From Wall Street to Fintech: Disrupting Traditional VC At Anthemis Group
By Murray Newlands for Forbes
Fintech companies are growing up, the disruption of fintech is still in early stages. The opportunities presented are huge, and the handful of investors who have been at the helm of this disruption since its inception are uniquely positioned to take advantage of what is sure to be one of the financial revolutions of our age.
Anthemis Group, founded by Amy Nauiokas and Sean Park, has consistently been ahead of the curve in the emergence of a new paradigm in finance. The impact of Anthemis’ 33 globally-placed, digitally-native financial services companies is yet to be fully determined, but if their present positioning is any indication, there is a massive amount of growth and success coming down the pipeline.
I sat down with Nauiokas and Park to speak more about the fintech industry, what they see coming in the future, and how Anthemis became the powerhouse it is now.
How did the fund get started?
Amy: Sean and I met in 2007 when he was running digital markets and strategic investments for Dresdner Kleinwort Wasserstein Capital Markets, and I was in a similar job at Barclays. The writing was on the wall about where the market was going, so we got together to contemplate. We were finding that it was very difficult to invest the bank’s assets into small financial technology startups. They weren’t called fintech at that point, but there were various companies in and around financial services with technology-centric business models. We had an idea that we could be very useful to other VCs and investors if we could do this on our own account, outside of the big banking franchise businesses.
So, we started what became Anthemis in the early part of 2008, with the goal of aligning ourselves with some solid venture capitalists with track records and recognizing that we had a unique position with one foot in the traditional Wall Street firms. We understood the regulatory regime and how these companies operated, but we also appreciated what was happening in the world of technology and the digitization of businesses. Most VCs at the time — in fact all of them — didn’t have financial services practices. They had folks that marginally understood the space, so we became an easy add-on to invest alongside of them. Our earliest deals were largely funded by our own capital and family and friends, with what started out as some small checks that came to carry an outsized amount of influence.
We quickly knew that we could create something bigger than just two people investing, so we built Anthemis specifically by bringing Nadeem Shaikh on as CEO through an advisory channel. We kept a foot in the world of advising big financial institutions because we knew what they were looking for, what they were challenged by and what they were working on. This also gave us a much fresher perspective when we looked at early stage startups, helping us understand not only how to identify the winners, but the opportunities to help those startups grow to be the partners, add-ons and strategic take-outs for the big financial institutions. We grew the business in two directions: one as a proper venture capitalist, and two, as a strategic advisor.
The financial services market has had a good run. Lots of fintech companies have gotten started, and there is a great buzz about fintech. On the other hand, certainly in the last six months or so we have seen a slowdown overall in the market, specifically in investments. Where do you see the market right now, and where do you see it going?
Sean: As you said, the market has grown literally exponentially since we started investing about a decade ago. In the early days, you could almost count on two hands the number of fintech companies. Now there are thousands of them, and that brings both opportunities and challenges. The opportunities lie in the pool of companies, entrepreneurs, people, and talent being much, much deeper than when we got started. Also, in certain instances it’s also a little bit easier for founders in fintech but in traditional internet or consumer technology, too, to get moving more quickly.
The challenge is that with the increase, the signal-to-noise ratio has gone down considerably. You might even call this the normalization of the marketplace for startups in financial services. It’s starting to look like some of the more mature sectors of venture where you have a power law distribution of a few great companies, lots of not-so-great companies, and many that fall in the middle. It makes it harder to pick winners because, as I said, the signal-to-noise ratio has gone down, but that puts a premium on having deep market and industry opportunity insights. It’s very important to be able to pick out from these vast crops of startups the one that is unique and is going to be successful. There are two sides to the coin; there’s a lot more fish in the sea, but it’s harder to find the tasty ones.
Are you seeing a slowdown in fintech investment, and where do you see that trend going overall? Do you think that financial services companies still need to innovate fast? Are there still opportunities there?
Sean: For us, short term is around five years, medium term is 10 to 15 years, and long term is 20 to 30 years. This is, quite frankly, the reason why I left capital markets and investment banking — I just thought that the very short time horizons were silly. Chuck Prince once said, “If the music is still playing you have to keep dancing.” That might be true on the institutional level, but certainly that’s not true on an individual level. From that perspective, whether there are more or less investments or more or less startups founded in any given quarter or year is not something we pay a lot of attention to. We pay some attention, we read the press and we see what the environment is.
However, I think the there’s a little bit more sobriety on the part of investors in 2016 versus 2015, or even 2014. The end of 2014 and the beginning of 2015 were perhaps a little bit over-enthusiastic. But the secular reinvention of finance is something that’s just getting started. You can think of it perhaps as more towards the end of the first chapter or the first inning, but there are many innings left to play out.
We’re a thesis-driven investor, and besides being very sector-focused, our thesis is that, like any other sector, finance is going to need to be reengineered for the Information Age. The business models that were so successful for the best part of a hundred years or more in the Industrial Age need to be restructured and reinvented. That’s going to take some time; at least a couple decades, if not more. The opportunity set for us remains vast, but it’s moving on. Perhaps some of the low hanging fruit has already been picked. We see a lot of companies where there’s nothing fundamentally wrong with the idea, the technology, or even the founders, but it’s not enough. The same company five years ago might have been something that we were quite interested in, whereas today there are already people who are doing that or have done that successfully. We’re always trying to keep moving onto the next wave of innovation, the next business model and technological innovations in financial services.
Amy: There’s also a fundamental difference between those who are inherently part of the financial institution mind frame and who have worked in and around financial services their entire career. They look at the marketplace differently, versus a technology investor looking at it only from a digitalization perspective. I think that folks like us who are truly embedded inside of the world of financial services and focus on this as a passion but also as a unique sector have a tendency to look at things with a wider breadth and also a longer-term view.
Any tips or advice for founders trying to raise in the current environment? What stage are you currently investing at right now?
Sean: We have structures investing across the early-stage in pre-seed, seed, and A rounds, and through the later growth stages: B, C and beyond. When possible we typically prefer to make a first investment into a company earlier rather than later, but will look at great companies at any stage.
Amy: The advice that I personally always have for founders when we’re talking about capital raising is simply: in a market where there is so much capital available, be very careful where you are getting your money from. Where are the future checks coming from? Who are the future partners going to be? Who is going to be there to help you get further down the road when things don’t look the same as they do today? That’s the partner that you want to align yourself with.
We’ve been very privileged to be in some of the earliest conversations with some of our founders that actually had us punching well above our weight in terms of the kind of capital that we had to deploy. If you go back to 2008, we were writing $50K and $100K checks, and it was very easy to just take the check and move on from anything that Anthemis may or may not have had to add to the conversation. But what we recognized was that that the money was less valuable than the advice, the counsel and the access to information in the ecosystem that we could provide. It really made us unique from some of the other investors, who just had checks to write.
So, be very careful about what partners you are aligning yourself with: Can they stick with you and help you grow? Can they provide you with a certain level of counsel that is as relevant as their checks?
What do you look for in a startup team?
Sean: Especially in the early stages we look for entrepreneurs who really deeply understand the challenges they’re going to face. The more obvious part is do you have a really exciting and interesting proposition? Not everybody does, but there are many who do. The key for us is seeing that the founding teams have that deep understanding of how hard it’s going to be; it makes them that much more resilient. You have to have a certain amount of hubris to be a founder; there is a certain putting aside of doubts that goes with the territory. We really try to hone in on founders that have that ambition and that insouciance, but also deeply understand just how hard it’s going to be to make their company successful. I don’t think that we’re unique in looking for that. The best investors look for founders that have that sense of pragmatism or rootedness in reality, because once the pitch book is done and the money is in the bank, the hard work is just beginning.