Remote Seed Investing and Post-Pandemic Fintech Opportunities
Today, Rebank co-host Aman Ghei is joined by Seb Wallace, an investor at Triple Point, an early stage UK venture capital firm that has invested in companies including LendInvest, Credit Kudos, CountingUp and many more.
In this conversation, Aman and Seb discuss strategies for remote seed investing, the skew they’re observing in terms of how venture money is flowing, startup opportunities Seb sees in insurance and capital markets and more.
Full transcript:
Aman Ghei:
Hey Seb, welcome to Rebank.
Seb Wallace:
Thanks so much for having me. Awesome to be on.
Aman Ghei:
It's great to have you here, and maybe to start off with, I wanted you to give the audience a little bit of a background on Triple Point, because as one of the most active seed investors in Fintech, you guys have a pretty unique structure. Maybe just start off with, do you want to give everybody a little bit of a background on Triple Point?
Seb Wallace:
Yeah, absolutely. Yeah. Triple Point's been around for just over 15 years now, so we've been around quite a long time in the UK scene. And actually, our early stage investing began predominantly with debt investing, which obviously therefore meant that Fintechs were our bread and butter. We backed LendInvest, which were then Montello, with their first debt, Capital on Tap, Paymentsense, Contis, Contis Group, as they were called then, and several others.
Seb Wallace:
And so Fintechs have always been something that we've been very interested in and been very close to, as the ecosystems developed, particularly over the last 15, 20 years in the UK and London in particular, and so it's something that we feel that we know. And then a few years ago, off the back of the debt investing, we decided to begin equity investing at the seed stage because often that's where we are getting involved with debt, normally receivables based debt. So we have quite a unique structure because we're an early stage seed, opportunistic Series A investor, but we also have a debt offering, which is very helpful, and there's potential synergies for early stage Fintechs looking to grow.
Aman Ghei:
That's really interesting, because there are a lot of early stage Fintech companies that are not able to get access to debt for a variety of purposes, you mentioned LendInvest. I'm assuming that's lending and then having a partner like you come with the equity component as well as the debt component to scale their business is, I guess, a pretty important thing.
Seb Wallace:
Normally the model, the way it works, is that you want equity in order to grow the operational side of the business, your employees, your marketing, sales, what you consider to be the tech side, but then your product, because you're a Fintech, you have a significant portion of lending, or if not lending, then there's some sort of capital backing. It might be the case that you have a long-term debt facility on electric cars now and you offer a service, basically an electric car service now, as you see businesses like Evezy, who are doing exactly that. And what's so fascinating about that is that normally you have to go to one investor to go get the equity and you have to go to another set of investors, normally actually a consortium at that very early stage, of angels, and you have a consortium that will provide the debt and then you build up your underwriting experience within your product and then that allows you to then go on and eventually you go get that debt.
Seb Wallace:
And what we're able to do is we're able to, particularly in cases where the business model is receivables based, like for example, LendInvest, we're able to lend off those receivables and particularly B2B, and that's our bread and butter on the debt side. And then on the equity, it is as you'd expect, seed and Series A stage venture capital, and we view it through that lens. But what we're able to allow businesses to do, is effectively power their products, which is debt, easily through one provider. And so one business recently that we've been helping very closely is SteadyPay, for example, these guys are trying to effectively pay-smooth, they're fundamentally got a debt layer to them. And so we're able to do that. And not many other investors in the London Fintech scene are able to do that.
Aman Ghei:
Super interesting. Talking about SteadyPay, the broader topic, you guys are one of the most active seed stage investors in UK Fintech. What is exciting you right now in this space?
Seb Wallace:
Really interesting question. I mean, so me and my colleague, Daniel, we do a lot of the investing at Triple Point, and one area that really stands out that I think if you ask anybody, they will say, it's really interesting. Open banking is fascinating for a whole host of reasons. And actually recently Blockchain has come back on the radar. And I say recently, and you can hear that in my voice, because I think everybody knows in 2017 cryptocurrencies were all the rage. And then it all went pop and the hype died and then Blockchain became a bad word in venture capital. But actually, I think that we're getting to a stage now where the applications of Blockchain are shifting and it's maturing and we're starting to see some real opportunities there, particularly in Fintech, where it was always destined, I think, for it to be a Fintech opportunity.
Seb Wallace:
And so, I think those two areas in particular are just hugely interesting. And it's hugely interesting, not just globally, but in London, where obviously we have such a developed financial services industry and also to be honest, world-leading in a lot of cases, legislation, which is often needed for things, particularly like open banking. And so those areas, I'd say I'm really, really interested in at the moment.
Aman Ghei:
I'd love to dive deeper into those two areas in a bit, but I guess before we go in there, so on Triple Point, like what size of a check are you writing today? And what's your sweet spot in terms of looking at a Fintech deal and saying, "Hey, this is something we want to invest in?"
Seb Wallace:
So we can invest anything from a hundred thousand, sort of first money in a friends and family or angel round, all the way up to a million pounds. Our sweet spot's around £500,000 to £600,000, although we really can flex depending on the opportunity. So we're normally leading pre-seed or seed rounds, or we're participating in Series A's either as a follow-on, or as a first time investment. And we've actually recently partnered with the London Evening Standard for a campaign, which you may have seen, which is the Kickstart Fund. And through that, we are effectively providing pre-seed funding to businesses, tickets up to 150,000 pounds and being London and people being in lockdown, there's lots of different opportunities that we see through that. And that's how we're able to do the pre-seed investment.
Aman Ghei:
Interesting. And have you seen anything fundamentally change in the early stage market? I know a lot of people have been talking about on we're still doing deals. I think the reality is you're seeing a lot of money go into some of the later stage deals. So the value of the deals still looks nice and good, but the number of deals has come down post pandemic. How are you seeing it on the seed side, particularly where like entrepreneurs and meeting them is so important in this day and age?
Seb Wallace:
Yeah. And also, it's a really interesting question, because the seed stage is the future A, B, C stage, right? So what's happening now is kind of a beginning of what will unfold over the next few years, later stages. When COVID hit in March, obviously there no one who really knew what to think. And everyone was saying, "oh, deal volumes will drop" and they have. The stats are now out, they have dropped. But fortunately, in the seed stage in particular, that's less in the company's operations. So the companies are newer, less mature. And that means that due diligence is typically desktop. And then in terms of meeting founders, obviously that is the number one thing everyone looks for, a seed stage where that is the one thing you can really anchor off to gain conviction. And I think probably fundamentally, like everybody relates to, Zoom has become absolute bread and butter or video conferencing generally.
Seb Wallace:
If things are advancing, me or another colleague can always meet up with the founder once or twice, just to get a sense and meet face to face, but sometimes the deals are happening very quickly. And I actually think at the seed stage, people have found their rhythm again and investments are still happening into good businesses. I think you're right though, that few other investments will happen. I think that perhaps, there's renewed emphasis on quality. There always was an emphasis on quality, but just a renewed emphasis, but, we certainly see good competition. Valuations haven't significantly changed. They have decreased a little bit in some cases, depending on the area, sector, stage, and by stage, I mean, are they raising a seed round off a little bit of revenue or raising a seed round off a decent amount of revenue, which is, both count as seed stage and both types of companies, but yeah, overall I'd say it's actually a much more positive picture than I think I would have painted three months.
Aman Ghei:
Super interesting, Seb.
Seb Wallace:
Yeah.
Aman Ghei:
Well, I love to dive into some of the industries we spoke about, and let's get started with maybe something that is going to be controversial, which is Blockchain.
Seb Wallace:
Yeah.
Aman Ghei:
And I think as you rightly mentioned, there was, particularly around 2018, and in some areas, trade finance, remittance in particular, this, let's call it hype for now, around Blockchain, right? So I'm curious to understand how, where do you see this vertical going as an early stage investor, right? And, also keep in mind that maybe later stage investors are looking at it, from my view at least, and saying, "hey, when are we really going to see some applications built on top of this that have true scale and have achieved a certain amount of revenue?" And at the same time, I guess we shouldn't really be talking about things in terms of technology, which is Blockchain, but more in terms of applications that are powered by Blockchain. So, love to get your sense on why you're so excited about Blockchain.
Seb Wallace:
Yeah. I think that's a really interesting, because the point you make about not talking about it as an application... as not talking about it as a product, but as an application, it's true. It's the same with AI, isn't it? It can be used anywhere, it's...
Aman Ghei:
Yes.
Seb Wallace:
... fundamentally a tool. And what was it put to... how is it put to use? And I think initially Blockchain, when it was new, it was being put through all these funky uses and what came with the PR was not necessarily the most exciting use cases. And the two key use cases that I think are really exciting at the moment, are public international capital markets use cases and insurance. And insurance obviously we can talk about second because it's a lot going on there. But in the legal tech world, one of the traditional kind of, I think things that people in venture capital say is legal tech is something that's been growing, but it hasn't exploded in the way that Fintech has or HealthTech has.
Seb Wallace:
And so I think what's particularly interesting with Blockchain in the legal sector is that things like bond issuance at the moment are heavily manual. They require hours of human eyeballs and scrutiny, and you've got very large legal practices at the big players like Allen & Overy or Clifford Chance, the big law firms who are receiving very large fees, but also are doing a lot of work to effectively help somebody raise money on the bond market. And a lot of that could be automated. And a business that I thought was particularly interesting in this area and actually has raised quite a lot of money at albeit pre-Series A stage is business called Nivaura and Nivaura are effectively trying to use Blockchain to simplify and speed up the bond issuance market. And they did a very large round full of strategic investors.
Seb Wallace:
It had London Stock Exchange invest, Santander InnoVentures, Allen & Overy, and a couple of other Magic Circle law firms. And so they really do have the right backing and cap table to enable them to have their products adopted quickly. And the thing that I find so fascinating about that is at its core, you're just using distributed ledger software, Blockchain, but you're replacing the entire underlying pipes for international capital markets, which is a massive, massive market. And if that application for Blockchain can be rolled out more widely, then the business that is doing that rolling out, whether that be Nivaura or someone else, stands to gain significantly. And there isn't really an equivalent business doing that in the current manual market. And so I think that area from a sort of, what is the size of the market, I think that's a real white space that somebody's going to have to take.
Aman Ghei:
I guess the interesting component in a capital markets situation is obviously it's going to be regulation driven, right?
Seb Wallace:
Yeah.
Aman Ghei:
So how do all these different actors, it's interesting that they have, financial services players and a lawyer, I'm talking about that the startup that you mentioned. I'd be curious to understand how government regulators also get involved, right? Because I think we were all sitting here and agreeing that the technology that is out there is significantly better. And the application of it is significantly better, but you do need the counterparty to accept it and you do need the governments to OK it for this to go ahead. So there is this little bit of a network effect that needs to happen for it to start scaling.
Seb Wallace:
Yeah. And actually that's going to initially slow the adoption of the technology, but it's going to create a very large moat around whoever is able to roll their products out first. And in particular, the UK, I find is a particularly exciting place for the adoption of this technology in the capital markets, because the FCA, whilst obviously being a regulatory body and being very difficult to deal with in many ways, are incredibly forward thinking when it comes to things like their sandbox or their accelerated regulatory approvals. And you see that with startups, particularly around the pay advance industries that they, you can get full regulatory approvals within 12 months for different particular areas. So you can see that the UK could be very well placed to be the sandbox environment for much of these new products, but you're right.
Seb Wallace:
I mean, that's probably one of the main reasons that this technology has taken some time to take hold. It's inevitable, I think that it will be adopted because it is a magnitude, 10, 20, plus probably even a hundred, times better than the incumbent solutions, the very manual processes. And so I see that as actually attractive with investors because I think the person that's going to crack that is going to have a real blue ocean in front of them that they can sweep up before somebody else can get regulated.
Aman Ghei:
That's capital markets. Interesting. You mentioned insurance. How do you see the insurance world adopting this kind of technology?
Seb Wallace:
In InsureTech, one of the key areas that I think is very interesting in the concept of Blockchain is the ability to automate some of the processes that either brokers are currently doing or brokers currently help with. So not replacing the broker necessarily, but augmenting the broker. The broker holds such a key role in the insurance market, Fintechs that want to, or InsureTechs that want to try and displace completely the broker, I think come up against the law of resistance and that resistance, because the insurance market's incredibly relationship driven, much more so than many other markets. It can actually be something that halts adoption rather than just slows it.
Aman Ghei:
Brokers give you a distribution, which is the most important thing for an insurance business.
Seb Wallace:
Fascinating business in this area is actually Nayms. That's N-A-Y-M-S. Nayms. And they effectively are using Blockchain. And in fact, even cryptocurrencies to enable the reinsurance market to become platform based rather than basically assisted with brokers. And there are not many reinsurers. There are three, four, five in the world that are very large. And at the moment, many of the insurance products that are, for example, denominated in US dollar, will go out and will sell effectively to those five reinsurers, a particular portion of the risk. And what's so interesting is that Blockchain and alongside it, cryptocurrencies. One of the things that crypto has done recently is well, not recently but in the last couple of years, is introduced Stablecoin, and Stablecoins, various Stablecoins. And so whilst they benefit from the infrastructure that Blockchain has, they are fundamentally tied to whether it be USD or GBP or Euro.
Seb Wallace:
And what Nayms are doing are allowing those Stablecoin providers to provide coverage for US dollar denominated risk, or at the moment they, for example, they've begun with Bitcoin products at the moment, Bitcoin into the Bitcoin product insurance is denominated in USD, which is the terrible, terrible mismatch because obviously the volatility of the underlying insured products. And so their first product is to have a Bitcoin product insured with Bitcoin. But the logical next conclusion is you can take a USD product with the same platform that they have, and you can ensure a USD product, reinsure a USD product with Stablecoin, which obviously converts to USD one-to-one. So it enables you to use the quick distributed ledger system of Stablecoins around the world, not just one, but any, it widens the market who can actually be a reinsurer and it provides an application for cryptocurrency that fits within what I would consider to be a traditional financial market, a traditional insurance market. And so...
Aman Ghei:
Very interesting.
Seb Wallace:
I think that is, we're talking the bleeding edge there. I think this is something that we'll hear more about over the next few years over the next two, three years.
Aman Ghei:
Makes a lot of sense. And I didn't really think about this, I guess on the insurance side, a lot of focus on distributed technology has been around automating payouts, right? Because if you think about it, the insurer and the consumer have this misaligned match, so to speak, because the insurer makes money when they reduce the amount of claims that they pay out while, while that's not such a great experience for the customer, but that's why they're buying insurance. And so the idea would, was really, and you've actually seen some of this happen in the flight cancellation space actually, because it might not be a direct, distributed ledger technology application, but the idea is basically around smart contracts and having the ability to fact check across a central database that is governed and then initiating a payout, which makes a lot of sense.
Seb Wallace:
Yeah. And in fact, that smart contract technology is exactly the sort of technology that is used to enable widespread bond issuance automatically. Imagine if you could sign a standardized document and then immediately issue into the bond markets, without having to go through multiple layers of either regulatory approval or human processing, exactly as you say, it's fascinating. It's not necessarily what you think of when you think of Blockchain, but it's fundamentally the same technology.
Aman Ghei:
That makes a lot of sense. Interesting. Seb, the second one you mentioned was open banking. I know you guys have invested in Credit Kudos who are trying to build this alternative credit score based on open banking data, and then Vine, which is doing some really interesting things around building payment methods on open banking. And then we've obviously seen a lot of money flow into this space, right? Whether it's from an M&A front with Mastercard, SoFi, Visa buying Plaid, Galileo and so on. And then also from a funding standpoint. What is exciting you about this vertical right now?
Seb Wallace:
Yeah, it's interesting because there's Plaid, but not just Plaid, but you've got TrueLayer, you got Tink, all these other guys. I think that particular area, the providing, the provisioning of open banking APIs, is actually a really competitive space now. And as a seed investor, that's not where we'd be looking. I think that well and truly has some great leading names there, like those guys we just mentioned, but many others as well. What I think is so interesting about open banking is, obviously there's two parts to open banking in the sort of European sense of the word. There's open banking, which is focused on payment initiation service by PISPs, which is effectively, it allows a new incumbent, a new company to come up and effectively act as an intermediary between the customer and the bank. And so the PISPs, the payment initiation side of open banking, we can talk about in a second.
Seb Wallace:
And the second side is access to data. And I think that's where most of the has been to date. So account information service providers, AISPs, in open banking lingo. So access to data is an area which we find fascinating at Triple Point, and its one of the main reasons why we backed Credit Kudos. Because for a long time, the banks have not shared their transaction data or their account data, not necessarily just because they don't want to. Although I do think that naturally, if you are a bank and you have a lot of proprietary data, you wouldn't necessarily want to share it, but I don't necessarily think that's the main reason they haven't shared it. I actually think the main reason they haven't shared that is because that's been legacy IT that's prevented that data from being easily shared or integrated into other systems.
Seb Wallace:
And so what we're now seeing with open banking is, we're seeing open banking catalyze investment, capital investment. And software investment at banks to the tune of hundreds of billions of pounds per bank a year. And it's allowing individual users to share their data with other providers that can then enhance the products, Fintech products, financial products that they're offered in the future. So a brilliant example of this is with Credit Kudos. There is at the moment with the incumbent credit bureaus, 20 to 30% of people are grey, in the grey area, grey file. They're not bad credit, but they just don't have a lot of credit. And traditionally we've all heard the story our moms and dads have told us when we were growing up, make sure you get a credit card and you do some transactions on it, build a credit history, because when you come to get a mortgage, you don't want to be rejected for not having credit history.
Seb Wallace:
And actually there are many people who might not be heavy users of credit who are credit worthy, and those people can really benefit from the businesses such as Credit Kudos, at being able to reference them through their transaction data, to determine that they are credit worthy and allow them access to credit, where they would otherwise have not been able to get it because obviously the incumbents, the Experians of the world, all work on historic data, and normally historic credit data, not just historic transaction data in the way that Credit Kudos could, which is a much richer form of data, which is currently being unused. So it allows democratization and acts of access to credit potentially. And I think that's really interesting because credit's a fundamental thing that fuels the economy and that fuels economic growth, and it doesn't always necessarily have to be bad.
Seb Wallace:
So I think the data side of it and what that means for consumers is fascinating. And then on the payment side, I mean this is where it gets extremely exciting very quickly. It's not a slow growth of the ecosystem. Payments right now, a very sexy area of venture capital, and why they are very sexy area? A, they are hugely profitable. I mean, just Visa alone is trading over 18 times forward revenues at the moment. But more interestingly than that, the area has so many different providers or services within it. So you might say, for example, in the payments chain, you start at sort of a bank, your bank, you have an issuer, you have a card network, you have an acquirer, you had a fraud checker. You have a clearing bank, you have independent sales organizations, which are ISO's, who sell terminals to SMEs.
Seb Wallace:
You've got this very large industry that's grown very fat off taking very small transaction fees consistently. And there is an opportunity in open banking on the payment side of open banking, to simplify that down. And if you say, and I'm just taking numbers out of thin air here, the total fee on a transaction, in pay from the acquirer back to the issuer, with everything in between and the sales organizations on top, it's sort of 2% of the transaction. Imagine if you could say, as an open banking organization, I'll facilitate your payment, but I'll do it for 1%. All of those businesses that have got large, and we've backed businesses like Paymentsense who are within that. But imagine if you could take just 1% of that 2% and how big that business could be. And that's one of the reasons why we backed Vine.
Aman Ghei:
No, I agree with you. I think the payment space is, obviously, the payment rails have been around for a while now. And I think the biggest challenge in this space is going to be really around conversions, right? So I think at the end of the day, let's call it the e-commerce vendors. They've spent so much time in the last five, 10 years perfecting with their payment analysts, what the best payment flow needs to look like. And it's really making sure that there's a clear value connection between, not only reducing the fees you pay to the players in the value chain, but also passing that on to the customer in some form. I think that the credit players do a really good job in terms of packaging it up, right. So I would pay by Klarna if it was bypassing payment rails. I know it's not right now, but I would because the value proposition of paying in three core installments is so high.
Aman Ghei:
And then, I think that needs to happen at a larger scale on the payment rail side of things with open banking in mind, because I think that's how you'll get consumers to really adopt it, because at the end of the day, you still need the consumer to initiate a payment, right? And that's going to be absolutely key.
Seb Wallace:
Yeah. I think you're completely right. And in fact, in a wider trend, I guess you could call access to payments, you have on the one hand, this real move towards what's called IIF payments, instant, invisible, free. Sort of quick, easy transactions in that box. You've got Apple and GooglePay. You got Klarna, all these guys you've heard of. You've now got Facebook Shops. You've got Visa checkout has just changed to click to pay by Visa.
Seb Wallace:
It's all about just making the payments simple and straightforward, because as you say, it's about capturing the consumer at the points of payment, and they now have many options. And so the competition has grown and therefore friction needs to reduce. What I find so fascinating about the open banking payment potential is that one of the things that credit cards have been doing for a while, Amex is probably most famous for this, is the level of cash back that is provided to customers who are using their payment rails as you quite well put it.
Seb Wallace:
They obviously have such a large amount of cash flow that they're able to provide cash back without it impacting their bottom line materially. Just imagine if you had much of that payment system consolidated in one business, the size of the consumer benefit, monetarily as cash back, like imagine if you just... imagine if Amex or whoever it may be, controlled the entire payment rail system. Imagine the potential, obviously there's a little bit of trickle down economics there, and I'm not sure whether trickle down economics is always right. But the point is that it's potential for a fascinating improvement for customers who are not necessarily credit users, but use obviously credit cards or payment networks to benefit from a cash back perspective. And I think that's going to be one way that we'll incentivize new customers to use things like open banking, pay by bank, Vine technology.
Aman Ghei:
Totally agree. Seb, it was really interesting having you on the podcast and talking to all three things; Blockchain, open banking, and of course, getting to know Triple Points a little bit better. Thank you again for being with us.
Seb Wallace:
No, no, thanks very much for having me on. It's awesome to shoot the breeze. Yeah, it was lovely. Thank you.
