Episode #214: Jake Gibson, “We Think This Idea Of Embedded Fintech Is Going To Get Really Interesting In The Years To Come”
Guest: Jake Gibson is founding partner of Better Tomorrow Ventures, an early stage venture fund focused on building the future of fintech. Prior to Better Tomorrow Ventures, he co-founded NerdWallet, a site dedicated to helping consumers make better decisions with their money.
Date Recorded: 4/7/2020
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Summary: In episode 214 we welcome our guest, Jake Gibson, founding partner of Better Tomorrow Ventures.
We discuss startup investing in the world of fintech. We get into some of the opportunities going forward, from disruption in products, user experience and distribution models, to how some non-fintech companies may be able to start leveraging the fintech infrastructure to integrate financial services into other products.
We touch on the next wave of fintech, banking as a service, and a future that may evolve into a far deeper set of automated financial services that greatly reduce friction and improve the experience for the consumer.
Stay tuned to the end to hear some detail about Jake’s new fund, focused on pre-seed and seed stage fintech companies.
All this and more, in episode 214 with Jake Gibson.
Links from the Episode:
- 0:40 – Intro
- 1:37 – Welcome to out guest, Jake Gibson
- 3:45 – His background
- 6:05 – The original vision for NerdWallet
- 7:50 – Funding the company
- 10:24 – Association with the company today
- 11:02 – When Jake started investing in companies on his own
- 13:15 – What Jake’s learned about the Fintech space as both a company founder and a VC
- 17:15 – Opportunities in the fintech space today
- 25:19 – Ledger
- 28:05 – Exploration of international markets and the incumbents
- 31:39 – Educating people in personal finance
- 35:28 – Automating the financial advisor
- 38:54 – The Meb Faber Show Podcast – Episode #212: Eric Satz, “I Want Everybody To Be Able To Invest In Alternative Assets”
- 39:03 – Places where Jake wants to see Fintech get involved
- 42:15 – What the new fund focuses on
- 43:44 – Activities on AngelList
- 45:25 – Challenges with angel investing
- 48:03 – How COVID is impacting the investing and Fintech worlds
- 49:10 – Why Software Is Eating The World (Andreessen)
- 53:14 – Most memorable investment
- 55:01 – Best way to follow Jake – @IamJakeStream
Transcript of Episode 214:
Welcome Message: Welcome to the “Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information visit cambriainvestments.com.
Meb: Welcome podcast listeners. We have another excellent show for you today. Our guest is founding partner of Better Tomorrow Ventures, an early-stage VC fund focused on building the future of FinTech. Before that he cofounded NerdWallet, a site dedicated to helping consumers make better decisions with their money. In today’s episode, we discuss scuba diving but also startup investing in the world of FinTech. We get into some of the opportunities going forward from disruption of products, user experience, and distribution models to how some non-FinTech companies may be able to start leveraging the infrastructure to integrate financial services into other products.
We touch on the next wave of FinTech, banking as a service, and a future that may evolve into a far deeper set of automated financial services that greatly reduce friction and improve the experience for the consumer. Stay tuned then to hear some detail about our guest’s new fund, focus on pre-seed and seed-stage FinTech companies. Please enjoy this episode with Better Tomorrow Ventures founder, Jake Gibson. Jake, welcome to the show.
Jake: Yeah, thanks for having me. Glad to be here.
Meb: We’re in L.A., global headquarters quarantine San Fran. I just watched “The Little Mermaid” with my three-year-old. He said it was a little scary. You got two twins. But I also heard you’re a big diver. Where’s been your favourite dive spots?
Jake: My favourite dive spot right now is in Belize, Placencia. It’s one of the places where you go to dive in the open ocean with whale sharks. I’ve been there both of the last two years during whale shark diving season to try to see some.
Meb: Two follow up questions. What time of year is that? And two is the Big Blue Hole or something, that’s Belize, right?
Jake: Yeah, yeah, that’s kind of northern like off the coast of northern Belize. Placencia is down in southern Belize and the reason Placencia is special is because there’s like an elbow in the continental shelf there that for some reason attracts a lot of massive schools of fish that come in to feed and breed. You know, those giant balls of fish like you see in “Finding Nemo,” there’ll be a bunch of them out there right off the continental shelf and the whale sharks eat them. And so they tend to breed around full moons between, I think it’s like, March or April and June. And so I’ve usually gone around the full moon in June, which just turns into a remarkable trip too because you’re kind of out in the middle of nowhere, under a full moon, in the evenings and then during the day, you’re spending six to eight hours out on a boat in the open ocean. Like no land within sight, no bottom of the ocean within sight and just kind of hunting whale sharks in a sense.
Meb: Out in the middle of nowhere sounds like a pretty good place to be quarantining right now. I did, out of college, when I graduated college my dad and I went on a fishing trip. He’d done the same with each of the boys in mind. We ended up going to Belize but on the little islands.
Jake: The Cayes. The Caye Caulker.
Meb: Yeah, yeah. Caulker, whatever they call it [crosstalk 00:03:35.025]. Went bonefishing. It was awesome, it was during carnival. So we got painted with a bunch of paint. It was awesome. All right. Well, look, this is gonna be a lot of fun. You know, you’re now a venture capitalist angel investor, and we’ll get to that in a minute. It’ll be, I think, particularly informative to at least burn through your background pretty quick to give the listeners a little bit of understanding where you came from, what you’ve been up to. So fellow, not engineer but science guy, right, MIT undergrad?
Jake: Yeah, I grew up wanting to be an engineer but ended up studying math and finance. I got a little distracted.
Jake: Yeah. So I mean, I spent my childhood sitting in front of a computer and teaching myself how to code and all that stuff and was convinced at a young age, I was going to go to MIT and study computer science. But I started school right when the internet bubble burst. And so, like a lot of people in my cohort, ended up kind of switching over. A lot of my friends went into consulting, a lot of them went into banking or trading, I did the latter. I ended up studying math and quantitative finance at MIT and wanted to go into interest rate derivatives trading. So I was at JP Morgan. I was a prop trader from 2004 until 2008 when all the prop traders went away. Then I switched over to the sell side, trading interest rate swaps for another year or so.
But during that time, basically from 2007 until the end there in early 2010, I was convinced I was leaving. I couldn’t figure out how I was going to leave or what I was going to do because you don’t learn a skillset on a trading floor that’s transferable anywhere else. Took the GMAT, took the GRE, didn’t really think that either one of those was for me though and ultimately decided, “You know what? I’m just gonna leave. I’m going to go to California. I’m going to start something. Since nobody’s going to hire me for what I have today, I’m just going to build the skill set myself. Like I instead of spending two years on business school, two years and some ungodly amount of money on business school, I’m just going to kind of create my own business school by trying to start a company. And that will be my forcing function to like meet people and learn and all this other stuff. And if it doesn’t work out, which it probably won’t, then, at least after two years, I’ll have a skill set that maybe somebody will hire me for.”
And thankfully, I ended up joining up with a buddy of mine I’ve known since eighth grade. We grew up in Atlanta together. And he had also like he’d gone to Stanford while I was at MIT. We lived across the street from each other in New York. He worked at a hedge fund while I was at JP Morgan or he worked at a series of hedge funds while I was at JP Morgan. But he had also gotten laid off in 2008, and ultimately, had started working on what would become NerdWallet. And so when I left JP Morgan, I immediately joined on with him and helped him build that.
Meb: What was the original vision by the way? Because I don’t know if I’ve heard the origin story. Were you guys just kind of kicking around all sorts of different startup ideas? Was this one that had been gnawing at you for a while? Where did it come from?
Jake: So it was Tim’s idea. And the original vision was effectively a kayak for credit cards. Like if you look at…like by that point, you know, we had kayak, we had all these other products, like Web 2.0 was starting. We had iPhones. But then if you tried to find any sort of financial products online and like the classic story is his sister had just sold a company and she was trying to get her finances together and reached out to Tim like, “Tim, you’re a finance expert. Can you help me? Like I don’t even know like what credit card I should get, like what savings accounts I should get, like where I should park my money.”
And so he went and started doing some research online. And the world at the time, it was basically like bankratecreditcards.com and then this massive long tail of random bloggers who are operating out of their basements effectively. And all the content was garbage. Like it was basically all just it was…we joked it was NASCAR. Like every pixel on Bankrate’s website or on creditcards.com’s website were optimized for monetisation. And there was no customisation. There’s no transparency. Like if you’re really trying to make the right decision for you and your own personal finances, nobody was helping you. And so he started working on this idea that would kind of become like a kayak for credit cards. And originally, we thought it was just going to be a lifestyle company.
We’d kind of work from home so I ended up moving to California. He actually stayed in New York for a while working from home trying to get this thing up to like 1 or 2 million in revenue and then we thought we’d either live off of it or sell it. But after a couple of years of that realized there was a much bigger opportunity ahead of us and then he moved out here. We started hiring people and then it was kind of off to the races.
Meb: What was the evolution of the company? So there’s bootstrap from the get-go. Did you eventually take any funding and then how the eventually projectory for your exiting?
Jake: Yeah, so we bootstrapped it initially mostly because we didn’t know any better. Or I should say mostly, but partly because we didn’t know any better. Like I said, it was just the two of us. We thought of it as a lifestyle company. This was back in like 2009, 2010. So the ecosystem as it exists today, with like all the angels and the scouts and all the micro VCs and like all the money that’s out there today didn’t exist back then. And all the content there is out there around like how to raise money, why to raise money, all that stuff, how to build a startup, that didn’t exist back then either. And so we just thought we were building a company, we weren’t even really thinking of this as like a startup the way you think about it today. And we just didn’t think anybody would fund us.
Like we’re not going to go knock on Sequoia’s doors. It’s like two schmucks that just left their jobs, that basically just got laid off from their jobs on Wall Street building a product that was intentionally under monetizing relative to all of our competition. It was moving into an extremely crowded space during the middle of the biggest recession and previously the biggest recession in our lifetimes. And so we’re like, “Nobody is gonna give us money for this. That’s insane.”
And we also just kind of thought that as long as we kept control over it, we’d be able to do what’s right by the end consumer or I think that’s how it evolved. Like once we actually started getting some traction and we thought people might actually want to invest in this thing, we were like, “Why would we give up that control? Why would we raise money? If the whole strategy here is we wanna be consumer first, build the brand around that, gain market share around that, rather than trying to go…” Like we thought we’d be forced out of the Bankrate or creditcards.com path in trying to squeeze our users for every dollar we could. And then eventually, we got to the point where we just…it wouldn’t have made sense for us to raise money anyway because we couldn’t spend it fast enough. We had nothing that we could have invested in that would have really moved it.
Like we were making enough money that having to…raising more money would not necessarily have changed any of our decisions. That changed a year after I left. So I was there until 2014. We were kind of in the middle of a massive inflection point growth-wise at that point. We’re hiring a ton of people. And ultimately, Tim decided that we should probably have a war chest. Like if the cycle turns or something like we should have some money. If we want to make any acquisitions, we should have some money in the bank. And so that’s when they went out and raised their first round of funding. I think it was January or something, early 2015. Which was…I don’t remember exactly. It was something like a $70 million Series A. That’s the only primary capital we’ve ever raised.
Meb: Are you totally dissociated with the company now? Did you just say, “Look, I’m gonna start procreating. I want to go diving?”
Jake: I’m not on the board. I’m not involved day-to-day. Tim and I are…I was best man at his wedding. Tim and I are still good friends and he keeps me posted on everything that’s happening over there. I still know some of the executives and stuff. I stay involved to the extent that I can but it’s more like I’m the arm’s length like biz dev and corp dev person just because of what I come across in my day-to-day job and how that might apply to NerdWallet. Helping keep them on top of like all the different things that are happening in the FinTech space. But that’s it. And I’m a shareholder.
Meb: So you started investing at the same time. This is the vintage round 2014 on your own or was it the sort of evolution where are you today?
Jake: So my kids were born in December of 2013. At that point, I had hired a few people to come in and replace all the functions that I was doing at NerdWallet. I hired a new COO.
Meb: Just like one intern. You’re like, “I can do this with just one intern.”
Jake: Which was part of the problem. Like I didn’t realize that I wasn’t doing my job particularly well because I was spreading myself too thin and not being particularly strategic when there were much better people out there that could do the jobs. So I helped Tim hire a new COO who was going to be my replacement. I hired a head of finance. We hired a managing editor. We hired a few other roles like that to fill out the senior suite. And then once they all came on board in March of 2014, I stepped down. So at that point, my kids were about three months old, and I took the rest of 2014 off. I just went home and largely decompressed. I can’t say I took the time off because I had two infants at home, but it was really just kind of disentangling myself from NerdWallet and trying to figure out what I was going to do next in my life.
And towards the end of that year, I’d started helping out friends of mine that had recently started companies, kind of informally advising, mentoring, whatever, just given me an excuse to get out of the house and use my brain again and talk to adults and stuff like that. And I really enjoyed that. I found it to be extremely rewarding and was able to like really help them out, which I liked. It also made me feel a little bit better because I kind of felt like I really sucked at my job at NerdWallet, what’s notable I’d hit a certain scale, but being able to go back and work with founders that were in those very early stages and help them avoid a lot of the mistakes that we had made seemed like that was kind of the best way for me to leverage myself and make an impact.
So after I’d been doing that for a little while, I decided to start putting my money where my mouth is. And so I’d say also kind of early 2015 started angel investing. And I’ve been doing that full time up until last summer when I made the transition from angel investor to…Somebody on Twitter the other day was like, “Jake, you’re a full-blown VC now.” And challenged me to update my Twitter profile accordingly, which I did. So I’m now no longer an angel. I’m a full-blown VC. Doing the air quotes for the people that can’t see me right now.
Meb: So let’s talk about it. So you’re raising a new fund, Better Tomorrow Ventures. Let’s start broad though, your background, obviously, FinTech and maybe as a lead into this, I’m sure the people listening would probably love to say, “Hey, there is a founder of incredibly successful FinTech company.” As a lead-in, is there anything that you learned from NerdWallet as far as FinTech space and meaning from the consumer side opportunities, mistakes that people make, that lead-in to kind of the world of FinTech today, the state of FinTech and we can hop on this for a while.
Jake: So I guess it’s kind of a couple of themes that I tend to fall back on when it comes to FinTech. And some of those is from my NerdWallet experience, but a lot of it’s just from the fact that I was so steeped in kind of traditional finance before that. Having been at a big bank and been on an interest rate trading floor, which gives you a pretty unique, you know, relative to kind of equities and stuff like that which tend to be very company-specific into like being in the interest rate world gives you a much more macroeconomic view on how the world works. And then having lived through the financial crisis and everything, just you learn a lot about the plumbing.
And so, a couple of things that I always come back to. One is that in a lot of financial services, and most of financial services, I would say, especially on the consumer side distribution is everything. And so there’s a lot of product-focused founders out there who it’s kind of the classic YC line make something people want. There’s also just so much lore in Silicon Valley that if you make the prettiest app, like you’ll win. But that’s just not how financial services work. Like you don’t really get the word of mouth advantages and stuff like that with financial products that you could get with like a cool new social app. There’s not really network effects in most of finance. You don’t really get virality in most of finance.
And most of what’s been built in FinTech over the last 10 years is not really tech, it’s more fin. Like here’s not much of a technology differentiation that you can use for defensibility in FinTech as well, at least not in a lot of it. Which means that the whole game is how you acquire customers. And if whether or not you can do so more cheaply and at scale relative to your competition. And the crazy thing about finance, in particular, is like your competition just has such an incredible scale advantage. I can’t tell you how many founders I’ve talked to over the years that thought that like, “Oh, millennials hate their bank. So Chase is going to go away.” I’m like you’ve lost your damn mind if you think Chase is going anywhere.
Like the scale advantage and the cost of capital advantage are worth so much more than anybody really gives them credit for. And one of the things that Sheel and I, Mohnot Sheel, my partner at Better Tomorrow Ventures that we found over the years is a lot of people building these companies and a lot of people investing in these companies just don’t fundamentally understand the business models and where the strategic advantages and financial services companies tend to come from. There’s plenty of people out there that do and they’re doing a fantastic job. But there’s also a ton of investors out there writing cheques at crazy valuations into crazy companies that just don’t fundamentally…we don’t get the sense they really understand what they’re investing in.
They’re investing in these as if they’re just like consumer tech apps, when we think the finance side of things is so much more than just kind of the consumer front end. So distribution, it’s one of the big ones and then yeah, the incumbent’s ability to compete and the advantages that they have and the unlikelihood that a small startup can overcome some of those are things that we keep going back to.
Meb: I think a big one, obviously, in our space in the public markets is simply Vanguard, where they’re just like this enormous Death Star to me but depending upon your perspective, that’s just, you know, consuming everything and rightfully so. I mean, that’s a great product that’s really hard to compete at when you’re three basis points. Fintechs are saying, “Well, let’s do this at 50.” Well, that’s a tough competition. So, as you look around the world today, let’s start chatting about some of the opportunities and feel free to use any portfolio companies as case studies, if you like, but what are some of the spots that you guys personally over the last five years have been interested in? And then we’ll look to the horizon too on spots you think there’s a lot of opportunity?
Jake: Yeah, so I’d say one of our overall themes is that we think that the next 10 years of FinTech is going to look very different from the previous 10 years. So the previous 10 years, roughly, has essentially been like let’s take all the existing financial services that we know like kind of go line item by line item down the income statement of every financial institution and create a bunch of startups in that space. So you had your life insurance companies, your auto insurance companies, your neobanks, you had your robo advisors, you had your personal lenders, everything. Anything you can imagine, we basically just created like an online version. And that’s really all it was. It was like let’s take an existing business model and put it online.
Very similar to what happened with the internet was first getting off, right? Like, it was very hard, very expensive, took a long time to start an internet company. And so a lot of what was happening was let’s take an existing business and just put it on the web. Let’s take a bookstore, like a pet store, like a grocery store, whatever, just put it online, stick the Yellow Pages, put it online, and just copy the business model but give it a different form of distribution. And that’s exactly what’s been happening in FinTech over the last 10 years. Personal lenders, SMB lenders, robo-advisors, every type of insurance you can imagine, basically anything in personal finance.
I’m very consumer-focused here, as you can tell, but the same thing is kind of happening on the B2B side. All of these have essentially just been like, let’s copy what already exists and put it online or let’s put it in a mobile app. But just like what happened with the internet, that’s now led to people going on to create new companies like kind of the next layer of, “All right, let’s build infrastructure and let’s build tools that would have solved a lot of the problems we dealt with when we were building that first wave of companies.” So now we’re starting to see all this crazy stuff like…I shouldn’t say crazy. We’re seeing all this really interesting stuff. Banking as a service platforms, we’re seeing like loan servicing as a service. We’re seeing underwriting as a service, KYC as a service, like fraud prevention as a service. There’s all kinds of identity stuff out there now. You name it. There’s like investment platforms.
Like basically robo-advisors as a service. Everything is being built now like all the different layers of the stack are being API-ified in a way that they weren’t previously. So we think that’s going to open up a lot of opportunity going forward. So that’s not only going to make it easier to build all these FinTech apps, which is both a blessing and a curse. So it means that that’s why there’s 1,000 neobanks out there now that all look exactly the same. But at the same time, it means that you have a lot more flexibility, a lot more freedom to innovate and experiment when you can build something in a few months that used to take a few years and when you can build it for less than half a million dollars when it used to take $5 to $10 million.
And so we think that’s going to lead to like fundamental disruption in what kinds of financial products are available, what kinds of user experiences are available, distribution models, business models, you name it. We’re not creative enough to know what that is. But the founders will find them. That’s kind of our thinking. Then we also think there’s an opportunity here where basically companies that don’t look like FinTech companies today can start to become FinTech companies because they can start to leverage this infrastructure to integrate financial services into their other products. So then you know, I said before, FinTech has not been tech, it’s just been fin, basically.
Well, now you can start building tech platforms that actually have marketplace effects, network effects, maybe some virality, they have some tech defensibility like a real tech product, but then monetize it through financial services or maybe get some sort of distribution advantage or something like that depending on what the product is and what the financial angle is. And once you tie that all together, you get like very different user experiences, very different access points, different distribution, different data, advantages around the products that you’ve built. And you can just fundamentally change the business models as well like business models that previously weren’t accessible in terms of kind of niche marketplaces or something become a lot more accessible and a lot more scalable or like higher margin and much bigger businesses once you can start to involve financial services.
And we’ve seen a bunch of the big companies do this already. So Uber has Uber Money. Flexport has Flexport Capital. Airbnb is obviously involved in a bunch of different types of financial products. Shopify has a lending arm. But what we’re seeing now is that because of all this infrastructure, we now have pre-seed and seed-stage companies coming to us who on day zero are saying, “FinTech is going to be a big part of my model,” and they have the capability to build that now. So that’s kind of how we see the world having evolved the last 10 years and how it’s going to develop over the next 10 years. Obviously, we’re very involved in a lot of the stuff that happened in the last 5 or 10 years. We did a lot of investing in consumer insurance, we’ve done a lot of kind of B2B products selling into insurance companies, insurance brokers, banks, you name it, like all the things that I was just talking about, we were heavily involved in, but we think the next wave is going to look very different.
Meb: All right, well, let’s start to talk about the next wave. And you can either outline any current companies or just broad ideas. What are some of the more specific niches or ideas that really got you excited, interested in, wanting to fund?
Jake: So the companies that we’re investing in now are just too early and I don’t want to step out of line and call them out by name. But in terms of themes, like some stuff that we’ve seen recently that we really like, banking as a service is going to be a big one. There’s a few companies out there working on stuff like that now with the idea being like integrate into a bank on the backend, do all the kind of hairy work of building the APIs down into their banking core systems, but then provide APIs for things like KYC AML fraud prevention, issuing debit cards, provisioning bank accounts, and then potentially even lending on top of that so that other tech platforms like gig worker marketplaces, for example, can start to issue white-label bank accounts.
Similar to what Uber does with kind of the prepaid debit cards for their drivers. Like imagine if you could just start issuing bank accounts and debit cards, and then using the data from all that to do kind of working capital lines of credit and things like that, but specifically targeted towards, you know, you as a platform are able to start issuing that stuff in a white-label format to the users of your platform. So that’s the theme that we think is really cool. We think that kind of this idea of embedded FinTech is going to get really interesting in the years to come. As well as that we’ve seen similar types of things like an insurance… Actually, one company I can’t talk about, they’re public, it’s called Ledger I think can start to fit into the stack at some point where they’re effectively a securitization platform for kind of basic PNC risks.
So right now we have the Insurance-Linked Securities market, ILS market is primarily large contracts focused on can I-should I take therisk traded between hedge funds and reinsurance companies. But imagine if you could take that same idea and bring it down to kind of smaller packages of consumer and commercial insurance where you can standardize it, securitize it. And then you don’t need to have this kind of cumbersome stack of like reinsurance with insurance with brokers and agents on top of it. And everything very much a risk silo with lots of correlated risk in there as well. Like if you think about kind of California fire risk or like Florida or Texas hurricane risk or something in your homeowners’ books, for example, like insurance is regulated on a state by state basis. And so you end up with this kind of silos of risk that tend to be overly correlated.
So imagine if you could just as a broker price the risk and sell it off to the open market at a much more kind of market price versus whatever the reinsurance company or whatever the carrier wants to charge, and then I guess give the reassurers and the hedge funds or whatever or a lot more room to just be asset managers in a sense and then allow the carriers to be much more capital efficient and kind of thinner, in a sense, like really play up this model, this MGA model that a lot of the insure tech have been built on in the last few years, to give you a lot more flexibility to underwrite and package up risk much more cheaply and much more scalable.
Meb: This idea has such a large potential and we as an asset manager, the insurance-linked space and catastrophe bond space is this really fantastic “asset class,” not really an asset class, but more of an active strategy of transferred risk where you can invest in securities, like you mentioned, that I’m sure against the risk of hurricanes or earthquakes in Japan or even pandemics, etc., etc. And it’s for a large part often not correlated with each other and in many other things. So from the end investor standpoint it’s pretty interesting, but it’s not particularly liquid. It’s a bit complicated. We had considered trying to see if there was any possible way to do it as an open-ended fund and there’s not really much. There’s one group that does it and I’m blanking on the name. It’s called like Stone Ridge or something who does a mutual fund but ledger is… So is their business model like business to business? What is their sort of concept?
Jake: Yeah. It’s essentially like an institutional marketplace. They’re effectively brokering the risk from so you have like a specialty insurance broker on one side that’s selling like call it commercial auto or life or could just be like a package of consumer auto insurance or homeowners insurance or renters insurance, like any kind of like commercial or consumer PNC insurance. And then effectively, the brokers would underwrite that risk. And then, through the ledger platform, they would sell it to carriers, reinsurers, hedge funds, anybody that wanted to invest in it. And to your point, like it’s highly uncorrelated risk. Well, for the most part, it’s uncorrelated. What’s interesting right now is like, clearly, pandemic, if we’re thinking of catastrophic risks, like pandemics and markets are correlated.
And interestingly enough, like pandemics and auto insurance are negatively correlated. Like loss ratios and auto insurance have basically gone to zero this year. But you could think about, like, if you were a giant reinsurance company managing tens of billions of dollars of assets, like being able to invest some of it in like consumer auto over here and homeowners over here and so on and so forth, and not kind of be stuck into the same kind of pipelines through your carrier relationships that they do now, you get a lot more diversification. And even for, you know, high net worth individuals, family offices or whatever, like you could potentially use something like this as part of your cash management strategy or something where you can earn like low double-digit returns with no kind of strict market risk.
Meb: Double-digit returns sound attractive to people right now with U.S. bonds and the 1% range. It’s a very cool world and concept. I hope they figure it out. I’d certainly do that. What else you got your brain on? Any other kind of specific ideas or ones that you wish someone would tackle that currently are not?
Jake: Yeah. So other areas that we’re really interested in, we’re looking a lot at international markets. So like Latin America, Africa, maybe even Southeast Asia, we think there’s still a lot of…where there’s not as much low hanging fruit in terms of financial services products here in the U.S., we think there’s still plenty of opportunity overseas when you put together like young populations, digitally native, increasingly educated, increasingly wealthy, but with like very little financial infrastructure to support them, we think there’s gonna be a lot of opportunity in spaces like that. And so we’ve made an investment out of the new fund that’s in Mexico City that we’re really excited about.
Meb: You mentioned earlier the challenge of the incumbents, you know, of like a Chase and the challenge of fighting those, you know, what is the big reason that a Square or Plaid or any of these stripe firms wouldn’t move in to big opportunities of Latin America or Africa? What’s sort of the thinking there? Is it governmental? What’s the big opportunity?
Jake: Sure. I mean, I can’t speak to the actual roadmaps of any of those companies. But I don’t think they won’t necessarily. I think there’s plenty of opportunity for them to move into those spaces. That doesn’t necessarily mean that there’s no opportunity for new entrants. But I’d also say that anybody who starts in America is going to tend to spend a lot more time in America than overseas because we’re the biggest market. So you’re seeing it with a lot of the neobanks and stuff now, there’s some that’s new bank started in Brazil, Monzo and N26. And a few of those other companies started in Europe and all of them are starting to look at the U.S. as their next market because they’ve basically saturated the markets that they’re in.
I think I read recently that something like…I’m gonna screw up the numbers, but I want to say something like 60% of bank account holders in the UK have neobank accounts now. So like, where do you go from there? You go to the U.S. So anybody who started in the U.S. probably still has a long way to go before they have that kind of market share. And they have to make hard decisions about how much time and resources they’re going to put into moving overseas versus staying in the U.S. That said, like companies like Stripe and Square are at a scale where it does make sense. And Jack famously, last year was talking about moving to Africa for a while and looking at that market.
So I’m sure they will, at some point, but I think there’s…I mean, the company that we invested in, in Mexico City is…you’re going to start to notice a theme here…is a parametric earthquake insurance company. And so that’s just not something that anybody in the U.S. is particularly focused on and was up until a few weeks ago, very top of mind in Mexico.
Meb: How’d that one cross your plate? Was it just network, friends of friends, people reaching out cold? What’s the typical process there?
Jake: Generally, so Sheel spends a lot of time overseas, talking at conferences, going to events and things like that. He knows founders and investors all over the world and he tends to be our lead on anything international. But in this particular case, it was a founder who was the head of product at another one of our portfolio companies. At this point between 500 FinTech and my angel portfolios, we have something like 160 portfolio companies already. And so we see a lot of things like this. He was the VP of product at another one of our portfolio companies and he left to move back to Mexico where his family is and decided to start an insurance company in Mexico. And we were his first call.
Meb: Yeah, I think you were actually talking with Sheel about this somewhere. And you can correct me if I’m misinterpreting. I heard you say something along the lines of there’s a big challenge with personal finance and investing education, you know, and whether it was an insurmountable problem or just did no good. What are your thoughts on trying to educate because we don’t teach it in high school? It’s like 10% of schools or something. It’s a constant thing I be-moan about. What are your thoughts there and is it an opportunity at all, you know, having run a consumer-focused, essentially FinTech education site? What’s your thoughts?
Jake: My view is largely that maybe there’s some education that’s necessary, but at the end of the day, none of us don’t know we need to eat more broccoli, right? Or maybe some of us do. But, look, that’s not the problem. The biggest problem is not that we need to be educated on what foods are healthy and what foods are unhealthy. The biggest problem is compliance. And it’s the same thing in finance. I think finance and health are very similar. And there’s a lot of reasons why that is. Like the industries are set up to take advantage of our psychologies and make these things difficult for us. A big part of the thesis behind NerdWallet was like you should never believe bank marketing because they are 100% set up to take advantage.
Like they make the products as confusing as possible and then make the advertising seem like it’s easy in order to get you to sign up for like a 5% cashback rewards card when you’re going to be paying 30% a year in interest, which obviously is not in your best interest. So my view is basically that it’s compliance that’s hard. And there’s plenty of companies and founders who’ve tried over the last 5 or 10 years to help that like create these good looking apps that help people stay on top of their budgets or let you know kind of how you’re doing against your goals when it comes to paying down your debt or whatever. But they’ve always kind of struggled to hit real scale because engagement is just so difficult like you’ll acquire a customer super cheap in the early days because it’s the early adopters that all want to try the new, new thing. They’ll play around with it for a few weeks.
And then once they get a sense, they’ll just churn or they’ll just stop using it. And all these products are monetising through or all of these apps are monetising through referrals to financial products. So if you’re not engaging, they can refer you to anything and they’re not making any money. And then it was so easy to build a product like this, there ended up being hundreds of them essentially just front ends on top of Plaid. And now cost of acquisition is just through the roof. And so basically, it’s just hard to get people to keep coming back and keep engaging them. So one of the things Sheel and I talk about a lot is that…NerdWallet is kind of following the same path.
Like we started by just doing content. We were effectively like Money Magazine, right? You know, it was mostly content. We’d help you make the right decisions. We’d point you in the right direction and send you on your way. But that required a lot of work and there’s only a certain subset of the population that’s willing to do that work. So we’ve even started moving more and more towards, “All right, well, we’ll give you a product to like give you more insights that are personalised to you.” And then the future is, we should just be able to do that for you. Like rather than giving you the tools to figure out what the best credit card is or rather than giving you the tools to figure out what the best loans are for you or just telling you like, “Hey, maybe you should have a lower rate on your student loans or something.” We should just go out and do the research automatically and just refi you. Or we should kind of automatically be pulling money from your deposits and paying off loans in an optimal way, putting money in emergency savings, putting money in your Wealthfront, Acorns, 401K, whatever, IRA. And doing that in an automated way, so that you at the end of the day just kind of get a second pay stub that says, “This is how much disposable cash you have.” And just kind of take a lot of that friction away from the consumer.
Meb: Do you think we are from that? Because you’ve seen some of the robos and people do what you’re talking about, which is, you know, in many ways, a lot of this is what a true fiduciary financial advisors should be doing, right?
Jake: Yeah. Yeah, for sure.
Meb: It’s not automated, certainly and certainly software could take over most of the role. The problem you have so much is most of the world is still not fiduciary. And also that some of the FinTech startup, you see the problem that you mentioned because of the cost, they start to creep into areas that are aren’t in the customer’s best interest, whether they admit it or not. And I’ve seen it multiple times already where it’s just like that is clearly a monetisation effort not in the consumer’s best interest. How far are we away from that actually kind of happening?
Jake: Yeah, I think we still got a ways to go. I couldn’t put an actual time on it. But I know a bunch of companies that are working on different parts of this in interesting ways. And hopefully, it’ll start to congeal and we’ll start to see more movement here. But I have a portfolio company called Astra that’s automating a lot of the money movement stuff, but they’re doing it and it’s more focused on power users to begin with but it can kind of adapt over time. Like if you think of it as like Zapier or If This Then That for moving money between your different accounts. Like you could set up your own rules like I want 5% of my paycheque to go to this account. I want 3% to go to this account. I want to 2% to go to this account every single time I get a paycheque.
You set up those rules and then they’ll automatically manage the money movement for you. And they have much more complicated routines that you can design than that. But like that’s an easy example. There’s a company called Northstar that’s also trying to do a lot of this automation. They’re working on that kind of pay stub idea that I mentioned to you, where using kind of machine learning to analyze your spending, to analyze your bills, to analyze your debt, and then whenever you get paid, they’ll kind of figure out the best places to put all the money and then let you know what your disposable income is. And they’re offering that as a kind of financial wellness benefit to employers to then give to their employees. That’s just Northstar.
One of my portfolio companies Grove was trying to do tech-based financial planning like what you were just talking about, as a fiduciary helping you figure all this stuff out through technology, they ended up selling to Wealthfront and are now running Wealthfront’s kind of self-driving money initiatives.
Meb: There’s an interesting idea in there that I think the landscape could shift, it’s more of a regulatory barrier up till now is that you couldn’t have the discovery and financial advisors is tough because you can’t do testimonials. So you can never have recommendations, you can ever say, “This guy is an absolute idiot.” And so there’s no like Zocdoc for financial advisors, but recent rumblings has been they’re going to lift that. I would love to see a lot more transparency and disinfectant in that world because I think I don’t know the exact business model is because it gets a look you paying for leads with testimonials is currently illegal, obviously, but someone will eventually figure it out. So if you ever find anyone that does it, let me know I would certainly invest, but there’s certainly some opportunity there. Because it’s so opaque with so many people with the world still being most of the relationships being non-fiduciary, which already right there is a tough spot to be in. You were an Alto IRA investor too? Was that you?
Jake: Yeah. Yeah, yeah.
Meb: They should have been in the last podcast we’ll publish by the time this comes out. We just have the time to talk about it. So it should be in the right linear order. Are there any other areas that you think are you just haven’t seen a company do it yet that you’d really love to? You know, for me, I was looking last night, I was starting to do my taxes with TurboTax, which is like, you know, still like the most frustrating thing. And I couldn’t even download them. I couldn’t even get a picture of like how it slipped through the years. There seems to be a lot of it. Any other areas where you’re like a call to entrepreneurs out there that you wish it’s a good idea that you wish someone would be doing because I have terrible ideas I could talk about for hours.
Jake: Yeah, you know, I’m usually not the creative one that comes up with the ideas. Like I see the problems and then hopefully there’s founders working on smart ways to solve them but they have to call it.
Meb: Have there been any others that have just banged you on the head where you’re like, “Wow, that is fascinating or really cool idea that I just hadn’t really considered?” Or do you think is a much better approach to the fintech landscape? Anything come to mind?
Jake: You know, I have seen some like, kind of off-the-wall stuff lately that I’m just not sure if it’ll work and haven’t figured out what the right approach is and all those other stuff. But there’s another company recently that is doing…it’s basically like lending to help people get their 401K match. So it’s employers offer this 401K match. It’s effectively free money but not a lot of people are able to take advantage of it because they’re not putting enough money in their 401K. It’s not a model that really works as stated. I’m not convinced that it’ll work that way. But I thought it was just like so off-the-wall. You know, it was one of these things that was like, “It’s just so crazy, it might just work.” I actually spent some time on it.
But like that’s the kind of out-of-the-box thinking that I would like to hear more of from founders. I had another founder recently who wanted to start basically like the new credit union, which on the face of it just kind of seems like, “Oh, it’s just another neobank by another name.” But when you spend more time thinking about it, there’s actually a lot of interesting differences in credit unions that don’t really exist for banks. Again, it’s another model that’s really hard to get off the ground that may or may not work. But I do think there’s a lot of value in credit unions and credit unions are never going to adapt technologically to this new world. So maybe there’s a way to create credit unions 2.0 and there’s obviously an audience out there for it giving all the people voting for Bernie.
So I think that there’s got to be something to that as well like in a community-based banking or affiliation-based banking where the kind of benefits accrue back to the end-users. You know, Lemonade actually kind of started out this way as well as a mutual…or like originally their idea was to be an insurance mutual and they kind of pivoted away from that. But I think there’s something to that where like your customers own the company in a way and like the benefits accrue back to them instead of just shareholders. I think we’ll start to see more and more stuff along those lines and maybe eventually we figure out a way to do it with technology.
Meb: So the new fund guys exist mostly in the sort of pre-seed, seed series A? What’s the cheque size? What are you guys looking for? Talk to us a little bit about your opportunity there.
Jake: Yeah, so we’re pre-seed and seed exclusively focused on leading deals. We want to be writing something like half a million or one and a half million dollar cheques being the primary if not the only institutional investor and around. We have a little bit of flexibility there to co-lead with some of our friends in the industry. But for the most part, like the types of companies that we look at we would be in position to be that primary institutional relationship. And that’s basically the gist of it. I mean, very broad-based in FinTech, our kind of tongue in cheek thesis since the beginning has been everything has FinTech.
So if you play out this embedded FinTech idea and how essentially any company has the opportunity to eventually monetise through financial services and things like that, our mandate is actually quite broad. So we have a couple of my angel investments warehoused into the fund. There’s a company there that’s…a tracking software company, I should say. There’s a company in there that’s software for landlords, random stuff like that, but will be able to monetise through financial services over time.
Meb: And I imagine it has a pretty traditional VC structure now that you’re a VC.
Meb: Do you still plan on syndicating AngelList or other sort of investments as well or is this totally fund related? And then we’d also love to hear about the AngelList experience as a syndicate lead too?
Jake: Yeah, one of us had focus on the fund now. The only stuff that I’ll do on AngelList going forward would be if any of my current AngelList portfolio companies raised another round or I can get allocation, I would offer the pro-rata to the existing AngelList LPs, but I won’t be doing any new investments through AngelList. It’s more just kind of managing the existing portfolio. And then I guess my experience with AngelList has been…it’s a great way to kind of get leverage as an angel investor and kind of practice playing VC, which is the way that I looked at it. It has its positives and its negatives, like it makes things very easy for you. I don’t have to kind of manage the back office or anything like that, which I just wouldn’t be capable of doing as an individual anyway.
You know, they’ve got a great marketplace of capital there. But at the same time, not having a dedicated set of LPs means that it’s hard to do these types of SPVs. It’s hard for me to go to a founder and say, “I want to invest 250K or half a million dollars in your company, but like give me a couple of weeks to figure out if I can actually feel that or not.” Because I haven’t actually found any real…like I’ve had some deals that like oversubscribed immediately, some deals that took me weeks to basically pull teeth to get them filled. And it’s not always obvious what’s going to put one company in one bucket versus another like the investors on AngelList just tend to be fickle.
Meb: I think I heard you say you’ve done over 100 private investments at this point, is that right?
Jake: I’ve done about 90 and then we ran the 500 FinTech fund before this, which invested in another 75 or so companies.
Meb: Talk to me for just a moment about the challenge with angel and venture capital often is that so much of your returns are dominated, and this is public markets too, so much of your returns are dominated by the big outliers and the 100 Baggers or more? If you go back and look at your investments or your experiences, is it a situation that you go back and look at them and from the get-go it was obvious your conviction at the time the ones that became the big winners? Was it somewhat random? How’s it played out over the past almost decade?
Jake: I mean, there’s a ton of uncertainty in all this. It’s always really hard to know which ones are going to be the best ones. The way that I’ve thought about it is my goal as an angel was to build a network. It was to invest in a lot of companies. Relatively small dollar amounts into any individual company and build out a pretty expansive network and learn a lot and learn as much as possible. So being involved in companies just across every sector that I’m interested in, basically. And over time, your deal flow starts to improve or like in theory, if you’re doing your job correctly, your deal flow should improve over time. You should get access to better and better stuff. And then you just start to like narrow your aperture.
It wasn’t until I really felt like that had happened or was happening that I would have felt comfortable raising a fund. Now I feel like I’ve seen enough both through the 500 FinTech experience and through my own angel portfolio to have a pretty good sense once I spend a couple hours with a founder and kind of have the…we always talk about the prepared mind around certain ideas. Now that I’ve seen enough of it, I feel like I have a pretty good sense when I meet a new company of what my interest level is going to be. You learn little things along the way all the time, like how important it is that you just…it not only has to feel like a good kind of financial opportunity but this is a founder you’re going to be working with very closely for a long time. So like you have to evaluate that too.
Like am I gonna sit across from this person every week for an hour and help them build this company? And am I also going to give a shit about this idea enough to put in the effort to help this founder build this company? So if it’s somebody that’s like, yeah, that obviously is gonna make a lot money, but I don’t care about bringing that idea into the world, it’s just not something that I would get out of bed for in the morning. It’s probably a red flag. It’s probably not something you should invest in. Or like if a founder rubs you the wrong way, in some way, then that’s probably not something you wanna invest in. And these are things that you kind of pick up on over time as you learn more and more. And, again, you can kind of start to narrow your focus.
Meb: How’s this year changed things in the world of FinTech and investing and VC and everything else? Any major takeaways other than we’re doing this from your couch and my bedroom?
Jake: Yeah. So I think just in terms of investing in general you know somebody just kind of do a match on a powder keg, we’re still waiting for the dust to clear before anybody can really start to… An analogy that I heard recently was like we’re still putting out the fire and only then can we assess the damage and then start planning for the future. And I still feel like the uncertainty level is high enough that that’s very much the case. I’m not gonna make any kind of strong judgments on what the world’s gonna look like six months from now. Although one thing that’s been really interesting that we’ve seen in all sectors, but FinTech has been one that’s been affected really strongly by this is like overnight digital transformation.
We’ve been talking about technology has been kind of slowly creeping into every industry for the last, call it, 10, 15, 20 years now or definitely since the famous Marc Andreessen’s “Wall Street Journal” article, Op-ed, whatever. It’s the software eating the world thing is kind of it’s been slowly creeping in out there. And FinTech is one of the more recent kind of examples of that is like software is kind of slowly creeping into finance or at least kind of consumer-facing finance. But now all of a sudden overnight like that’s just been accelerated. Like our kids are learning on Zoom now. My mom’s accounting firms just adopted Slack and Dropbox and bought laptops for the first time a couple of weeks ago.
Like we’re seeing all of these different companies and all these different industries just overnight have to figure this shit out and like move everything to the cloud, start using collaboration software, all this other stuff. And then it’s happening in FinTech too. From talking to some of our portfolio companies, things like digital banking is kind of finally seeing its day because all these…like bank branches aren’t open right now and they’re closing a lot of them permanently, just like the push of a button basically. And so digital banking is going to become more and more important going forward like contactless payments, digital payments, mobile payments are definitely going to be accelerated from here on out.
Anything that required kind of a human touch to sell like a lot of insurance and life insurance, for example, life insurance is very top of mind for people right now. And at the same time, like most life insurance is sold by like, talking to an agent face to face, and then they’ll often even do like a physical exam on you. Well, that’s not happening right now. So companies like Ethos and Ladder and Bestow and stuff like that do fully online life insurance are having some of their best months ever right now. And we’re seeing that in a bunch of different types of insurance as well because the traditional agent model is kind of breaking down. They’re just not set up to sell insurance 100% online, but they have to now because people are just sitting at home buying insurance or signing up for credit cards or giving loans.
Meb: But what’s the credit card you are? You’ve got a Brex? You’ve got a Chase? From the NerdWallet co-founder, come on, you gotta give us the goods.
Jake: So Sheel makes fun of me because of the credit cards that are in my wallet, especially given my background as a NerdWallet founder. So Chase hates me and refuses to give me any other premium credit cards. I have been rejected for a Chase Sapphire Reserve every time I’ve applied for the past like three years. And I’m like it’s even funnier with Chase because like, “I worked for you for six years. I’ve been a customer of yours for something like 20 years. I was also one of your biggest distributors for about four years.”
Meb: Why do you get rejected?
Jake: I’ve signed up for too many Chase credit cards over the years. It’s like there’s the 5/24 rule they called me out on and then it was like, “We can’t give you the Sapphire Reserve because you got a Sapphire Preferred four years ago or something. Every six months I’ll go back and apply again to see if they’ve relaxed the rules or if I’ve kind of run out the time period but it never works. And then even like, I tried to get their Premium United credit card and they rejected me for it and just gave me the Regular United credit card. So I have like a United credit card. I have the Marriott Bonvoy, that used to be the SPG card. I’ve had that for a million years. My business card is actually a Ramp card because they’re a portfolio company of mine similar to Brex.
Meb: I was laughing when I saw Brex hit such a rocket ship valuation because their name and logo looks nearly identical to one of the biggest stock frauds of all time, which was Vx which was a mining company and I saw that and I’m like, “Are you guys…no one stopped to think that this was a terrible idea?” But whatever.
Jake: I’ve not heard that. What company was this?
Meb: Look up Bre-X. And the story is fascinating too. There’s a lot of sort of cloak-and-dagger, people died in like helicopter crashes and stuff. It was one of the biggest frauds of all time. I think it was Canadian but it was like a gold mining company. Anyway, look it up. It’s fun. It’s like a Silk Roads style story. It’s like too crazy to believe. Looking back on the career so far, not including NerdWallet, what’s been your most memorable investment? I mean, it could be that computer. What was your first computer you started coding on, by the way? It was a Commodore 64?
Jake: No, I mean, like literally, the first computers I was playing around with it was just parts that I cobbled together. It’s like take a motherboard and stick some RAM on it, stick a video card on it and put it in a white box or like a beige box. My first computer didn’t have a hard drive. I was booting everything off of a five and a quarter inch DOS floppy to play my video games and run WordPerfect and stuff like that QBasic. So yeah, I don’t even know if it had a brand on it, to be honest with you. I didn’t have the Apple II or the Commodore 64 or any of the stuff that…like some of my friends had and I liked to go there and play like amazing video games and loved them, but I was always just barebones.
Meb: So on the investment side, nothing comes to mind? Even your trading interest rate? What were you trading? Interest rate futures in the banking days.
Jake: Yeah, it’s a little bit of everything. I was trading swaps, Eurodollar futures options, you know, swaptions and Eurodollar future options. A lot of that stuff.
Meb: Didn’t have all your retirement money in JPMorgan stock in the financial crisis?
Jake: Yeah, even worse. Like all of my liquid assets were in the stock market because I was only 25 years old or whatever. And so like why wouldn’t I have all my money in the stock market? And then half my net worth was in uninvested JP Morgan stock and I was getting paid.
Meb: I was joking. I didn’t mean for that to come home. It’s so close to home.
Jake: Yeah, you learn a lot of lessons in a seat like that. I learned a lot about correlated risk and leverage. But, yeah, 2008 was the year that basically none of us got paid and I almost got laid off and I lost at least half of my money. So I’d also recently bought my mom a house in Florida.
Meb: That’s the best type of investments, the one you can’t sell if you wanted to.
Jake: Yeah, especially when they go down 50% or 60% value.
Meb: Where do people go if they want to find more out about your fund, what you’re up to, where’s the best places?
Jake: Twitter is probably the best place these days. I tend to be pretty engaged on Twitter. It’s like the only social media stuff that I do.
Meb: We’ll add it to the show notes. What’s the handle?
Meb: Got it. What’s the story behind that?
Jake: You know, that handle is 10 years old and I think I loosely borrowed it from Fight Club.
Meb: Yeah, there you go.
Jake: When your name is Jake, like your name is always taken when you join something new and so I always come up with weird things.
Meb: Hey, man, look, it’s been fun. Thanks for taking the time out of your quarantine. I’ll let you get back to whatever craziness that’s engulfing you in your world. But thanks for joining us today.
Jake: Yeah, thanks for having me. This is fun.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favourite is Breaker. Thanks for listening, friends and good investing.