How to Differentiate in Early-Stage Fintech VC with Sheel Mohnot
Sheel Mohnot is Co-Founder and General Partner at Better Tomorrow Ventures, an early-stage fintech VC currently investing out of its $225m second fund.
Sheel is a former founder, having built a tech-first card processor way back in 2010 which was quickly acquired by Groupon.
Since 2014, Sheel has been angel investing and, as of 2016, investing full-time.
Sheel is an incredible Twitter follow and constant source of information, insight and entertainment.
In this conversation, we discuss how fintech VC has changed over the last few years, the state of the early-stage market today, what separates elite seed funds from others, building social capital as an investor, the investment areas Sheel is currently focused on and more.
Key takeaways
Fund economics & strategy
Better Tomorrow Ventures is investing out of their second fund, which includes a $150m seed fund and a $75m follow-on fund. At that fund size, they want and need to lead rounds in order to deploy capital and obtain ownership sufficient to generate fund-level returns. With a fund their size, even ~$250m exits aren’t sufficient to generate the returns they need to be successful (presumed ownership at exit 10%). Portfolio companies really need to exit at over $1b in order for the fund economics to work.
Previously, when Sheel ran a $15m fund, leading rounds was very difficult, and co-investing with other leads was sufficient to deliver returns.
Current state of fintech venture capital
In 2020 and 2021, there was so much capital available to fintechs that many, many companies got funded, competing away niches that could have previously supported a dominant VC-scale startup. This is great for innovation on one level, with more people and ideas getting a chance to build and scale, but if the industry in aggregate can’t return 3x on venture capital, it won’t attract LP funds longer term.
In general, bigger VC funds have lower returns, because it’s harder to scale capital deployment into great companies. Recently, Founders Fund announced that they’ll return half of their flagship fund to LPs, cutting the fund size from $1.8b to $900m in a move that will reduce their fees dramatically in the short term but ideally improve long-term results.
What separates the best early-stage funds from good funds
To be a great early-stage investor, you need the best companies to want to pitch you and then want to take your money instead of other potential leads they get offers from. So, the fund’s job first and foremost is to create as much extra value as possible for founders. Only then, having built a strong reputation as valuable investors, will they be able to attract and invest into the best companies, ultimately leading to strong financial performance.
Most important traits of great founders
Tenacity is one of the most important traits in a founder. In general, great founders also tend to be very knowledgable about their businesses, their economics and their competitors. Great founders must also be capable of leading large companies if they're successful.
Current investment areas of interest
The last decade of fintech innovation was focused around bringing offline finance online. BTV believes that the next decade will be about making fintech seamless in your life. "If the goal is to make fintech seamless in your life, the way to do that is have a bunch of building blocks that make it easier for a non-fintech company to become a fintech company.” E.g. embedded finance.
Given the current headwinds in consumer, many fintech investors are more interested in B2B companies. But who will they sell to if consumer goes away? Banks are increasingly buying from fintechs, but that demand is not sufficient to support an industry. Other B2B fintechs can be customers too, but that market is similarly limited. As embedded finance continues to develop to power fintech adjacent industries, the B2B customer base has the potential to grow significantly.
Full transcript
Will Beeson
Sheel Mohnot, welcome to Rebank.
Sheel Mohnot
Thanks for having me.
Will Beeson
It is a pleasure to speak with you again. I think we first met some number of years ago prior to COVID at A BBVA event at the Presidio area, at least in San Francisco. That was fun. Really great to connect with you. Again, you've been quite active in the intervening period, so look forward to covering all of it.
Sheel Mohnot
Yeah, likewise. It's been fun and that was a great event, pre-COVID era when everything was happening live and then I think shortly afterwards COVID happened. it feels like live events are fully back and hopping now.
Will Beeson
You're based in San Francisco, you were saying that the scene there is quite active now.
Sheel Mohnot
Yeah, I think a lot of people had, I would say, written San Francisco off. To be honest, myself possibly included. I never moved from here, but I was like, "Is this really the place to be or does remote work make it such that now we can move somewhere else which is virtual?" I do once again feel like the serendipity of being able to bump into each other and work face-to-face is really important and the network effects of San Francisco are pretty great. Here if I walk down the street and go to lunch, I'll probably run into people that are talking about interesting things and really building stuff.
Will Beeson
Is it the same people or is it different people?
Sheel Mohnot
It's different people, which makes it hard for an older guy like myself because a lot of the energy now is actually very young. A lot of the folks during COVID that moved... I live in the city, a lot of people moved just to the suburbs and they probably would've moved to the suburbs anyway, but they might have done it like 1, 2, 3, 4, 5 years earlier than they would've because COVID was really tough on the city. I'd say my friend group people also moved to New York and some people moved to LA as well. People have moved, but we do have new folks coming in, but they tend to be younger and maybe that's just how cities go, but it was accelerated by COVID.
Will Beeson
Maybe we can circle back to that when we're talking about investment themes and the stuff that you're looking at as an investor, but for further context... Actually first I think I should congratulate you on a very recent wedding, right?
Sheel Mohnot
Yeah. It's been just a little bit over a week and it was an interesting and weird wedding. We had a Taco Bell sponsored Metaverse wedding. There's a lot of craziness embedded in that myself, but it was really fun. It was a fun time.
Will Beeson
How do you swing a sponsorship from Taco Bell for your wedding?
Sheel Mohnot
Yeah, we just applied. You had to submit a two-minute video. They only had a few hundred applicants and we won and it was great. They did a lot of work over six months. I think we won in September and the wedding just happened last week, maybe five months of continuous meetings and planning. It was a really good time. They did a good job.
Will Beeson
Your wife sounds like a great sport.
Sheel Mohnot
For sure. Yeah, I don't think very many other fiances would be as into it as mine was, but it's not our only wedding.
Will Beeson
That's fun. Maybe to complete the intro, you can tell us a little bit about yourself and what your focus is now.
Sheel Mohnot
Yeah, sure. I'm Sheel Mohnot, I'm a former founder in the Fintech space and currently run with my co-founder Jake, a fund called Better Tomorrow Ventures. We are a Fintech focused fund leading pre-seed and seed rounds. We're on our second fund. We started the fund about three and a half years ago and our first one was 75 million and then we raised a new fund about a year ago and that is a total of 225. It's 150 million seed fund plus a 75 million opportunity fund.
Will Beeson
Is that a good size for a seed fund? Is that the right size? Is that the optimal size for you guys given where you are?
Sheel Mohnot
For us it's absolutely the right size. It's not for everybody. There's personal preferences involved. There's how much you can raise involved. All these things are topics for us. The math just works at this size, so the seed fund $150 million, we will do 30-ish lead checks at seed and then we have a lot of capital to follow on into our companies. If you imagine 30 lead checks of an average of 2 million bucks, that's 60 million bucks and then we have a lot of capital to follow onto those companies in the A and B rounds typically.
Will Beeson
To unpack some that a little bit. The current fund Better Tomorrow Ventures, you said you started about three and a half years ago, call it 2019 era, and I think you were doing some investing before that, right? Similar structure, different structure?
Sheel Mohnot
Similar in some ways. I had a small fund, a 15 million fund, just me as a GP who was affiliated with 500 startups, but a separate entity called 500 Fintech and the 15 million fund, obviously it's hard to lead rounds. We weren't leading rounds, but I ran an accelerator and had a lot of great companies in the accelerator. Running an accelerator in some ways is similar to leading a round in that you have to convince the folks to take your money and usually they were doing so at a much lower valuation than they could get elsewhere. That was a different beast, but similar in some ways.
Will Beeson
Does your role feel more like pure capital providers, I imagine you're still looking to differentiate through providing whatever value you can to help your portfolio company succeed. Is there a specific pitch, specific areas where you guys try to focus to help your companies build value?
Sheel Mohnot
Yes, so I would say first thing, we don't think of ourselves as just capital. I think there are a lot of things that we can be really helpful and involved in. The fact that we're founders ourselves, particularly in the Fintech space is really helpful because we've seen a lot of pitfalls that people can avoid and actually that's why I got into the business. I wanted to help people avoid the mistakes that I made when I was an entrepreneur. In terms of how we can help, we generally think of ourselves as the first call, so anything that happens in the company, good or bad, give us a call and people do for the most part, call us all the time. We're most helpful in hiring, thinking through distribution, building company culture, strategic partnerships like business development. Because we're Fintech focused, we see all the other Fintech companies out there and if we meet a company we can say, "Oh, here's our portfolio, we can just do this, this, this."
That tends to be really valuable and then raising the next round. Our companies have done exceptionally well at raising the next round from great VCs. We do as much as we can to help there. It's obviously a place where VCs can be really involved.
Will Beeson
The first, the 500 Fintech, that would've been what like 2016 era.
Sheel Mohnot
I started doing some angel investing before that, probably like 2014, but yeah, started doing more in 2016.
Will Beeson
How have you seen the VC market change since 2016?
Sheel Mohnot
Overall, the VC market has grown tremendously during this time and Fintech even more so. I actually just looked this up for something I tweeted recently. The VC market has actually like six or seven X since 2016 and then the Fintech market probably more than that. Certainly between 2016 and 2021. If I had to guess, I would say it's more than 10x. I would say in 2016 when I started, any company that I saw had raised money, I had met that company and now that is no way the case. At that time in 2016, there weren't that many funds focused on Fintech. I would say there still aren't that many, but there are a lot more than there were in 2016. In 2016 very few generalist funds had partners educated to Fintech and now most of the top funds do. Things change pretty rapidly.
Will Beeson
Maybe now's the time to ask you that question I was thinking about before the one that came to mind earlier as you were talking about the changing energy and almost generational shift in Fintech startup terms in San Francisco. You said that in 2016 you'd basically met all companies that you were reading about in TechCrunch, right? Everyone announces a raise, you kind of looked at it, right, and you were either involved or you weren't. Now it's not like that at all.
Sheel Mohnot
Not at all.
Will Beeson
Is that a sign of a healthier environment where there're like different types of funds and different places that can play different roles and different people can bring different angles depending on what founders need? Maybe that is a positive. Also, I imagine it's a little more difficult for you because whereas previously you had second degree connection with every single person that was potentially pitching you, now probably they're complete strangers. How do you validate the quality of this person, the ability to execute of this team sitting right in front of you if you don't have that same super tight network to rely on?
Sheel Mohnot
On the how we assess somebody. I would say most people that we meet, we do have some connection to or we can ask around and find out enough, but it's certainly different than it was in 2016. At that time, I was an unknown person coming into this industry and still at that time I was able to meet most of the companies that were raising seed rounds. Now even though we have somewhat a brand in Fintech as a Fintech seed fund, probably only a third of the companies have we met. Now we have a team and everything else. Yeah, the world has changed. There's a question about is it good or is it bad? Fintech was overheated in 2020, 2021 where everything got funded and everyone chose to build a Fintech company. Not everyone of course, but a lot of people chose to build a Fintech company.
What happened there is because so many people were building a Fintech company, there were like four or five competitors to anything you built immediately. Of course that makes it harder because if there're four or five competitors, you're competing for a piece of the same pie so that pie gets smaller. There were some categories in which there was a breakout winner in a space where there were five or six companies. One company clearly is now the winner and may have taken the line share of the revenues. We have companies like that in our portfolio. Then there are other categories where there were a bunch of companies eating away at the same pie and nobody is really a winner and we have somebody to be like that in our portfolio.
What I see going forward as Fintech falls a little bit out of favor compared to what it was a couple of years ago, and I think that incremental founder that was choosing to build in Fintech now might be building generative AI or something else. That's a net positive for Fintech overall because we had too many companies and too many companies makes it hard for any one company to be successful.
Will Beeson
With all the knock on implications for even things like fund economics. The whole concept is modeled off a whatever it is, three x or five x return if things go well, and that means X number become successful exits IE unicorns and X number don't. If every single microvertical is now competed between five or six companies, then a successful outcome becomes what? A hundred million, 300 million? Which changes some of the fun dynamics, right.
Sheel Mohnot
Yeah. A fund like ours, it's unfortunate, but a 100, 200, 300 million outcome just isn't that meaningful for us. Of course, in many cases it's the right thing to do for the company. We have had that. We've had a couple of exits that were in the 200, 250 range and they're really nice outcomes, but for a fund of our size, it doesn't move the needle that much anymore, and that's a little bit frustrating.
Will Beeson
n terms of fund dynamics overall, and maybe this is still related to the general where we are in the VC market today, I saw post at least an article that you posted the other day about founders fund returning something like half of its main flagship fund. You want to talk a little bit about that and what's behind that reasoning?
Sheel Mohnot
We talked about how there's a lot of venture capital out there much more than there was five, six years ago. If you think about what that means, I don't have the numbers offhand of venture capital dollars, but let's say it's 50 billion just for argument's sake. I don't know the number. Let's say it's 50 billion a year and for a fund to be a decent fund, you want to be returning three x, I'm simplifying significantly here, but let's just say from that 50 billion, you want to return 150 billion. At exit, let's say you own 10% of company, then that 150 billion needs to have 1.5 trillion dollars of outcomes overall. Where is that coming from?
Will Beeson
Annually?
Sheel Mohnot
Yeah. These numbers are off because this is just the number I threw out there, but overall, this founder's fund, they had a 1.8 billion fund that they had raised and they shrunk it down by half and said, "We're going to deploy half as big a fund." Everybody in the industry needs to do that because otherwise the overall returns in the industry aren't going to be as great. A lot of funds chased AUM in the last few years. Building a bigger fund can and usually does come at the expense of outcomes. A multi-billion dollar fund is not going to have a 10 plus X outcome. It's just pretty unrealistic to think that would happen. For us, what that means is we're not chasing AUM, we're not trying to be a multimillion dollar fund. We're happy with the size of our fund. We don't have to think about our next fund anytime soon. We're not actually thinking about it, but I think we probably stay around the size that we are now.
Will Beeson
In terms of deploying your current fund, I imagine your day-to-day is receiving inbound, maybe doing some strategic outbound to companies that you think are interesting and ultimately validating investment opportunities. How would you describe the caliber style of the stuff that you're seeing and how does that compare to your seven years of experience now?
Sheel Mohnot
The caliber of talent that we see has increased over time going into Fintech. As I mentioned, as Fintech became hot, many of the best founders choose chose to build in Fintech. In terms of how I spend my time, I'd say it's probably equal between existing portfolio and new companies that we're looking to invest in. When we meet a new company, there's the time it takes to meet the company, but then there's a lot more time in doing due diligence. If we meet a company, we might talk to potential customers of that company or as you mentioned, we might talk to other folks that that person has worked with in the past. That's a big part of how we spend our time.
In helping the portfolio, any number of things, but I would say for me it's primarily around raising the next round and hiring. Hiring and then I would say BD. I'd say those three things. In hiring, we have a full-time talent partner on our team, Yoni, who is head of talent at Nerd Wallet, and all he does is help our portfolio companies with that. What I do is help close the sale. If we're recruiting a new chief marketing officer, they might want to know how the investor feels about the company and so I might be involved in closing that candidate. BD we talked about and then raising next round we talked about as well.
Will Beeson
What's the main source of deal flow for you guys? You personally seem to have an amazing network. You're extremely active on all the places that Fintech people spend time. You're amazingly insightful and funny on Twitter and LinkedIn. I imagine that's a huge positive contributor to your visibility.
Sheel Mohnot
It's really hard to quantify where leads actually come from, but I do think being on social media helps us stay top of mind. Being a Fintech only fund means that a lot of people send us deal flow because they're looking at a company, they think, "Hey, this is too early for me or this is like too Fintechy for me. What do these guys think about it?" The social media stuff helps to stay top of mind. By the way, I don't do it for this purpose, I do it because I'm having a good time and just tweeting whatever stupid shit comes to my mind. I will say, people have told me, "I was looking at this company and then I saw you tweeted this other thing and then I thought of you, I should send this to you." That does happen and it's great.
Will Beeson
As we were saying, you've been at this for a while now. What in your estimation differentiates an excellent pre-seed or seed fund, top 2% from a good fund?
Sheel Mohnot
Excellence? I'm assuming you mean in outcomes.
Will Beeson
In outcomes. Let's start with that.
Sheel Mohnot
The way we think about it is outcomes are of course a function of inputs to a certain extent, and then there's this big luck thing that is truly involved and there's no way out of that. Our goal is to be the founder's number one choice. Any founder building in Fintech should say, I want to work with BTV. We're doing as much as we can to make that the case and the output is founders choose us. You can't just invest in any company you want, the founder has to choose you. Oftentimes companies we invest in have five or more options of term sheets and we don't ever want to be the one that wins because we gave them the highest price. That's not our game. To be successful, you have to get in at a good price and have a great outcome. Just working with great founders is the number one thing that you could do, and we want to be sure that great founders want to work with us.
When I say great founders is the number one thing, it's because so many of my top companies that I've invested in, it turns out what I invested in from a product perspective wasn't actually that amazing. What was amazing was the founding team and they just turned it into something incredible. First and foremost, it's investing in great people.
Will Beeson
When you say great people, what does that mean to you? Specifically in the context of great founders.
Sheel Mohnot
It's hard to measure what you really mean, but I think great founders are really tenacious, will break through walls to make stuff happen. That's like the number one quality you see over time and time again. They also know their business really well. They know the competition really well. It's usually clear that they've done their homework. They wouldn't be wasting their time building this business if they didn't think it was a very investible business that can be a multi-billion dollar outcome. If we think about businesses that can be multi-billion dollar outcomes, that probably also means that they're going to be leading a team of hundreds of people. Do I think this person is the right person to lead a team of hundreds of people or can they get there in maturity? Those are some of the things I think about.
Will Beeson
You are, as we were saying before, an extremely networked guy. You seem like a likable guy in the space. Yet at the same time you're in the business of basically saying no to nine out of 10 or more people that step in front of you and ask you for something. How do you balance that? Genuinely having a strong reputational capital. How do you maintain good relationship capital credibility, both with your peers as well as with the founder community?
Sheel Mohnot
It's tough because we're all founders, operators ourselves. There are things we really value. We try to do a fast process as quickly as we can, we do deep references to understand a business and then we try to decline if we're declining with a thoughtful response. That's, of course, if we take the time to meet the company. The overwhelming number of companies that we see, we don't even take a meeting because we know we should save the founder's time because we're not going to be the right fit. If we do take a meeting, especially if we take multiple meetings, we want to be really thoughtful about why we declined and maybe it'll help that founder in the future. It all comes back from what we talked about earlier, which is like we want to be the founder's first choice. We want everyone to want to pitch us. There have been cases where we said we're not the fit for you, but we know other people that might be and we have introduced folks to investors who ended up investing in the company.
Will Beeson
To wrap up, I would love to get any thoughts you have around themes within Fintech that you're currently interested in or even curious about. Circling back to that first opening discussion around a different group of people in San Francisco now different energy. Does it feel to you like coming out of COVID, March 2023 now, bottom of the cycle, is it the same stuff? Are there the same themes that you were excited about in 2020 and 2021 and 2022 with the same types of founders and the same broader go to markets? Or are you seeing meaningful evolution among the founder community that you're interacting with people that are thinking about some of this stuff in different ways?
Sheel Mohnot
First of all, I'll say I think you can be inventor, you can be thesis driven, which is like, "I have an idea that I want to see and I'm going to invest behind it." Or you can be opportunistic and of course you're always somewhere in the middle. I would say we're more opportunistic, which means when companies come to us, we evaluate that company and that team and make a decision. It's not like we have a bunch of things in our mind that are what we want to see or thesis that we want to invest behind. Part of the reason for that on my end is I have been a thesis driven investor and I realized a few times there was an idea that I fell in love with and then I just invested in a team that came along that was doing that problem. It wasn't the right team, it wasn't the problem that they faced, so I think we've become more opportunistic, we'll call it.
Have we changed in what we're interested in that time, over the past few years? I would say no. We think the last decade of Fintech innovation was largely bringing stuff that was offline, online, and we think the next decade is very different, making Fintech seamless in your life. If the goal is to make Fintech seamless in your life, the way to do that is have a bunch of building blocks that make it easier for a non-Fintech company to become a Fintech company. That's still a category that we're interested in. We never did a whole lot of consumer investing. I'd say maybe 10% of our capital has gone into consumer, the rest is b2b, and I think that probably continues to be the case going forward.
We have seen some amazing consumer Fintech companies out there, but consumer in general has had its woes that I probably don't have to tell you about. It makes us less likely to do consumer going forward. But then you think, "Okay, if you're less likely to do consumer and everyone's less likely to do consumer, who are these B2B companies going to sell to? If you're selling into Fintech, who are you going to sell to?" I would say on the margins, we're probably more interested in companies that are selling into banks, now we've seen more reception from them. If you can sell into Fintech and banks, that's great and our most recent investments sell into Fintech and banks, so I think that's interesting.
Will Beeson
Sheel, thank you so much for taking the time to connect today. You're such a thoughtful guy about all this subject matter and you're just so close to the middle on everything going on in early stage Fintech, at least in the US. It's a real pleasure to connect with you.
Sheel Mohnot
Thanks Will. It was great. I really enjoyed the conversation.
Will Beeson
Sheel Mohnot, thank you very much for joining us today.
