Fintech Hustle // Peggy Mangot and Neil Underwood

Hey, everybody. Welcome to another episode of the Fintech Hustle. I’m Ron Shevlin, chief research officer at Cornerstone Advisors and one of your co-hosts, joined again, of course, by Sam Kilmer, managing director of the fintech advisory practice here.

We’ve got a great show lined up for you today. We’ve got two guests. The first is Peggy Mangot, operating partner at PayPal Ventures, where she’s been for, I think, coming up on about two years now. Prior to that, she was the general manager of innovation at Wells Fargo.

Peggy was also the founder and CEO of SparkGift, which is where I think she was when I first met her, so we’re going a while back. Before that, she held senior roles at Google and Visa. Clearly, she can’t make up her mind whether she wants to work for big established firms or small startups, so we’ll talk more with her about that.

Also joining us today is Neil Underwood, co-founder and general partner of Canapi Ventures and president of Live Oak Bank. Neil co-founded Live Oak and nCino, digital banking provider Apiture, and is on the board of a lot of fintech startups. Prior to being a founder of fintech companies, banks and venture funds, Neil was a general manager at S1, one of the early digital banking providers.

Sam, if it’s okay with you, let’s jump right into the discussion with Peggy and Neil.

Peggy, I’ll start with you. Most of our audience, our listeners and viewers, are typically fintech technology providers, along with a lot of bankers and credit union folks, but not a lot of venture fund or other investor types.

I would imagine that many of them think like I do, that your day is filled with going out to breakfast, lunch and dinner with fintech founders, hanging out at conferences and maybe going to the beach down in Miami, where it seems like a lot of you types have migrated recently.

So set us all straight, Peggy, and tell us a little bit about what your typical day looks like.

Sure. I’ll start with what PayPal Ventures is. We are a strategic VC. We invest for financial return in four broad areas: consumer fintech, commerce enablement, infrastructure, which includes risk, fraud, security and cyber, and then our fourth and growing bucket is infrastructure surrounding crypto, blockchain and NFTs, the broad crypto infrastructure play.

We invest for financial return. We don’t require a strategic relationship or a business sponsor from PayPal.

When you think about why we exist, we are an arm of PayPal that helps bring insights and market learnings back to the mothership. I came from innovation at Wells Fargo, and that was one way of doing it. We had a large R&D team. We did proofs of concept and white papers.

Having a strategic VC like PayPal Ventures is another way to essentially have an in-house innovation arm, where you have people on the ground learning not only from the companies you invest in, but from all the companies you say no to.

That’s a broad overview of PayPal Ventures. We’re investing out of our second fund, $500 million. We’re a global team, and we aim to invest 50% outside of the U.S.

When you think about my day, I’m an operating partner for the fund. My team’s remit is a few things.

I’m involved in every deal that we do and every follow-on. I need to get to conviction and work with the investing team so the team is on board with new and follow-on investments.

There’s also about 30% to 40% of our portfolio that is looking to do a deal with PayPal. They want to sell to PayPal or partner with PayPal. I have a member of my team who spends most of their time working the commercial angle and trying to help these portfolio companies work within PayPal.

That might be relationship mapping or helping them with their pitch deck. How can we make it easier for them to get to the right people to explore commercial partnerships or arrangements?

And yes, we do have an ecosystem play. I attend the conferences and try to make myself available to companies that want to pitch PayPal.

But I’m sure, as Neil can express further, there are so many good deals out there and so many great companies that it really comes down to bandwidth. There are only so many investments we can do in a year. There are a lot of companies we see that we want to invest in, but obviously, we can’t invest in all the good ones.

Awesome. So, quick follow-up question to that. You listed four areas of focus. They seem very broad. Are there areas of the fintech and financial services world that you’re not looking at?

I would say, to be honest, we’re doing less in U.S. consumer. If you look at our U.S. investments over the last couple of years, it’s a lot more B2B. It’s a lot more embedded finance and infrastructure plays.

I think that’s a little bit of the trajectory of fintech and the investing world. You saw a lot more deals happening in consumer in years past.

It’s harder for us to get to conviction, and a lot of it surrounds CAC. Ron, you and I have had these discussions about the neobanks and neoadvisors and how difficult it is for them to acquire and pull customers away from large institutions and make their account the primary account, which these neo institutions need to make the economics work.

Just to be clear, though, when you say you’re not focusing on B2C, you’re really not focusing on those that are direct to consumer versus the B2B2Cs or those that enable direct-to-consumer firms?

I would say, yes, we’re doing less direct to consumer in the U.S. Globally, we think there’s a lot of opportunity going direct to consumer, but we’re doing less in the U.S.

We’re going to get a lot more into what you’re seeing that’s hot, but let’s get Neil into the conversation.

Same question to you, Neil. What does your day look like?

Well, I did not go to the Bitcoin conference in Miami, the boondoggle down there, but I am going to a crypto conference in the Bahamas. It’s called SALT, in a couple of weeks.

Just a little background on Canapi. I think many might know our story, but for those who don’t, we’ve had close to 50 banks invest in our fund, between $10 million and $50 million.

We’re a venture fund, essentially a strategic venture fund for banks. Our banks are our LPs. We’ve successfully deployed Fund I, we’re on to Fund II and hopefully closing that out here somewhat shortly.

My day is actually quite similar. It’s a combination of listening to what we call fintech prospects, listening to these CEOs and their pitches, and then managing the portfolio.

The third vector that we deal with a little more at Canapi is that we have a lot of LP meetings and one-on-one bank meetings. We’ll present to bank boards about the future of fintech. We’ll do thematic one-on-ones or Zoom calls on specific things like identity, bank infrastructure, SMB marketing and neobanks.

It’s really a combination of those three.

We’re a bunch of operators turned venture folks, much like Peggy. We’ve got great backgrounds relative to fintech and understanding fintech, but the context and exposure you get from meeting with these companies is incredibly valuable.

I probably meet with four fintech CEOs a day, just on 30-minute Zoom calls hearing pitches, and so do my partners. We have about 24 professionals with us right now.

It’s really interesting because you hear so many different things. The context and exposure help you get conviction when you see something that’s completely different and you just know it’s going to be a home run. Then you go deep.

Our fund will look at a thousand companies a year, and we’ll probably do 20, just to give you some sense of the ratios there.

We like highly concentrated positions, meaning when we see a company we love, we’re ready to write a big check and own a nice piece of it. Not control, way under control, but that’s really been our thesis thus far, and we’re going to continue that same approach into Fund II.

Is that a wire transfer or an actual check you’re using on that one, Neil?

Yeah, it’s funny you mentioned that, Sam. People still use the word “check.” They’re going to write a check. You’d think, being in venture and technology, we’d actually use another way.

We’re going to change it into a cryptocurrency and move it via crypto to the checking account, the operating account. How about that?

Well, you could just use Takeoff.

There you go. Amen.

One thing I’m curious about, because you’re seeing so many transactions, Peggy, you mentioned more than you really have time to participate in. You mentioned B2B2C and embedded finance.

What’s hot right now for each of you? What’s maybe not cold, but lukewarm, that you think ought to be hot? Are there subcategories that jump out at you as being particularly hot or that should be hotter?

Peggy, if you want to take a stab at that, I’m genuinely curious about what you’re seeing right now.

Sure. One area within crypto that I use as an example, especially when I’m talking to people who are just getting started in crypto, is the desire for a consumer or business to get better yields on their accounts and cash holdings.

Everyone can understand that their current personal bank account or treasury management account is not paying very much yield on the cash in the account.

When I look at a more obvious use case, it’s who are the companies that are going to help unlock greater yields for consumers and treasury management?

That enabling crypto technology, or companies that are going to enable it and sell into banks for their customers, is going to be an area of adoption that feels obvious to me. I think we’re going to see more of this risk-adjusted access to higher yields.

I’ll pause there because I’m curious if Neil is looking at that as well.

Yeah. First of all, on the crypto side, we share your view. We love blockchain and crypto infrastructure companies. It’s happening out there.

The question is, how can we as a sector in banking, or even in fintech, make sure we have all the regulatory and compliance pieces wrapped around the stuff that’s happening? That seems to be a bit of a moving target, but some companies have clearly stood out in that particular subsector.

You guys mentioned embedded banking, or embedded finance. It’s probably one of my favorite topics to talk about. I literally just got out of a two-hour meeting at Live Oak Bank on the concept of embedded finance.

I’m starting to hear CEOs talk about it on earnings calls. I think it’s this recognition that consumers and SMBs aren’t going to be going into branches anymore.

How do we embed our financial services companies into other software so accounts can be opened there, money can be moved there and credit can be established there?

Plaid and Stripe are great examples of API-first platforms that are selling to developers. I think banks ultimately have to follow that same path.

A couple of great little technology companies have popped up along the way to help banks do that. But I think the business of embedded banking for financial services companies is going to evolve very quickly in the years to come.

It has to be a different way of thinking, embedding your bank, whether it’s loans, deposits or payments, into another e-commerce app.

A great example at Live Oak is that we’re looking at practice-management software providers so that when a veterinarian enrolls in a piece of software, the last step in that enrollment is a little Live Oak Bank logo.

Through elegant APIs, new-account-opening APIs, which are something very different and something the industry hasn’t really solved for, you can do that and then stay in the experience of the e-commerce platform or practice-management provider.

Absolutely. We’ve looked at that a lot as well. What’s the next vertical software serving these different industries?

We have some of the obvious ones we’ve seen already, but like you just mentioned, veterinary care. We’ve seen dentistry. We’ve looked at beauty and salon vertical software, and the different fintechs serving that vertical software and embedding into the experience.

And just a quick plug back to crypto, we share your thesis surrounding investing in the infrastructure that is helping make crypto regulatory compliant and tax compliant.

We’re an investor in TRM Labs, which is AML for crypto.

Love TRM Labs. That one got away from us. Damn. Sorry.

And TaxBit, which is helping companies be compliant with the tax requirements surrounding crypto holdings.

Just a quick comment on that. We recently completed a consumer survey about consumers’ interest in getting accounts and doing financial business with nonfinancial providers. We’ll actually have a series of reports. The first will come out soon.

One of the things we found that I thought was interesting was that, yes, there’s a lot of interest from a general consumer perspective, but when you look at it from a small-business-owner perspective, it was huge.

The other big opportunities were gig workers and gamers. The gamer population is absolutely huge globally, and there’s interest in being able to interact and transact seamlessly within the game environment.

That kind of begs the question, what do you guys see as future opportunities from a metaverse perspective, beyond gaming?

Neil, you want to start there? Then, Peggy, we’ll ask you the same thing.

Sure. On the gaming side, that’s quite an interesting approach. It’s another example, in my view, of embedded banking, where you can embed a bank or financial services company inside.

The metaverse, to me, is still very early days. Folks have tried this before. I actually bought an Oculus device and played around with it for quite some time.

The experience is truly immersive and interesting. I just don’t know that I’m going to be in that for eight hours a day.

This is probably not a popular view, but I think it’s really early days. Those who are staking their virtual claims, whether they’re virtual branches or stores, might be early.

However, it’s something we’re watching quite closely. We haven’t made any investments in the space just yet.

Peggy, what’s your take?

We had a thesis surrounding creator commerce. Based on the research that we did in 2021, we invested in a few companies, Cameo and StreamElements among them.

StreamElements is a company that enables streamers to engage with their fans and monetize around those fans, as well as monetize with brands.

When you think of streamers, it’s mostly gamers globally. This infrastructure play is helping these gamers monetize and engage with their fans.

We definitely see opportunity in gaming. In 2021, we looked at it from a creator-commerce lens and less from a crypto or metaverse lens.

Going into 2022, it’s early for us as well, but we’re looking at what the crypto and gaming crossover is. Will it be NFTs that can be used in games but are portable, so they can go outside and inside the game?

For us, it’s a little bit early, but it’s definitely exciting. The NFT world itself has about five different subcategories that are equally exciting, surrounding art, access, in-game skins and points. It’s really exciting, and we’re looking to dig in more.

I think the gig economy and sole proprietors are also super interesting. We like investing in that particular market segment. We love the macro trends of what’s happening there, and we see more products being presented to that market segment. We have our eye on that as well.

I just want to run a theory by you guys and get your reaction to it. I couldn’t tell you whether the metaverse will be big or not, and I don’t really care about that.

But at the moment, I think there’s this huge opportunity for banks and financial institutions. I don’t mean creating or starting branches in the metaverse. I actually think that’s one of the stupidest ideas I’ve ever heard, and we can fight about that later.

I think there’s a huge opportunity right now to be the lender. I don’t think of them as mortgages. They’re not mortgages for buying land. To me, it’s more akin to a commercial real estate investment.

You’ve got to assess the business plan of the borrower, how they’re going to use the land in the metaverse and whether they’re getting it from Decentraland or wherever they may be getting it from.

Neil, from a Live Oak perspective, do you see any opportunities to be the lender of choice into the metaverse?

Sorry April 1st is behind us, because I swear what I’d love to do is take that to my chief credit officer and say, “Hey, look, I’ve got a great new vertical for us. It’s going to be lending on land in the metaverse.”

I think that can be real over time. You’re going to get alternative lenders to maybe do that.

It’s going to be hard for banks and a chief credit officer to understand the collateral, the underlying collateral that’s there.

You could say, “Well, here are some bona fide trades that are happening,” but I see those as probably being pretty volatile.

Who knows whether Metaverse 2.0 comes out and has a completely different world?

The only challenge there goes back to supply and demand. There truly are unlimited worlds that can be created virtually.

In my view, that brings into question how one truly values the underlying asset as collateral to do a loan. But I’m sure I’m probably wrong.

That’s so interesting to me because, first of all, you need to tell the chief credit officer that it’s going to be collateralized by a Stash Box from Snoop.

Any more collateral on that?

I’m sorry, but you’re pushing too hard. This is the new world.

What I think is interesting about it is, even going back to when I was a banker and making my first choice around which digital banking platform to use, wasn’t it always interesting to ask, “Would I loan this company money versus would I buy tech from it?”

Are we using the same metrics? Are we using the same values?

I think we’re trying to get to a point where it’s one conversation around what’s considered valuable versus not valuable and the future view.

Do you guys have a formula for how you view valuations? Do you follow some type of adopted methodology that you’ve brought in, or have you created your own way?

Do you have five things you look for, where two of them are wholly economic and three of them are more subjective?

How do you look at valuation? Since you brought up thinking about the chief credit officer, Neil, I’m curious.

Peggy, any thoughts on how you guys look at values and whether you think something is overheated or undervalued?

Sure. We have a standard methodology where we look at the company’s P&L, their forecast and their execution against plan.

Then we also do a return analysis. What needs to be true for them to deliver X return?

Part of that return analysis compares comps for other companies that may have exited to give us a direction for whether the current valuation is reasonable and whether the return we expect from the investment is on track as well.

However, these last couple of years have been a little bit wild, I think, for everyone investing.

I’d add to that growth and gross margin. Last year, literally, there were just a couple of metrics: growth and gross margin.

If you had great growth, tripling growth, and best-in-class 70% to 80% gross margins, people would be clamoring for that company and valuations would go up.

The multiples on ARR, annual recurring revenue, which is monthly GAAP revenue, and this man always loves to tease me because rarely do we talk GAAP, were kind of how it worked.

Three or four years ago, that multiple may have been 10. I’ve seen it go up to 40 or 50 in some odd cases now for the exact same property and exact same growth characteristics.

Those are ones you kind of have to stay away from because they’re overheated. They’re going to have a really difficult time.

When we underwrite them in venture, we’re underwriting them to a return. Can we do a 5x or a 10x?

When those valuations are that high, the risk of being able to underwrite to that metric is going to be really difficult.

This year has brought in something completely different. The public equity market meltdown is now feeding into later-stage growth.

It’s got a lot of folks, those crossover guys like Tiger and others, asking, “What’s the right price to pay for later-stage growth, given that the IPO exit may not have the same profile?”

We’re seeing some of that revaluation come into play.

Some of the metrics we’re looking at now are burn to revenue. We want to make sure a company doesn’t have a Series C burn with Series A revenue, even if that revenue has great growth characteristics.

The efficiency of the investments is now being looked at and scrutinized way more than a year ago, when it was the Wild West of valuation.

So, question for both of you. Peggy, I’ll start with you.

Which fintechs are overvalued right now? Who will you not invest in during the next round because the valuation is already too astronomical?

Oh.

See, Neil, you’ve got 30 seconds to think about it. Sorry, Peggy. Put you on the spot.

No, that’s okay. Look, I’m not going to point to one or two companies, but I would say many of the companies that, if you were to Google them, canceled their SPAC but then raised privately, we would not invest in those companies.

What we started to see was that many of the companies that were going to SPAC were not able to get the valuation in the current public-market environment that they were able to get in the private markets.

They were able to raise in the private markets at high valuations. I think time will tell, if the public markets turn around by the time they’re ready to go public, whether that’s going to work out for them.

My quick answer would have been no comment specific to a company. That wouldn’t be quite fair.

But I would have us look at the profile of a company that we would give an automatic no to, and it’s connected to the burn that I talked about before.

There are companies out there that are just not efficient. They’ve hired a ton of people in a pandemic. One has to question the culture if there’s a massive amount of burn ahead of the revenue.

We could take a quick look at the P&L and give a quick no, no matter what sector or subsector the company is in.

A path toward profitability is not something we’re requiring of all our companies, but you have to see how efficient they are relative to the TAM and market size.

Those are some quick ones.

Then there are CEOs who don’t have the experience to navigate a cycle. If the numbers are soft, you kind of hit the no button.

We’re seeing a bit of a tale of two cities. There are some really hot companies out there, and everybody wants to invest in them. All the usual suspects are on the table, driving up the valuation.

But if it’s not a perfect story, meaning the growth isn’t perfect, the burn’s a little bit ahead, or the leadership team is good but not perfect, those are getting significantly discounted in our experience.

Very interesting.

I’ll just make a comment that’s somewhat related. What we’re seeing is not only on the venture side, but also in recruiting.

It’s harder for these later-stage companies with really high valuations to attract top talent because that top talent has options. They’re worried it’s going to take too long for the company to grow into the valuation they have.

Square is down significantly, public-company comps are down significantly and even late-stage private valuations for some of them have come down.

I think it creates a talent problem as well.

That’s really well said. It forces us to think about maybe even earlier stage.

We love the term “incubation,” where it’s pre-product, pre-revenue. We meet a great CEO who has a great idea. We validate it with partners like Peggy or our banks that are out there and say, “Hey, guys, what do you think? Does this fill a void?”

If the answer is yes, then we’ll all put a little bit more in on that and be there for the ride up.

Really interesting.

I think the perspectives I heard from you go back to your point earlier, Neil, about, “What am I going to tell my chief credit officer?”

I think it’s really interesting that both of you are former bankers.

We run across people every day in our world, and I’m sure you do as well, who haven’t been bankers before. They’ve been tech entrepreneurs, serial investors or serial startup folks. It’s all good stuff.

When you look back on the fact that you were bankers, do you think it has helped in what you do every day? How has it helped, or has it held you back? Has it made you think perhaps too conservatively?

Neil, if you want to give a first shot at that.

I think it has certainly helped. Running a bank for 10 years, going to regulator meetings and examining the findings gives you discipline around understanding regulatory compliance.

I think many of the fintechs that don’t have that experience, quite frankly, underestimate that element and what it means to run a financial services company.

I still remember LendingClub and OnDeck in their public filings, their S-1s in 2015. I’m dating myself here, but they were flaunting the fact that they didn’t care about regulatory compliance. Banks suck.

Ultimately, I think five years later they found out that stuff really matters, whether you’re a bank or not.

The other thing is that we see a lot of convergence happening where some of the bigger fintechs, including some of the neos that have these really horrible interchange-only models, have spent $100 to acquire a customer and the LTV, lifetime value, is really not there.

They’re going to have to increase their average revenue per unit, or ARPU, and cross-sell products.

One profitable product can be lending. But if you’re going to lend money, you probably need to be a bank ultimately and not rely on capital markets to fund.

We think there’s going to be some of this convergence where you’ll get these fintechs acquiring banks. It’s already happening. You’ve seen SoFi, and Square got the ILC charter.

I wonder what that first regulatory exam is going to be like when you’ve got the culture of those companies coming in and trying to understand the bank side of it.

I think there are going to be some lessons learned.

Peggy, any thoughts on your experience as a banker and whether it has helped or not?

I loved my time at Wells and at more traditional financial services companies like Visa. Those were tremendous experiences, and it definitely helps me in investing.

Yes, I understand the business a lot better after being on the inside of those companies. But I think the value I can give to our portfolio companies is helping them sell to banks, whether that’s selling into Wells Fargo, PayPal or Bank of America, because I understand how they think about buying.

Yes, the sales cycle is long, but it’s also not a rip and replace. It’s, “How can you help this bank solve this particular problem?” whether it’s around risk, account opening or identity.

Then it becomes, at least this is how I advise them, “How can you incrementally help them? What are the basis points? What are the total accounts they open or logins per year?”

It is a land-and-expand strategy for large banks. That’s what I work with them on.

They’re not going to rip out their entire risk and fraud system. They have very smart people and lots of partners and vendor relationships. You will be one of many.

It’s helping them with that pitch, that sales process and the enterprise sales process, along with all the wraparound that goes into those meetings: who they should be talking to, what white papers they should be referencing and how you can show the math that is going to get the attention of these business leaders and buyers.

Really interesting.

Well, guys, I think we’re pretty much up to our time limit here.

I want to thank all of you. Peggy Mangot, operating partner at PayPal Ventures, and Neil Underwood, president of Live Oak Bank and managing partner at Canapi Ventures, we really appreciate you guys taking some time to join Sam and me on the Fintech Hustle.

For everybody listening in, watching or whatever, thanks a lot. We hope to see you at the next episode of the Fintech Hustle.