Fintech Developments in Venture Capital w/ Steve Lord

ABOUT THIS EPISODE

There’s a multitude of new developments regarding fintechs — both on the company side as well as on the VC side.

To break it all down, today’s episode features Steve Lord, Fractional CFO, Fintech Practice Lead, and Chief Learning Officer at Burkland. He talks about recent fintech developments and what they mean for venture capital.

Topics covered:

-The growing demand for data and reporting

-Changes to financial and accounting reporting

-Fintech influence on the VC community

-A greater emphasis on cybersecurity

-The widening geographical reach of VC backing

This discussion with Steve Lord was taken from our show Startup Success. If you want to hear more episodes like this one, check us out on Apple Podcasts.

If you don’t use Apple Podcasts, you can find every episode here.

Listening on a desktop & can’t see the links? Just search for Startup Success in your favorite podcast player.

Welcome to start up success, thepodcast for startup founders and investors here you'll find stories ofsuccess from others in the trenches as they work to scale some of the fastestgrowing startups in the world stories that will help you in your own journeystart up. Success starts now welcome to start up success. Today'sshow is a real treat. We have Steve Lord, who is a fractional CFO atBergland and the head of R Fintech start up practice and Steve recentlygave a presentation at the two thousand and twenty one leading entrepreneurs ofthe world conference. This past June and Steve's presentation was aroundfintech developments in venture capital. The presentation got rave reviews andit's a fascinating overview of fintech startups right now, and investment andtrends that Steve Sing and future trends. So I wanted to share it onstart up success. So here we go thanks for listening there we go what I wantedto talk about, set the stage a little bit here with two main stats, and thereare a lot of stats. We can pull to kind of underscore what I'm about to say,but these are two good ones, but seventy five percent of consumersglobally have used a fin tech product either money transfer payments,something like that. That's from Ernst on Young in two thousand and nineteen,so that's pre pandemic. It's much higher now and McKenzie put a thing outin June of last year, that talked about five years worth of adoption of Fintechtechnology took place in about eight weeks during the pandemic. The pandemicwas this huge, forcing function, accelerator, infin tech, adoption forreasons everybody on the call knows, but that has really served tounderscore the utilization of technology in a fintech world. Now,what does that really mean? That's...

...where the rubber hits the road longtime ago, and one of the folks at Endresen, horror, whips me talk about.Everyone talked about this, and this was a big deal. I think it was four orfive years ago, Andreason horror was associated, talked about how everyonewas going to be a fin tech. Well, from our view, across those four hundred andsome odd companies, everybody is pretty much a fin tech now you're either usingit. Your product is using it. Your consumers are using it you're using it.Somehow you are touching a fintech application and remember: Fintech is avery, very, very wide zipod, it's a very, very broad sector. So it'severything from payments to propectory, tect, all sorts of cool stuff rightcrypto. In there you name it. Your competitors are all using it the feetand we're going to talk about this. Your vcs are using it your fees, yourvcs, the business model they may be using is changing because of Fintech,so for entrepreneurs in the audience super important to understand. Even ifyou are making widgets and a factory you are probably using fintechencountering FANTEC, your clients are using it. Your customers are using ityour competitors using it. Okay, however, Fintech is one of those raresectors where the regulatory environment is somewhat more unique ora little bit more prevalent than say your regular technology sector. So theregulatory environment is lagging the innovation in Fin Tek and we're seeingthis. You know all over the place, Kryptos, obviously the most visibleexample, but it's in banking, it's in payment flows, it's in licensing, it'sin audit and assurance in somewhat ten gentle to our world. There's a lot ofregulatory changes that are going to be coming down the road as that worldstarts adopting to the innovation that's going on, and that creates botha little bit of chaos, but also a lot of opportunity. So I want I, likeeverybody on the call, vcs and entrepreneurs alike, to understand thatthe regulatory changes that are going to be coming in the next day, two tofive years, will be reacting to what's...

...happened in, say the last eighteenmonths or two years. Okay, one element that Fintech is doing in the start upspace is, it is creating a greater awareness of and demand for, reportinginvestors need data and that loops back to what I'm talking about. We see thisin the clients that we work with investors vcs the folks you're,pitching to the folks that have already invested in you and want to know.What's going on the demand for the data out of your business is growingexponentially. They expect you to have extremely granular data if your assasstart up on your cohorts on all of the metric Lt Lv d, catete dollar retention-all of this stuff- and they expect you to have it easily and they expect youto have it quickly. So the days are gone where you can just like kind of doall of this, and as giant spreadsheet and and hope you can trace everybodythrough the formulas. They I do especially operating businesses thathave a product in market. They expect you to be doing things in the datadriven way and be able to report on what you're G, what you're doing? Don'tassume that the data will fill in if you're, pitching a business that hasn'treally gotten going yet go ahead and look at the kinds of metrics thatbusinesses that are successful in your space are reporting and model those out.So that you are showing where you're going to be right, the old sportsanalogy, you don't pass the puck where the fought where the player is you passwhere it's going to be okay, this ties into systems and processes. There arenow a ton of applications out there to help businesses report this stuff,Stripe Square, quick books online, obviously, is the the daddy of allFintech. As I relate to our world, all of these APPs are there now sass opticsright if you're a SASS business, those sorts of applications will make a verysimple job of tracking what's business and you really need to have that stuff.So don't be shy early on about saying,...

...yes, we're going to go, get these toolsand we're going to implement them in our business. Don't be shy of makingsure your vcs he, your vcs, know you're going to spend money on these tools,because that's a very important part of Your Business, you as the entrepreneurwant to know what's going on. Okay, you have to think this way. The theentrepreneurs that are not kind of at the bleeding edge of this stuff are alittle bit dear and headlights when they're asked about some of thesemetrics and have not thought through how they're going to get the data. Whatthey're going to be reporting the granularity demand is extremely hot.Okay, and this is everywhere. This is not only in your operative business.It's in the cohort analysis. It's in your pricing, it's in scenario,planning and modeling. It's in your Cap Table and your waterfall analyses allof this stuff comes together now, because fintech innovations haveallowed the visibility to increase. So, therefore, the data demand hasincreased. The FINTECH revolution so to speak, has created a bunch of differentopportunities. It's beyond just you know, good companies coming up withgood ideas, there's a record, I think, a hundred and fifty two billion in drypowder and VC firms at the end of two thousand and twenty that's according to.I believe it was frequent. This adds to the pressure for those folks to getdeals done. They have investors that are expecting them to deploy theircapital. What does that? Do that increases the valuations for firms andK areas, good firms that have their act together that have good decks, goodpitches, good products? I loved Steve's advice to bring the product into theclient. That is so. That is so true. We had a client that was a food start up,as Steve mentioned, and the fellow brought in his meat balls and fed themto the guys of the VC firm for lunch, and they had a check by the end of theafternoon. True story, so don't be afraid of that. Don't be shy of that.If you're not proud to show your product of people or what you want yourproduct to do, then why would they be...

...right? But what that means is thecompetition for strong deals for good companies that are working in key areasand Fintech is one of them are in that competitive environment that Stevementioned, and that means the valuations are going up. So don't beshy. Okay, make sure you use the environment to create what you want.We're seeing this in the average deal value we're seeing this change. Whatseed used to be seed is now what an a used to be in an a is really more. Whata what an a plus syrupy minus used to be in terms of funding stage. It's notstrange to see a five or eight million dollar seed round nowadays, rightfrequent, also put a stat out that deal value is up over a hundred percentsince the same period last year in con of two thousand and twenty one soassume the pandemic is kind of a valley that we're seeing across the dealvalues have continued to rise because of this innovation because of the drypowder in the sector. Now FINTAC has done two things in my view that aresort of like macro questions for us to ponder going forward the ones a littleboring, but it's really important that, if you're an entrepreneur on the call,this will matter to you down the Road Fintac is changing a little bit or hasthe potential to change. That's why it's a question some of the macroreporting that we do. You know you guys have all heard of when you pay aninvoice net. Thirty, you might get a little discount right, but why not?Thirty? Not Why? Because that rule sort of that convention grew up back when wewere. You know writing on parchment paper. With a feather, I mean it'sreally a vestige of a much earlier age. Now we can pay essentially instantly ifwe want, so we are starting to see intriguing questions around. How isfintech changing the accounting and the financial reporting inside of thebusiness. This is not there yet, but it is one of the things that we'restarting to see become a topic in our world is well. Maybe we should givepeople a discount if they pay in three days right instead of thirty, whatabout putting a premium on the payment...

...speed with which you have to processchecks? We all are using bolcom and Expensif and all of these great tools,they still are intersecting a banking system that likes to sit on float forthree to five days. Think of your pay, roll, your par will comes out, probablythree to four days before your people get their money. We expect that windowis going to increasingly narrow and you're, going to have more and moreability to use that capital differently from our world. What does that meanthat increases your working capital and your float a whole bunch of otherreally good stuff? Okay, digital assets play a role on this. If I've sold atoken, what is it? Is it revenue or is it? Is it a a liability on my balancesheet right? The GIG economy is changing things. If we can use GUSTAnow to pay people, and there are contractor and Wyoming working two daysa week for in the office and two days a week at home. What are they? Where arethey paying taxes all of these things, and we don't have the answers yet, butI wanted to flare. All of these things are sort of in play now because ofFINTAC innovation in the Commercial Space Reagans Tory frameworks obviouslyalso are a big player in all of this, because some of this is driven byregulation. Think of as six O six, the revenue recognition standard thatprobably is driving most of the people on the call crazy that really wouldn'teven be at that feasible without technological back stops in how wereport the next macro question really relates to your VC backers in the v Ccommunity in general, Fintech is going to do a bunch of things to the way theywork. It's going to make their decision cycles flatter quicker and much more quantitive. It wasquantitative before don't get me wrong, but it's now going to be even morequantitative back to what Steve was saying about the data driving an awfullot of this stuff, and what I mean by flatter is that, because of Fintechthey're able to manage their portfolio much better, there be able to see thosetrends in the world much easier. Much...

...quicker quicker also relates to the duediligence process. They're going to be able to evaluate your start up againstthe other hundred that they've seen this week. Much faster. The process ismuch less manual. So as a startup, you want to embrace that you want to makethat job easier for them. We have a saying in Berkly for all the C fos thatwork with US always be due diligence ready right. You want to be able tosend a deck out to anybody literally the day they ask for it. You can dothat now, because all of these tools exist to provide the data that backs upwhat your product is doing. The kind of fit you've got the revenue growth, themargins you know whatever it is that you really want to highlight. You cando that now, so don't miss that opportunity to provide them the datathat allows them to make those decisions easier. I lothe thing: that'sreally changing is we're seeing a much greater emphasis on cyber security,obviously suck two audits to make sure your text stack is up to speed. Privacyis a much greater concern relating to both of those, so these teas care a lotabout this, because that's one of the key areas where things can really blowup, regardless of how good your product is, if you're not paying attention tothat world, I your a tech business. You can really end up on the wrong end ofthings and they care a lot more about that than they did probably two yearsago. Again, there are tools now that let you do that. Fintech tools thatallow you to take care of these issues ahead of time or at least be in a placeto manage them. Okay and then the final thing that we think is happening isthere's a bit of democratization. That's going to happen. Fintech is alsoallowing that reach right, that data to expand and there to be a greater influxand outflow of information. Sharing, that's changing a little bit and speakwe're beginning to see the green shoots of it. I wouldn't say it's a ragingtrend yet, but it's getting there of a wider net or a wider tent in the VCspace to backing startups outside of...

...the traditional bay area. New Yorkcorridors there's a sense that they can get the touch and the feeling that theyneed in a startup if they're, maybe not in one of those two locals, becausethey are also more used to working remotely, they have had to makedecisions remotely and now they can actually get on a plane. Maybe in thatone meeting is sufficient to meet with you and you're in Minnesota are you'rein Texas or or in Chicago. So we think that over time, this fintech revolutionis also going to help widen the boundaries a little bit of who isgetting backed and where are they, which we think is great because there'sa huge sort of neighborhood. That's not in one of those two spaces that doesstruggle to get disability amongst the really well known pcs and we're seeingthe vcs back to that demand for really interesting deals. We're seeing the vcsutilize this technology to uncover really compelling opportunities inplaces where maybe other folks are not looking a that competition. That Steveas mentioning in the prior session is very real, so if they can get to areally intriguing start up, that happens to be in northern Vermont andthey can back that start up at a lower valuation than they would if that stanestartup was in New York and silicon alley or in the bay area, and there'sfifteen other vcs bidding to be part of that seed round tether going to do itand so they're actively. Looking for that, so I encourage all of you guys on,maybe not in one of those two areas. Don't let that get in your way thereare. There are people looking for you and just if you have the data andyou're able to present it in the right way, I think you'll get some goodattention. We see people in all manner of preparation stages. Some have theiract really together. Some make you kind of want to cringe when they get into astartup vcs office, and we want to try to get to them ahead of time. Ifanybody does have questions, here's our website and here's my email address, Ialso had knowledge share for berkly. So if you have any questions just ingeneral about how should I think about raising money or dealing with you knowmy finance stack, please don't be shy.

Let me know- and thanks for having me,I really appreciate it. You've been listening to start upsuccess to make sure you don't miss out on future episodes subscribe to theshow in your favorite podcast player. Like would you hear tap the number ofstars? You think the show deserves an apple podcast for more tools andresources for your own start up. Success check out berkely associates.Thank you so much for listening until next time, e.

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