How to Invest in Fintech Remotely with Accel’s Seth Pierrepont
Seth Pierrepont is a partner at Accel, one of the most renowned venture firms in the world and a backer of companies including Facebook, Spotify, Slack, Dropbox and many more.
Seth invests in financial technology and data infrastructure and has led the firm's investments in companies like Privitar, AnyFin, Soldo, Worldremit any many others.
In the conversation, Rebank co-host Aman Ghei of Finch Capital and Seth discuss how VC's have been adjusting to the new normal of investing remotely, the pieces of open banking they expect to be transformational, including credit and payments, and the importance of privacy for CIOs and executive decision makers in a rapidly evolving world.
Full transcript:
Aman Ghei:
Seth, welcome to Rebank.
Seth Pierrepont:
Great to be here. Thanks for having me.
Aman Ghei:
Fantastic to have you, and really look forward to having this great conversation with you and getting your thoughts on what's going on in the market. And also how you guys look at the FinTech space.
Aman Ghei:
But I'd love to start off with the first question, which is, what do you see happening in the early stage venture market right now? A lot of people are talking about, "Hey, we're getting ready to do remote deals." Some people are saying we just need to put focus on our portfolio companies.
Aman Ghei:
And I think we're probably now coming out of this hundred percent lockdown mode where people are getting a little bit more comfortable to write checks, but what's your overall view given that you guys probably see some of the best deals in terms of volume and quality across the board?
Seth Pierrepont:
That's a really good question. And I think it's probably been a couple of phases. So I think when we first went into lockdown and COVID really hit Europe hard in March, I think that was when we internally and then a lot of our peers at other venture firms focused on our portfolio just to ensure that the companies were in good shape and had enough runway to make it through the next few quarters, given that there wasn't much visibility into how long people would be locked down and how bad economy would ultimately be hit.
Seth Pierrepont:
But I think we've, we're very much in the next phase where portfolio companies are in good shape or at least they have contingency plans that are being executed upon and people are now back in transaction mode. And I think, at least from, the way it feels from where we're sitting is that it's very active. And I think that is consistent.
Seth Pierrepont:
Again, speaking to our peers at other early stage funds in Europe, that people are continuing to transact and just to at Accel, just to highlight it with a data point for us. So we've signed three new term sheets during COVID and several of our portfolio companies have raised meaningful up rounds in the last few weeks.
Seth Pierrepont:
So deals are definitely happening. And I think what's interesting is that they're happening at the speed and the prices that we saw pre-COVID. So it feels like things have, in certain sectors or subsectors of the venture market, things have bounced back pretty quickly.
Aman Ghei:
Very interesting. And how do you guys counter for the fact that you obviously can't meet the founders. And I'm sure a lot of the thesis around investing in a company, just like a lot of other folks, is around the team and meeting founders is obviously a very important component for that. So how do you get over that hump?
Seth Pierrepont:
It's been an adjustment, I think, as you said, when we invest early stage in, and for us by early, we mean seed and Series A. So there is in a lot of cases, these companies are, pre-product/market fit and certainly pre-go to market traction in a lot of cases.
Seth Pierrepont:
And so we really take a lot of signal from the team and getting to know them remotely has been an adjustment. So what we've done and certainly in the deal that I've been working on in the last few weeks is probably spending a lot more time with the founding team over Zoom. So, many more hours than I would typically in person, also speaking to more folks on the team. So trying to get a feel for what the culture is like within the organization, without being able to walk around the office and get a feel for it.
Seth Pierrepont:
And I think the final thing is the amount of referencing that we've been doing. So in a normal deal where you'd might take three to five references on each of the founders, we're taking five to ten just to ensure that we haven't missed anything about the founding team that we would normally pick up if we had the opportunity to meet them in person. So it's definitely been an adjustment, but something that, I think we've ultimately gotten comfortable with and we'll have to get comfortable with given that this looks like it could be the future for some time.
Aman Ghei:
Very interesting. And would you finally to that say to founders in particular to, "Hey, the markets are open, but be prepared that the process might take a little bit longer," is what I'm hearing from you.
Seth Pierrepont:
Yes, I think founders are expecting that the process is going to take a lot longer. I mentioned, from our firsthand experience that the markets still feel pretty active, but if you look at the numbers, the market's actually down. If you can just look in the first half of the year, this is PitchBook data. But if you look at the first half of the year dollars invested was around $60 billion versus $70 billion last year. So it's down about 12%.
Seth Pierrepont:
And deals done is, is around 5,000 versus 6,500 last year. So down almost 30%. So I think while we've seen a lot of activity in terms of new deals and within our portfolio, the broader landscape has been a bit more sluggish.
Seth Pierrepont:
And I think actually what's interesting about those numbers that I just mentioned is if you double click and look at the deals that have actually gotten done, the number of deals that are in the hundred million dollar plus range. So it's a very big transactions. Those are actually on pace from last year, and probably on pace to exceed what they were last year, but the seed activity is way down. So it's almost down 50%.
Seth Pierrepont:
So I think while deal-making continues, dollars are really funneling into the more established companies. So I think if you're an early stage founder, you really do need to be thinking about a longer lead time to closing around because there might not be as much capital available as there was a few months ago.
Aman Ghei:
Fascinating. I'd love to dive into the world of FinTech and how you guys view it at Accel. So maybe to start off with short term, what are you seeing that is exciting in this market? We've seen funnily enough a lot of activity over the last three months, but it would be great to get your view on what is exciting for you and how you see that progressing to the saviors.
Seth Pierrepont:
Good question. So one area that we've been thinking a lot about recently is account to account payments that utilize the open banking infrastructure that is starting to cement over here in Europe and is allowing companies to sidestep traditional card rails, sort of speaks to the existential threat that I imagine is what led to Visa acquiring Plaid last year and MasterCard acquire Finicity last week.
Seth Pierrepont:
So I think it's an area where the infrastructure, we saw a lot of activity, the infrastructure layer 12-to-24 months ago. So companies like Tink and TrueLayer and Yapily, all raised meaningful rounds. And now this infrastructure is starting to bed in, we're looking for opportunities at that application layer on top. One example of that is account to account payments that I mentioned that I think there there's a potential to build some really interesting products on top of this new open banking infrastructure.
Aman Ghei:
Really interesting. And what for you, I guess I'd be curious to understand how you think about the infrastructure versus the application stages of this open banking phenomenon. At least from my perspective, I think the infrastructure side seems a little bit like middleware, not much technology, but lots of execution focus.
Aman Ghei:
So what really matters is having the breadth of clients and market share amongst banks or certain markets, depending on what kind of strategy you're going for. And the application layer really is where the meat is or whether where the technology differentiation is. Maybe why didn't you invest in the infrastructure side versus maybe on, and are excited by the application side?
Seth Pierrepont:
So I tend to agree with you. And I think that's ultimately the conclusion that we came to. I think there is don't get me wrong. There's a lot of value in that infrastructure layer, particularly if you can derive insights on top of all the data that is being collected. And maybe just as a level set.
Seth Pierrepont:
So effectively what the infrastructure companies are trying to do is connect data from across different financial services companies. So if you bank with Barclays, when your mortgage is at HSBC, you ultimately want a single UI to consume and transact to consume all that transaction data, and then ultimately make decisions. And so that's what companies like Tink and true layer and others are trying to do. They're aggregating all of that data for consumers, and then ultimately allowing them to decision on the back of that data.
Seth Pierrepont:
Now, I think the one interesting, so as you mentioned, there's kind of the plumbing aspect to that. So connecting all of these things, and I think the winning hand there is just how much coverage do you have across the core markets in Europe and in depth as well within those markets.
Seth Pierrepont:
But then I think there, there is actually a value added layer, which is the insights. And I think this is ultimately where Plaid saw a lot of value, which is what, what can insights, can you derive off all that transaction data? So, one very simple example that we've seen is just transaction categorization. So how much, how much money is set spending, on Uber trips versus buying meals at Deliveroo versus other things.
Seth Pierrepont:
And so ultimately being able to bucket those things is actually hard to do because the metadata from these transactions is fairly limited and it's super valuable because it allows downstream consumers of this data to more effectively use it.
Seth Pierrepont:
So if I'm making a credit decision, for example, based on Seth's transaction history, it'd be really helpful to know how much time he's spending, doing X versus Y. So I think there is an interesting layer of insights or analytics on top of these vendors.
Seth Pierrepont:
That being said, I think that ultimately the most value is going to accrue to these applications and payments in particular, I think is super interesting because it has such disruptive potential from a cost perspective for merchants that I think it will drive mass adoption for this type of, for account account payments versus your traditional card products.
Seth Pierrepont:
So I think, I think your transaction costs can drop from hundreds of basis points to tens of basis points for a merchant. So it's kind of a no brainer for them. I think the real challenge will be getting consumers to adopt these new account to account payment methods. So how do you convince me to give up paying with a card and paying with a QR code, for example, ala AliPay.
Aman Ghei:
Yeah, totally agree with you. I think we've seen a couple of implementations of open banking infrastructure for, for instance, a credit decisioning where you don't have to send in physical bank statements. You would think that's a really good user proposition, but the conversion element is such a tricky thing to get sorted in this space, particularly for the eCommerce space.
Aman Ghei:
So there's always going to be this kind of fine balance between yes, it's great for a merchant in terms of economics, but what does it do to the conversion and how much are you hurting it, but totally agree with you in terms of what it can do to the payment rail landscape, right? I mean, MasterCard and Visa have been at this for many years,
Seth Pierrepont:
But just on that point in terms of how do you convince consumers that it's a good idea. I think the margin umbrella that you create by the dramatic difference in cost can be passed on to the consumer by the merchant. So all of a sudden you have a lot of margin to play with that you can incent them through discounts or through different loyalty mechanics that can ultimately convince the users or the consumers to transact using these new payment methods.
Seth Pierrepont:
But it's still very early at the infrastructure stage, let alone at this new payment slayer stage, but it's something that we're excited about and continuing to watch.
Aman Ghei:
Makes a lot of sense. And it seems like open banking is giving rise to a lot of these data silos. So we obviously spoke about account to account, there's account verification, there's credit and a number of other things. What do you feel is going to happen that is going to, I would say, transform financial services, or do you think these data silos in particular can enable financial services companies to build better products?
Seth Pierrepont:
I completely agree with that. I think that their more personalized financial products, particularly in credit is something that the market really needs and it is on the back of open banking is very doable and it's crazy that in 2020, we're still relying on such blunt instruments as FICO scores or the local equivalent thereof to make credit decisions.
Seth Pierrepont:
I think we can do a lot better than that. Unfortunately I think it's challenging for consumers that are thin file or under bank, but I think there, it's interesting, there are a lot of prime consumers in Europe that are paying subprime rates. And I think a lot of this is while it's in part structural and there are competitive dynamics at play clearly.
Seth Pierrepont:
But I think Europe generally is fairly far behind the UK, certainly, and the US in terms of the evolution of credit. So you don't have any risk based pricing. There's no balance transfer, there's an alternative data in underwriting. And I think that by opening up access to more consumer data will ultimately influence how these credit decisions are made and lead to much better products in the market.
Aman Ghei:
Fascinating. And I guess at the end of the day, it's a bit of an evolution. You had the payday loan lenders that took advantage. So to speak of the customers, I don't want to say vulnerability, but to a certain extent, their eagerness to it to get something really quick because they needed it at blanket interest rates.
Aman Ghei:
I think what you're saying, I think is totally the future, which is I should be paying a fair reflection of what my true risk cost is. And that can only truly be determined if you understand me and my behavior actually across all channels, as opposed to a FICO score or my credit score, that is a function of whether I am registered in my council for elections or whatever else affects these credit scores, which is probably something that hasn't been changed in many, many years.
Seth Pierrepont:
Oh yeah. I completely agree. And that's the opportunity that we ultimately see. I think once the... The annoying thing here is that the, this data is available. The challenge is that it's locked down in silo and fragmented across different data silos. So the first step, which is what open banking is hopefully going to enable is the breakdown of these barriers and the aggregation of information. So that new lenders, for example, can take advantage of having a better and more holistic picture of you as a consumer so they can offer you the best available product that's out there.
Seth Pierrepont:
I think what's interesting is what happens next, which is you ultimately want something that is like a personal assistant for your credit portfolio. So something that is constantly checking in and making optimal or helping you optimize your credit wallet. So, it should be constantly looking for better rates. Your car loan should be giving you advice as to which credit card you should be paying down first to ensure that you're not wasting money.
Seth Pierrepont:
And they're countless of examples. But the key is ultimately is getting all the information available to the consumer in a centralized place. And then the automation can be built on top. It's actually one of our portfolio companies called AnyFin, which is a consumer credit business based in Sweden.
Seth Pierrepont:
This is what their ultimate vision is. And they ultimately want to help consumers optimize their credit portfolio. And they've started by making it very simple for them to refinance their existing unsecured loans. But ultimately those decisions will be automated and consumers can just live a healthier financial life.
Seth Pierrepont:
So as you probably know, there's a really strong narrative right now around general financial wellbeing. And that's obviously in part credit related, but also around savings and investing, having a more secure financial future. And so companies like AnyFin are really playing into that. It's something that we've been thinking a lot about as, and we'll continue to invest in for some time.
Aman Ghei:
Fascinating. No, I think it's super interesting, definitely the future. It kind of reminds me of to a certain degree, what you switch does in the energy space and maybe certain other products as well, but one level above, right. It really needs to be automated. It really needs to be frictionless for the consumer to understand it.
Aman Ghei:
I think we're going to go through this interesting phase now, and I think we're already going through it where saving rates are up, 300, 400 basis points compared to a few months back. And I think consumers are going to have a number of choices that need to be made.
Aman Ghei:
I'm seeing a lot of my savings accounts, for instance, dropping interest rates in response to a lot of this and consumers have now the ability to play. So definitely I think there's this one level of automation above is the future.
Aman Ghei:
Switching gears slightly, Seth, we spoken a little bit about open banking and financial wellbeing and more of the financial services part of FinTech. What are you seeing in the other part of FinTech, which is actually selling enterprise software to financial institutions where financial institutions might be an important customer vertical or not. I know you guys spend a lot of time looking at that space.
Seth Pierrepont:
I think so as we do, we spend a lot of time investing in enterprise software and speaking to the ultimate budget holders of that software, which is a CIO. And it's interesting that maybe unsurprising that budgets are down fairly materially on the back of COVID. I think this year overall, the growth was expected to be fairly modest at 2%, but now we're expecting budgets to be down 4% overall.
Seth Pierrepont:
And if you look at the larger budgets, the billion dollar plus budgets of CIOs are actually contracting by 7%. So I'd say big picture is that, as I said unsurprisingly, is, is technology budgets are down. And we we've seen that impacting our portfolio companies last couple of quarters. So there are freezes in certain spend areas, stalled procurement processes, meetings with potential buyers, just, consistently getting pushed out.
Seth Pierrepont:
So overall, it is a very challenging sales environment. What I would say is that the areas that have been less impacted by budget freezes, at least in the short term, are those that are dealing with banks adjusting to a remote workforce, both in terms of productivity and security. And those types of products are continuing to see a decent amount of spend.
Seth Pierrepont:
And the other area that hasn't really been impacted or where we've actually seen acceleration in certain cases is in, the very broad category of digital transformation or in public cloud adoption. So I think that's something and those are linked. As financial services organizations realize that a larger portion of their workers are going to be remote, they realize that it's going to be far more efficient for them to adopt things like the cloud to serve to better service those employees.
Seth Pierrepont:
So I think those big strategic initiatives we've seen in some cases accelerate, and as a consequence, the tools that are helping that transition help make that transition more seamless, those are also kind of riding on those trends. So one example that we've been close to is around data privacy.
Seth Pierrepont:
I've been spending a lot of time there personally, as I invested in a company called Privitar last year, which plays into this trend. And as you can imagine for regulated organizations, putting any sensitive data into the cloud, without it first being sensitized in some way is very high risk, or they perceive as very high risk. So tools like Privitar, which effectively act as this kind of layer between your raw data and your end consumers and sensitize that data as it moves, for example, know, you don't want to put social security numbers in the cloud necessarily, so they can anonymize that or mask that.
Seth Pierrepont:
So those types of, of players that are kind of in that value chain that are enabling cloud adoption, we've also seen continuing to grow in this environment. But, I think overall, as you can imagine, the picture is, generally people are tightening their belts and focused on cost reductions.
Aman Ghei:
No, I think it makes a lot of sense. And I think what we're seeing actually is similar to what you said. I think some of the verticals that I think were quote unquote hot before the crisis, so I would say broader base AI applications where maybe the ROI is 10, 12 months out, where there needs to be some integration work that needs to go on.
Aman Ghei:
I think those budgets are getting are under a lot more pressure than maybe security budgets, for instance. And I'd love to pick up on privacy because I think that's a really interesting topic here and would be great to get your thoughts on why you think now is the time for privacy.
Aman Ghei:
Maybe two years back there was this wave of GDPR and number of companies came across and that didn't really go anywhere for a variety of reasons. And now you're kind of seeing this second wave obviously GDPR is a fantastic company leading it, but maybe a function of what happened with Facebook, but now with contact tracing and COVID and a number of other factors, privacy is suddenly kind of coming up to the fore in a lot of these CTO, CSO, CIO type roles. Why is that?
Seth Pierrepont:
No, it's a good question. We've been thinking or covering privacy now, since GDPR, as you mentioned, came into effect a couple of years back, and I think the regulatory pull is very real, certainly for regulated companies. So within healthcare financial services, they can't afford to take the risk that other companies potentially can.
Seth Pierrepont:
And so on the back of GDPR and CCPA in California and other consumer data privacy acts that have come into place recently, I think a lot of those regulated industries have started to put more robust privacy infrastructure in place. As you mentioned on top of that, I think consumer sentiment has shifted away from trusting enterprises. I think that initially started with Cambridge Analytica, but, I think subsequently there's been a pretty steady drum beat of big brands in the press related to different data breaches or data leaks where lots of sensitive data made its way out into the public.
Seth Pierrepont:
And so I think those have all helped reinforce the message that privacy is important and very much needed. That's sort of on the need for almost the stick of privacy, but pulling against that or the tension is with the enterprises needing to consume their data or democratize access to their data.
Seth Pierrepont:
So, they want in most cases to make all their data, even the most sensitive attributes available to most of their employees. And so these are kind of two forces that are pulling against each other. Generally though, we've seen.
Seth Pierrepont:
Now, I guess if you fast forward to, to COVID and things like contact tracing or the race to coming up with a better vaccine, the fundamental challenge is getting access to personal data in a way that is safe and secure. If you can imagine, for example, all the pharma companies that are trying to come up with a vaccine as quickly as possible, if they were willing and able to share clinical trial results with one another, then we could potentially accelerate the time to value for a vaccine, which I don't think anyone would argue with that.
Seth Pierrepont:
The real question is what is the risk to consumers? And can that data be shared in a very secure, responsible way? And so I think there is a technology question. I think it is doable, but there's also this, this trust element to it, which I think consumers generally have to get over. And, I think there is a lot of promise on the other end. And so it's one of the things that we've been again have been thinking a lot about in the short term, on the back of everything going on during COVID.
Aman Ghei:
Interesting, fascinating conversation. I'd love to end it with a little bit around how you see the current environment from a VC standpoint. I guess we spoke a little bit before about process and what's going on. I'd love to maybe get a little bit deeper into detail in terms of what do you see from a valuation perspective? What are you telling your companies? Just so that I guess people listening to this from an entrepreneurial perspective, have an understanding of what they should be looking at either when they go out to raise or right now in this situation.
Seth Pierrepont:
So there's still a lot of money in the system. So unfortunately, for certain deals, I don't see pricing coming down off pre COVID highs for top tier assets for sure. I think there may be discounts in sectors like travel that have been materially impacted by COVID. I think they're in the early stage deals we've seen in the last few months. I think these are more the exceptions than the rule.
Seth Pierrepont:
I think by and large, as I mentioned earlier on the pricing has been fairly resilient. I would say that that investors are at least talking about focusing more on cash, efficient businesses and more durable or recurring revenue. So you may see an increased appetite for SaaS as an example at one end of the spectrum and less appetite for big ticket discretionary consumer on the other end of the spectrum.
Seth Pierrepont:
So another way of saying that is, I think investors will spend more time really digging in on things like unit economics, cash efficiency than they have historically just given that is still a relatively uncertain macro environment.
Seth Pierrepont:
And as we already talked about, I think if you are a software company that is, selling into some of these trends that a CIOs are continuing to spend in, then I think those categories will continue to attract investor capital and prices will still be competitive or with what they were pre COVID. And in other sectors, I think you'll see a more material discount.
Aman Ghei:
Interesting. I guess the major difference between this, you can call it a downturn now, I guess, from a VC standpoint is really how well capitalized funds are across the board. Right? I think I was reading some things the other day, which was, I think could have 90% of VC backed companies will actually make it through this period, just because I think the funds that have backed them genuinely have the capital to support them.
Aman Ghei:
Obviously they have to believe in the fundamentals of the business and so on. And so that's an interesting component. And what we're seeing is actually some entrepreneurs deciding themselves saying, "Hey, let this period pass. We feel we might be able to get a better valuation or our business might fundamentally improve. Let us focus on unit economics and come back into the market in six, eight, twelve months from now." Do you see that happening as well? Or do you see kind of six, twelve months from now similar kind of dynamics in the market?
Seth Pierrepont:
I've been really surprised by how quickly the market seems to have come back in a lot of ways. So I wasn't expecting to see deals at pregabalin prices and happening at the pace at which they're happening pre COVID as soon as June. So I think that is surprised me. And so I think it's really hard to predict what's going to happen twelve months out, given that, even three months out I was surprised by the market environment.
Seth Pierrepont:
I guess my advice to entrepreneurs is don't assume that it will be difficult to fundraise at least at the price or the valuation that you'd hope to achieve for the next twelve months. And if there is an opportunity where to capitalize around at the price that you want, then that's all the better. But I think the conservative assumption is that the markets will continue to be volatile and that most companies will find it challenging to raise at the prices that they'd like the next twelve months.
Aman Ghei:
Makes a lot of sense, Seth. Seth, it was great to have you here. Thanks again for being with us.
Seth Pierrepont:
Thanks so much for having me.
