LFP056 – “Everything You Wanted to Know About Fintech Venture Capital But Were Too Afraid To Ask” with Rob Moffat Partner at Balderton Capital

Balderton BannerI am  delighted to welcome Rob Moffat, Partner at Balderton Capital to dive into the topic of Venture Capital and Fintech.  As I aim to present London Fintech in the round I have been – for a long time – keeping my eye open for a friendly VC to have on the show. This has taken two years would you believe!

Viewed from Mars you might think this is curious given how the whole mainstream tech media is so focused on fund-raisings, so-called valuations (and fantasy animals with one horn), and the whole machismo around money.

Viewed not from Mars the VC sector globally is perhaps rather problematic. If this is a surprise to you then I recommend as an entry point Diane Mulcahy’s 2014 Harvard Business Review article Venture Capitalists get well paid to lose money. As a former VC she knows where to direct the fire – high fees, illiquidity and underperformance. As I recall in the greatest tech boom ever, in the US the aggregate stats are something like that the average VC hasn’t even returned to the investors the funds they raised, let alone got a carry cheque (the performance related fee).

Furthermore as we heard way back in LFP008 with Richard Goold the UK/European venture capital market was very thin indeed in most of the 20th Century (post-WW2 the UK basically had the (originally government) 3i as the only player for a long time) and returns were poor.

Set against this virtually every Fintech that scales needs VC money – without which there would be no boom at all.

Equally like in all industries there are always some good players with a reputation for adding value. It was such a lead that led me to Balderton Capital who are one of the real players in the London Fintech scene.

Rob MoffatRob also writes a lot on the industry – I recommend his blog – and is on the board of seven of Balderton’s investments, the best-known of which in UK Fintech are perhaps GoCardless and Nutmeg. Balderton invests around £20m per annum into Fintech.

Above and beyond this Rob is – finally – someone who is happy to talk on air about the reality of VC and Fintech. As he joined the firm in 2009 (from Google) he has experienced the Fintech world from roots through shoots and now into a rather varied garden.

There is more than plenty discussed on the show, key topics include:

– blogging, how it has changed, why Rob does it

– Rob’s interesting career journey from maths through to Bain through Insead to Google to Balderton and learning lessons along the way

– Google and the whole challenge of the startup, scaleup, grown-up journey

– the history of VCs and Fintech and how it all developed over recent years

– the big picture of the problems with the tech VC industry worldwide (as mentioned above)

– serial correlation and returns in active asset management versus VC; as VC is (at best) adding value to firms one might expect to see good serial correlation – ie “good VCs” (&Balderton count themselves as one of the top European VCs) should continue to perform more than equity fund managers [where runs of good performance always come to an end]

– in the US the likes of Benchmark and Sequoia demonstrate this with impressive serial performance (“genuine alpha”)

– this is driven by the value-add (talent makes a difference – “there is a science and an art to choosing which companies to invest in” plus support to companies to give them an edge) and also by a self-reinforcing cycle – you become a leading firm and the best entrepreneurs seek you out etc etc

– how VC differs for Fintech compared to other sectors – many Fintechs being formed by folks with good connections to wealthy City folks; as a result Fintech VC tends to be invested in later than non-Fintech sectors

– the timing of when its right for you to go for VC money; the disadvantages of going to them too early

– the distinction between startup capital, development capital, and VC having blurred over the years

– the competition versus VC by angel investors, hedge funds, private equity firms dipping down; VCs have focused as a result on being clearer about their added value

– VC “when everything is going well we need to need to be giving the entrepreneur a hard time, when everything is going badly we are that support”; how angels often act the other way round

– how VCs communicate their investment needs (heavily weighted to finding one firm that hits the ball right out of the park); how the “vicarage and maserati” syndrome fits in

– 30 companies typically invested in over the 3yrs of a fund and they expect two to be huge successes which drives overall returns [to create the overall RoI for investors]; they typically hold 20% of a firm

– the role of the entrepreneur and what can happen along the way as phase transitions take place in the firm

– Rob’s interests in Fintech in 2016 are new areas which aren’t getting too crowded; few original ideas in P2P or lending eg; wealth management still an important area, life insurance, pensions, insurance (&sectors within)

– a conversation about how much low-hanging fruit is left in Fintech 1.0

– the advice gap in investment and artificial intelligence; the legaltech DoNotPay robot lawyer as an example of something that has manifestly worked well and doesn’t need to be “intelligent” per se (in the hard AI sense of complex tasks like beating the Go world champion)

– how you make value-added advice a joyful tech experience rather than oldskool approaches

– how the VC process works from soup to nuts:

  1.  the preliminary dating and getting to know each other before serious conversations [note that many Fintechers try and skip this step to their detriment]
  2. a funding round comes along and discussions then (comparisons with private equity firms re non right answers/metrics); Rob aims to filter out 2/3 at this stage
  3. diving deeper into each firm – Fintech and Balderton
  4. a presentation at the Balderton investment meeting (which ends in a vote); if successful you get a term sheet
  5. you hope you will get multiple term sheets; if you are hot then the VCs have to chase you and the power balance shifts to the company not the VC; increased competition and off-market deals
  6. what happens when the VC is on the board;
    1. how the value -added works; Balderton focuses on adding-value as a team not just the individual on the board; further there is a “private club” aspect of access to other Balderton investee companies who might have expertise in an area you are challenged by
    2. the challenging aspects of the VC identifying problems coming up ahead (with in general their much wider experience on boards)

– who Balderton are looking for – entrepreneurs with original ideas/twists who have already launched a product and want to go global

– “we are the leading VC focused on early-stage investing in Europe, we have the biggest team of partners focused on that and Fintech is a particular strength for us”

And much much more 🙂

Share and enjoy!