a bunch of different fintech companies across the full startup lifecycle. 2 years spent in ad tech which I did not enjoy very much, and here at Costanoa I focus on fintech and crypto for us.
Will Beeson
And if I'm not mistaken, you worked at PayPal maybe twice, initially as a result of an acquisition of a company that you we're working for, and then you went back to work on something else. You had some earlier stage startup experience as well as big fintech if we can call it that.
Jared Franklin
Yeah, I was a PayPal boomerang. You know, racing through the history I started at a company called BillMeLater. They were found in 2000. It was really "buy now pay later" before that term was coined. I started there in 2007 and we were acquired by PayPal in 2009. I worked there for a few years and then I went to a very fast growing ad tech company called Millennial Media from 2011 to 2013. They went public during that time. Boomeranged back to PayPal for a few years to work on a specific project to take BillMeLater outside the US to the UK in Germany in partnership with Apple for one of their product launches, and then right after that about six of us left to start a company called BlissPay. We worked on that for about 4 years and then were acquired by Alliance Data in 2018. Then I bounced around a few companies: Alliance Data, at the growth stage I worked at BlockFi, and I found myself getting a little tired of bouncing around dysfunctional growth stage companies and wanted to try something new, so I ended up at Costanoa.
Will Beeson
Nice one. So what do you think it was about you and your profile that that made you attractive to a firm like that with a decent history and track record right? Costanoa is a twelve or thirteen year old firm.
Jared Franklin
Yeah, yeah, a little over 10 years now, and I'll be glad to talk all about Costanoa when we get there. What attracted me to them? First of all I have to say you know, breaking the venture is hard and we could talk all about that. I got really really lucky. It was really through Twitter and I have to thank a partner here Amy Cheetham who's an amazing investor and partner to founders, and I'll be forever grateful to her for opening the door for me. But yeah, I reached out to her as well as a few other investors who I've known mostly through Twitter over the years and over the course of then four months or so it led to them bringing me on in the capacity of what we called a fellowship program and after a few months into that they brought me on full time onto the investment team. Costanoa is really special, and it's got a lot of former operators. Most of the folks including Greg who founded It worked in roles especially like product at previous companies before investing. So I think my background at a bunch of different fintech companies really resonated, and we also were getting deeper into crypto at the time which I have a background in, so I think that resonated with them.
Will Beeson
How do you think the product management experience or mindset. both your own and also the founders that you mentioned, informs the work that the fund does or the lens they use to evaluate investments?
Jared Franklin
I wrote a post... 8... What was it? "8 observations after eight months in VC," something catchy and cheesy, a few months back and one of the things in there that I realized was that operating experience is definitely helpful as an investor. It really helps you relate to founders. But I don't know if what I had, 13-14 years of operating experience actually makes you that much better. I think a couple of years is probably enough, and there's something to be said for people who have a really long career in investing itself. So I think it's definitely helpful. But I don't know if you really need a decade plus of it to make you a better investor or not.
Will Beeson
Maybe we keep pulling at that thread. So as you described, you're a relatively new investor. Just up on the one year mark. What has the experience been like so far, and what has the learning curve felt like?
Jared Franklin
I haven't had to learn anything. I mean I knew it all.
Will Beeson
It's easy right? You just pick good companies and you give them money.
Jared Franklin
Ha, right. No, in seriousness, I'm constantly learning. I'd say there's like three top of mind things for me in recent months. First, it was particularly tough coming from a product background to recognize that a great product or solution to an interesting problem is not the same thing as a great investment opportunity. Those things aren't the same so as a product person I love cool products, I love shiny objects, but it doesn't mean that it's a good investment opportunity. The current market and the future market matters. Competition, the customer base that you're trying to sell to, tailwinds and headwinds, downstream financing needs, all of those things matter. It's not just about is there a solution to some problem.
Secondly, you know something that was pretty tough for me, that I'm trying to work on, is really gaining confidence in the upside scenario instead of indexing so heavily on the risks. Yeah, every opportunity is risky. We're investing at deed. It's risky. Everyone knows there's risk. When a team is excellent, you can accept those risks. So I'm still working on that.
And then lastly, the art of effectively buying and selling at the same time. Great founders have options. You have to be selling yourself and your firm and the value you can provide to them, but you also have to do the work to get the conviction needed to put a term sheet out, so you're constantly buying and selling at the same time, and it takes a while to master that. So I'm very much working on that.
So those are three things that have been some learnings for me.
Will Beeson
It'd be fun to dive into all of those a little bit. You know, maybe taking them in order. So, the first one, the difference between a great product or the early stages of a great product and a great investment. I think you could probably extend that right? The difference between a great team and a great investment. The difference between a great company, you know a great idea. A great market opportunity. A great early customer base and a great investment. All of those things, maybe increasingly as I ran through that list, correlate with ultimately a great investment, but there are also so many considerations around timing, around valuation, around cycle, around exit strategy right? And I appreciate that some of those are kind of maybe higher level deal dynamics that the lead investors on individual deals or partners at the firm deal with but, even in those initial conversations, call it the screening process, the first phase of engagement with specific investment ideas or companies, what are the top 3 or 5 questions you're asking yourself to think about whether this is something that you should really dig in and do the work on?
Jared Franklin
Firstly, I get insanely excited when I encounter something truly original. You know, something that I'd never thought about, I've never seen before, but that's really rare. There's something to be said for having a prepared mind, and there's a number of areas I'm interested in exploring further, but I'll just say the things that come to you that you just never thought about and you've never seen, you know it's unique, that is special and worth spending time on. Team, especially at seed, is really everything. If I want to get a little cheesy and bubble up what we're really looking for, you need it to be a good deal. You need it to be something that you believe can be durable. You need it to be something you think is feasible. And it needs to be something desirable that people are really going to want, and you can branch off of those and try to figure out how you come up with whether those things are true or not for it. But those are really the high-level things that you're generally looking for.
Will Beeson
How do you think about - and the answer might be that at seed stage it's kind of irrelevant if you have the things you just listed - how do you think about, or do you think about, the ultimate outcome or exit opportunities for a company like that, or is it literally just if you have a great product and great team and customers are liking this, then it's just going to go in a good direction and that sort of stuff will sort itself out?
Jared Franklin
We write very comprehensive memos for any investment that we're going to make, and as part of that we have to do some scenario planning. You need to think about a base case and an upside case. Need to try to draw back to some parallels from something similar from the past to try to ground yourself in reality. There are category creation opportunities that are pretty unique where you need to get much more creative. But this is where having a firm that's been around for over 10 years with a bunch of investors who have been around for 20 years in the Silicon Valley landscape can usually draw back some vision of "this reminds me a lot of that, and here's kind of what happened there." It doesn't mean it's going to be what happens here, but it's okay to use that as a data point in your scenarios and yeah, you're not normally saying I want this to be an acquisition or I want this to go public necessarily, but you want to be able to come up with like, can it become a big business? Can it become a fund returner? We are generally leading deals, and I could talk more about our investment strategy, and what we're looking for. You need to be able to have that investment be a real meaningful fund return driver for you, which generally means you need to be valuable above a billion bucks one day to be able to actually return that back to our LPs.
Will Beeson
You mentioned your background in crypto or more specifically your time at BlockFi. How actively do you guys look at crypto, or more broadly web3, right? That's the more palatable term these days I think. How actively do you look at the web3 space right now?
Jared Franklin
First of all, I think I'm more of a crypto than web3 guy if we want to get particular. I have personally a love-hate relationship with crypto right now. I worked in it professionally a few years ago at BlockFi for a little while. I invest in it personally. I have for a while, and we do at Costanoa where it makes sense for us. It's not a huge sector for us. But it's an area we like to be opportunistic in, and we've made about a dozen investments today.
Will Beeson
In companies building in the space?
Jared Franklin
Yeah, in companies building. We can invest in tokens. We made a few private token purchases as well as some liquid tokens, but it's not a huge area of focus for us. You know, we're very opistic, especially where there's adjacencies to the areas that we specialize in around data infrastructure or fintech.
That's where it's most interesting for us. Look, I'm fascinated with the whole space. I've been in since '16 and beyond Bitcoin I became fascinated with the idea that the tech can actually be a solution to going deeper in the banking stack, like a truly differentiated backend to enable new capabilities which, I mean, well you understand this.
Will Beeson
Totally yeah.
Jared Franklin
It's what you're working on these days. But things really went sideways the last few years. If you've been in the space for a while you felt it, you knew it and things finally called up over the last few quarters, so I remain super interested but realistically from a professional investment standpoint it's pretty TAM constrained.
And we're pretty realistic about that. So we continue to look for opportunities, but it's not a core area.
Will Beeson
One of the challenges that I find in looking at even potentially great early stage web3 projects is trying to not even quantify but just point to the actual monetary opportunity. Maybe it is infrastructure. Maybe it's picks and shovels, right? And everyone's excited about that theme, right? So if we're ultimately recreating a financial system, a new infrastructure, then all of this stuff is going to matter. And you know it's going to be massive and everything will all work out, but it's hard. It can be hard to point to the specific revenue pool or even revenue model at some particularly early stage web3 type projects. What's your gut reaction to that or your experience based on what you've looked at?
Jared Franklin
I think you know the app-infrastructure post that USV had put out years back. I love referring back to it. But in crypto, it's been hard to figure out where exactly we are in that cycle. As a retail investor myself, investing in these different things for the sake of you know there's going to be another speculative runup. That's fine, but you can't do that at the professional level, and we can't do that. That's not what we do, and so being really thoughtful about where value actually accrues and remains is really challenging in crypto, especially in the last few years where you know everything's just being copied and tweaked and then copied and tweaked and there really wasn't a ton of new innovation. Even when there is new innovation. There's not really great mechanisms for capturing the value there. So yeah, it's a challenge I don't have the answer. I think it's going to take time to figure this out, and it remains fascinating, but you know things really went sideways there, and so hopefully we get back on track over the next few years .
Will Beeson
Well I think I got myself sidetracked. You had listed 3 key learnings that you'd taken away, and we went deep on the first one.
Jared Franklin
Two was just being more comfortable in the upside scenario case instead of just indexing on all the risks that can come up. I think it's just part of my personality to come up with all the things that could go wrong and that might go wrong, and that's fine, at seed every investment's going to have a bunch of things that can go wrong. It's most likely going to go wrong. But that doesn't mean you can't ever invest, and so for me, I have to work hard at making sure that that upside case that I make when it's a great team, that I actually gain the confidence to accept these risks. Let's go forward. And that's not something I really expected going into this.. It's a big responsibility being a capital allocator. I take that responsibility really seriously.
Will Beeson
And what was number 3 ?
Jared Franklin
The art of effectively buying and selling at the same time.
Will Beeson
Talk more about that. Maybe each in turn, right? So firstly, selling. What's your product to founders.?
Jared Franklin
Maybe we we should touch on Costanoa a little bit more. Costanoa fits the bill for specialized boutique VC. We specialize at seed and we specialize at offering hands-on help to technical founders as they start their companies. Greg Sands was the founder of it. He was a product person a Netscape. He created the Netscape name, business plan, and all the help with the initial products, so we can blame him for this whole internet thing. He then went to Sutter Hill for about a decade before starting Costanoa. We've got about 20 folks here, mostly in San Fran and Palo Alto. I'm in South Florida. We have an a investor named Maddie who's in New York, and 8 of us are investment team members, so we work on new investments. We take board seats. But we also have a handful of operating partners, and they exclusively focus on supporting our portfolio companies, and we call them our builder ops team. So that's part of our product that we're selling, and so they're designed to really help technical founders who may be less commercially minded where they need it most which is usually things like go-to-market and company building and recruiting. We take a really team collaborative approach to investing. It's not like one partner or one investment team member is going out and selling themselves like I'm going to help you out. It's really, we're selling Costanoa and the whole team that you get here.
So the art of selling is making sure you're letting them know what you can do and what you will do. It's leaning on your existing portfolio founders to talk to them as well and other folks in the ecosystem.
But personally, talking about myself, selling myself is a weird, awkward thing. That's why this is my first podcast. I've waited so long to do them. I don't like talking about myself or selling myself. I like talking about you and learning about you, so you got to sell constantly. But we also have to put the work in to be a buyer.
We can't just be, you seem great, and the idea is great, let's do it. We do a lot of work to get the conviction. We need to put a term sheet out there and great founders, not every founder but the great ones, they have choices. You just have to delicately balance that really well, and I have a long way to go to mastering that. Some people are better at it than others. One of our investment partners here, John Cowgill, he is masterful at this. I just, every time I watch him with founders, I'm in awe, because he's getting information that he needs, important key elements, and he's also selling at the same time, and it's really something to watch.
Will Beeson
And how about on the buying side? Let's take the example of a more competitive deal. You know there's the ticking clock. There are other firms that are interested. What is that? What is that buying process? How do you balance the heuristics, to quickly decipher large amounts of information, versus the elements on which you really need to go deep, and do that quickly?
Jared Franklin
Yeah, so this kind of dovetails into our investment strategy. Um, which is very much high conviction, high ownership and in order to execute on that well you have to be thematic, and you have to be focused. You can't gain conviction on some area that you don't have expertise in already, that you don't have a network of experts and practitioners in already that you can tap for diligence support, and you can't gain conviction if you're not capable of helping companies where they're weak, and so you can start to see how the way we're designed with our builder ops team and the certain areas that we focus on investing all help with us being able to get through diligence in areas that we already kind of have a prepared mind for pretty efficiently. So we can get there as fast as a week if we need to. We prefer to have much more time than that. We prefer to be earlier. Earlier the better, so we love getting to know founders when they're still actually iterating on their idea. Love to help with customer discovery and idea validation and market positioning and go-to-market brainstorming and introductions to design partners. We get high on that stuff. Seriously, the team loves that stuff here. All of that really helps.
Will Beeson
Even for companies that you're not invested in, that don't even necessarily have a round in progress?
Jared Franklin
Yeah, totally. We love that. So that's why we can rally around something in a week if we have to. The majority of investments when we look back are not that situation. It's a founder we've known and we've been working with in some capacity for a number of months, in some cases a number of years, where they've got an idea that they just can't get out of their head. That's how we really get to know somebody and they get to know us as well. That's also part of the design to help with the buying and selling. So it's not really on you alone in that hot deal where you have 24 hours to make a decision. That's not really where we play the most.
Will Beeson
Zooming out and talking more about Costanoa specifically. You focus on fintech with a little bit of crypto. How would you describe the firm's focus in general and does that change, has it changed at all as you've seen market conditions change?
Jared Franklin
So Costanoa has about a billion and a half dollars under management. We're currently investing out of our fourth early stage fund. It's $225m, and our second opportunity fund which is $150m, and the funds are really designed to enable us to support companies as they grow, assuming they're deserving of course. Our focus is pretty much exclusively leading seed deals, so writing checks between $2-5 million, and we'll also do a handful of As a year. We can go as high as $15m, and as I mentioned, mostly backing technical or product-minded founders. So people who can actually build products with that founding team, and that focus on enterprise apps and infrastructure across fintech, applied AI, data and security, so much more B2B than B2C.
The market and how we invest really doesn't change based on the current climate. We've been really consistent over the last four years. I think we've made about 13 core investments each year. We'll continue that, if anything we might actually accelerate in this environment. We were talking the other day. We're really freaking pumped about this upcoming vintage. It's going to be a great vintage of startups and the new normal is really just actually normal. The past few years was not normal.
Will Beeson
Why are you pumped about the new vintage? People say there's great talent, and I guess every day there's more talent because of all the layoffs that keep coming, and then there's the valuation reset which maybe brings dynamics a bit more in favor of companies that are building with strong fundamentals, with the goal of creating long-term value. And then maybe it's related to one or both of those things, but the stat around the Fortune 100 or S&P 500 or whatever about the percentage of companies, a vastly outsized percentage of those companies i.e. successful, big companies that were started during bear markets. Are those the reasons that the team is excited? Are there others?
Jared Franklin
You nailed it. Founders have an insane access to talent right now. There's way less competition for that talent right now, and there's just less pressure to do things that don't make great business sense anymore, and yeah valuations matter. Coming back to normal is only better for companies. You kind of pigeonhole yourself and put yourself into a corner when you raise really early at a valuation that doesn't make sense. That you're going to have a hard time living up to. It's just a much more sustainable path that everyone will be on, both investors as well as founders.
Will Beeson
So maybe to transition into the the tail end of this conversation, I think you've been giving a lot of thought recently to the themes that you're most interested in, where you see most opportunity, I guess probably for founders and also your yourselves as investors at this point in tim. You want to unpack some of those for us and we can talk them through?
Jared Franklin
Yeah I'd love to. This is the fun stuff, right? So there's about seven areas in particular that I want to spend a lot more time exploring and learning about, hopefully investing in, over the next few years. I'll run through them.
So, the first one is Insurtech. I just published a post a few days ago that highlights a bunch of areas within there that I'm pretty excited about. We're just generally really excited about the category even though it's kind of fallen out of favor recently.
The second one is what I'm calling the faster payments stack in the US and Latam in particular. I had written a post where I really highlight a bunch of the faster payment systems globally, starting with Japan in the 70s. And it's just an area that I want to spend a lot more time going forward. In the US, we already have about five of them. But there's another one called FedNow launching soon, and it should get a lot more adoption than RTP whichlaunched five years ago. So any infrastructure to support the growth of these systems and commercial use cases.
Another one is Proptech, which I think every fintech investor has mentioned for the last ten years, but I think that's because it's an enormous industry that's been super late to adopt tech. Construction tech in particular. Things like solutions to help with the visibility or speed of a construction process. You know things like on-demand insurance or licensing and financing I find really interesting.
The fourth is fintech angles to decarbonization, which I also think every fintech investor will start to talk about a lot more soon. Carbon accounting so you can better understand your footprint, marketplace capital market opportunities for funding projects and buying high-qual offsets. That'll be a long-term growth area, and it's starting to grow really. Really fast.
Automated back office operations and financing. Do do you follow Alex Johnson?
Will Beeson
From a distance. Maybe I dip in and out of an occasional piece of his.
Jared Franklin
He did a great one recently you should rea. It sent me down the rabbit hole. You know, most cars are sold in the US through one of few portals, one of which is called Dealer Track. That's what the guy's doing when he walks away and leaves you while you're trying to figure out the financing situation. Two-thirs of all cars went through 1 or 2 of them. So it's an area that's got to be filled with vulnerabilities and therefore some opportunities that I want to go learn about.
The next one, really important to me, I call it Agetech fintech . I went through the unfortunate process of losing both my parents in-law at a relatively young age, and it's really overwhelming what everyone's going to have to go through around house, cars, dogs, belonging, cell phones, communicating, the grieving process itself. It's kind of never ending, and so the asset transfer across generations is a really interesting area as well as leveraging familial assets to optimize your financial position before anyone passes is a big opportunity. It's all related to the the tailwinds that are coming around the silver tsunami. It's a real thing and it's coming. Another angle is just better products for tapping home equity post-productive years. So I think there's a lot of opportunities there.
Then lastly, crypto. We already talked about it. Love-hate relationship. But you know, I'll continue to look for interesting opportunities there.
Jared Franklin
Then I should say that an area that I don't have much expertise in but our firm is super active in is Latam, in particular companies in Brazil and Mexico, and we're going to start to look at Indonesia some.
Will Beeson
Interesting. Alright so insurtech and proptech. Everyone's been talking about both of those for 10 years, and probably every year they're on everyone's lists. Why is now the time?
Jared Franklin
In insurtech in particular there are new areas, emerging risk categories that are just exploding, and climate and cyber are two of them. Crypto is really nascent, too. A lot of interesting things that can come, but it's really nascent.
Cyber and climate no one can avoid going forward, and the threat surface is just ginormous and evolving super quickly, and so small businesses, they aren't even aware that they probably should have some sort of cyber coverage.
Looking at cyber, I think what we're gonna see more broadly is just much more of a focus on risk prevention instead of risk transfer and payouts.
Will Beeson
Um, what? what would? what would that look like prevention versus pay.
Jared Franklin
Yeah, one is just actually giving you a good valuable threat assessment of your current situation. You can imagine this eventually could be distributed through your SaaS provider that you run your business on. Your vertical Saas provider could actually distribute insurance through it and do a risk assessment of the current data that you hold, how you collect it, employee access, there's much more automation that could be leveraged to help give you a risk score of which, if you get it above a certain level, you may take action to improve, then you could become more insurable, things like that. I think that's just one obvious example.
Will Beeson
Of the other themes that we haven't touched on, which one are you most excited about? Which one do you want to talk us through in a little more detail.
Jared Franklin
Faster payments is a fascinating one just because globally we kind of got leap frogged here in the US. So we have ACH. It works pretty well, it's super cheap. Other markets just didn't have that and they went straight to faster payment systems. Now we are getting to a point where RTP is out there. There are some reasons why it probably hasn't gotten as much adoption as FedNow will, and it'll just be really interesting once FedNow really is distributed across every bank who wants to participate in it. All the use cases that will get born. It'll probably be a 5-year thing, and we're going to learn a lot of things around fraud and whatnot that need to get built around it before it can really take off.
Will Beeson
I haven't looked very closely at the US realtime payments space. So FedNow, is the concept that any bank, and I don't know, potentially other payment network members, can join, or is it kind of confined to tier one banks or something?
Jared Franklin
Yeah, so RTP which FedNow is largely designed after, they actually technically look extremely similar and they're even to be priced extremely similarly. But Rtp which has been around for over five years is owned by the Clearinghouse. That's largely the large banks, and so anyone smaller kind of feels like they don't want to participate in that because they're in control and whatnot, whereas FedNow being launched by the Fed is really for everybody, and that's why it's likely to get a lot more adoption than RTP has over the years. And Visa and Mastercard have some faster payment solutions that have actually done pretty well. But I think everyone kind of forgets just how massive ACH is as well as checks. But you know how massive ACH is. It's trillions of dollars that go through it. There's no reason why we shouldn't expect that faster payments will capture a really nice portion of that over time.
Will Beeson
So fraud, you think of like, Sardine right? Real time fraud scoring, if you're talking about realtime payments. You don't have much time to evaluate risks.
Jared Franklin
Yeah, fraud. Fraud is an obvious one. For instance consider stablecoins. That's a faster payment system. A really interesting one actually, but there's a lack of reversibility, and you don't really know who's on the other end, and so it just creates a lot of unique fraud issues that financial institutions haven't had to deal with before. Zelle is still working through theirs. I think there's a lot around bill pay. There's been a lot of innovation around earned wage access. But I think this will seep into the way all these existing products have been financially manufactured.
Jared Franklin
And this will be the technical solution for supporting a lot of them, and it really could speed up everything around the supply chain for everybody which could have really interesting implications down the line.
Will Beeson
And you think that kind of distribution of access could come through a fintech layer?
Jared Franklin
I think it's inevitable. I think a whole new crop of companies, everyone existing will incorporate them to a degree where it makes sense, but especially on the commercial side, a whole new crop will will be stood up around these.
Will Beeson
Awesome, Jared, fascinating conversation. Really great to connect and dig into some of this stuff. Where can people connect with you find out more about your work at Costanoa ?
Jared Franklin
Yeah, thanks for having me, this was a lot of fun, and we'll have to do it again some time if I didn't bore you too much. I'm super active on Twitter so @jsfranklin221, friend me on Linkedin. My DMs are open everywhere.
Will Beeson
Absolutely.
Jared Franklin
And Costnoa is @costnoavc. Yeah reach out to me, I'm super accessible.
Will Beeson
Awesome! Well great to connect with you. Good luck with everything, and we'll stay close all right.
Jared Franklin
Appreciate it. Thanks.
