Embedding Fintech Into Your Products to Drive Growth with Matt Harris, Bain Capital Ventures

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To unlock the next unicorn, you should consider embedding fintech into your products, right? More and more companies are embedding finance like payments, lending, insurance into their products, not only to drive growth and revenue, but also stay competitive. Starbucks has the second most used payments application in the US and they're not a bank. It seems like Shopify's payments revenue is going to grow faster than their subscription revenue. Companies like Toast have launched Toast Capital to provide customer base with fast, simple access to lending and couldn't find a better speaker on the topic. Matt Harris, general partner at Bain Capital. He's going to tell us all about how to embed fintech into your products to drive growth. It's going to tell you all about the fintech ecosystem, I think. Matt, you're one of the most sought after investors in the fintech space. How are you?

I'm doing great. I'm thrilled to be here. Lloyd, thank you so much for having me and thanks to everyone who's tuning in.

I love the space as well. I did an angel investment not too long ago. Austin company called Lend Flow out of YC that does embedded lending and they're seeing good growth as well. Before we dive in to Fintech, you've had a super successful career as an investor. How did you get into investing? Tell us a little bit about your journey.

Thanks for asking. So I started my career in consulting at a firm called Bain and Company. This is back in 1994, right out of college. And Bain and Company had kind of a sister company, Bain Capital, that had spun out from Bain 10 years ago. They were no longer really connected, but everyone knew each other still. And so I navigated my way to Bain capital in 1995 and I've been an investor ever since. So I guess that's 27 years now. Started out in private equity. That's what Bain Capital was doing back then. But I'm really more of a venture capital guy. So I left, started my own firm in 2000. And being out on my own, I felt some pressure to stand for something to have a major. And I decided that the whole industry, financial services, felt like it was all about tech, but no VC in the world was focused on it. I said, okay, I guess I'll be the only guy. And so that's really what I've done for the past 22 years, is invest in founders who are trying to disrupt the financial services industry from payments to lending to wealth to insurance for the first decade or so at my own firm. But then fintech 20, 22 years ago was nothing. 10 years ago was starting to look pretty interesting. It was 1 or 2% of the venture business already. So I came back to Bain Capital about a decade ago and decided just a bigger platform and resources would make me a better investor, make me more useful to founders. And so I've been back here 10 years. We've been among the most active investors in fintech. And I'm a nerdy guy, so I like to write things down and try to push the ball forward if I can in terms of what's happening in the space and what ideas might be useful. And so, yeah, once in a while I get inspired to write.

So 20 years ago, was FinTech even a word? Was it used or you were just investing in Office of the cfo?

Yeah, no, it's interesting. Fintech meant something. Fintech basically described a set of vendors who sold software to banks and broker dealers and insurance companies. So FIS and fiserv, ACI and Guidewire like the sort of companies we think of as now incumbents. Back then they were already big companies but that's what Fintech meant was companies competing for the budget of the CIO at JP Morgan. That was Fintech. And honestly that's still a part of Fintech. There's still terrific companies that sell into financial services. So Blend Labs is a company I hold in high regard. They revolutionizing the front end of the mortgage process. We have a company called Vesta that's doing the back end of the mortgage process. Companies like that sell into mortgage lenders and so we do back vendors, we don't back ones that look like FIS and fiserv per se. But we do think that's a good sized opportunity. And frankly it's a bigger opportunity now because if you were a bank even 10 years ago the last thing you wanted to do was buy software from a startup. Your procurement department would stop you from doing it if you tried. But now JPMorgan Chase announced they're going to spend $15 billion on tech this year. Every bank globally is realizing that not only do they need to spend more, but they need to diversify their vendor base and actually get modern tech. And so long answer to your question. But Fintech of old meant vendors. That wasn't what I was interested in 20 years ago. I was interested in challenging the incumbents. You know, I don't want to sell tech to JP Morgan. I want to steal market share from their payment tech business unit by backing next generation merchant acquirers. But then 20 years later, the vendor space, the traditional definition of fintech is actually much more interesting because the customers are now panting for new tech.

So how do you define Fintech as it stands today and looking into the future?

Yeah, I think the, the definition of fintech began to evolve in the late 2000s with entrepreneurs like Jack Dorsey starting Square with Renault starting Lending Club and and On Deck and Small business lending. There was and then Wealthfront and Betterments, a whole crop of companies that weren't just, they weren't selling anything to any bank. They were actually competing in lending, competing in payments, competing in insurance and wealth. And so that to me is the beginning of modern fintech. Was that crop of challengers. In some of my writings I refer to it as FinTech 1.0 and that's not a criticism. Basically the observation though is that all those companies weren't actually transforming the experience. They were just taking something that had always existed like a checking account in the case of bank simple or again a small business loan in the case of On Deck. And they were making it digital, an experience that had historically been analog, often in person, in a branch, opening an account, getting a loan, getting auto insurance, opening a brokerage account. All that stuff had been really kludgy and complicated and analog. These companies made it slick and digital, less expensive and more enjoyable. And honestly, that was a form of innovation. But that battle's over. You can't come out now and say, oh, here's a financial product, it's well understood, let me make it digital. Because all the incumbents have made it digital. Now, like I mentioned, Blend Labs, if you go to Wells Fargo to get a mortgage, thanks to Blend Labs, it's a really slick digital experience. So that era of fintech to me is done. Which is what kind of prompted me to write this piece you referenced three years ago about what we call in the piece embedded financial services, embedded finance, embedded fintech, lots of terms for it. We characterize it even more grandly than that though as a fourth wave, which is you had the Internet, which was a big deal. You had cloud computing, very big deal. You had mobile. Each of those three waves created hundreds of multibillion dollar companies. But now each of those three things is just an ingredient. It's goofy to refer to a company as an Internet company. It used to be extremely common. Even for me, the term cloud is feels a little retro. If you're a software company and you're not using the cloud, what are we talking about? And in a mobile company, you would never use anymore. And so I can take this view that at first, technology start out as something unto themselves that define an industry, define a company, and then eventually they mature into becoming ingredients like the Internet and cloud computing and mobile. And I see that happening with fintech to where every company should be asking themselves how can I leverage payments, lending, insurance, and maybe even investing to make my product better for my customers and to increase my monetization.

Yesterday's innovation or wow. Becomes today's option and then becomes tomorrow's table stakes. And like the Internet and cloud and even AI, every application has some level of intelligence in it. So you're arguing that every company will become a fintech company. Why don't you unpack that a little bit, maybe some examples of how you're seeing that.

Yeah, it's more the case that actually once every company is a fintech company, no company will be a fintech company. And that'll that that term fintech company will seem a little silly in our ears. I personally like the shopify example, first of all, because I love the company, I love the team there, and I love a success story coming out of Canada. So much to love about it. But they started life as a software company. And from a DNA perspective, you go walk around Shopify, it's a software company. That's what they do is build beautiful software. And that's important. I'll return to it, but that's what you want. There's lots of fintech companies that are basically kind of finance companies or financial products company. And that to me is a necessary aspect of your DNA. But if your core mission in life isn't building beautiful software, you're probably going to lose to somebody whose core mission in life is building beautiful software. Because end users and customers have so much choice these days. But Shopify, clearly that was the case. They wanted to help merchants and manufacturers engage in E commerce. They built basically a shopping cart. Not the most complicated piece of software in the world, but they did it better than anyone else. But if you look at their revenue now, close to 70% of their revenue is from financial services. And so it's not that they're not beautiful shopping cart software, it's that they've realized the best way to monetize that software is in the first instance through accepting payments. That sort of tends to be what goes first is you think to yourself, do my customers use my software in any way adjacent to where they're taking money from their customers. So obviously in the case of Shopify, you're running an E commerce checkout. The very last step in that is a credit card transaction, or at very least as they say, a card not present transaction card rails are not as dominant as they used to be now. And so Shopify had enormous permission to get into that business because they control. They already had the customer, this merchant, and they already had all the data. They had this sticky data rich relationship with the customer. And that gives you enormous permission to then layer in something like payments acceptance, which by the way, is a risky field of endeavor. There's lots of fraud, there's lots of chargebacks, there's lots of ways to lose money. If you don't know the merchant, but Shopify knows the merchant intimately, that's part of the unfair advantage is every financial services involves risk. And there's no better way to reduce risk than having this durable, sticky data rich relationship with the customer. And so Shopify very quickly became a majority payments company. But the beautiful thing about them is they didn't stop there. They thought about, okay, what else can we do for our merchants and what else can we do for the customers of our merchants? And now that includes bank accounts, it includes point of sale lending, it includes small business lending, it includes a whole new payment tender type and shop pay, it includes soon to be procurement. It really is a masterclass and how you create a customer base that's loyal and sticky, establish a durable data rich relationship with them and then delight them with these add on offerings that fit elegantly into the puzzle.

Huge endeavor and probably someone like Shopify has the team to afford to go to battle. But did you know what they used before like a Braintree or maybe something else that they used in the early days and said hey, we're just giving away too much revenue here, it's a great opportunity for us.

They very early on chose Stripe and that is fairly back then it was really kind of either Stripe or Braintree, which is of course now part of PayPal. What you need if you're a software company to get started is somebody to serve as what's called a payment facilitator. So you need somebody to enable you to look like and act like a payments company without taking on board the full burden of being a payments company. And so these payment facilitators or payfax, there are now many more of them than Stripe and PayPal and they each have their strengths and weaknesses. We have a company called Finix, just not to give a commercial for Finix. But the reason you would choose Finix if you did was they have a software platform to enable you to graduate to becoming your own payfac. And that does tend to be the path is that first you get help from a payfac and then eventually it becomes, as it has with Shopify, a big enough part of your business. You can get a lot more in the way of economics by becoming a payfac yourself. And you can also get a lot more in the way of control terms of underwriting merchants and the merchant experience. Every one of the payfacs that now exists has some element of kind of special sauce as to why one of these platforms would choose them. And by the way, the big guys, the worldpay, FIS and fiserv, they've all gotten into the payfac game as well. So it's not that hard is the short answer, to get into payments and to start earning 20, 30, 40 basis points on your transaction.

Wow. So I guess you explain the lever there. If you, your, you have a product that others are leveraging to make transactions, it could be events, event management, Is another one like an eventbrite or bizzible, Right. You may want to bring it in house. Are there any other levers to consider? This is the obvious one. If people are using your website to drive sales, are there any other levers to look at?

There's a category of companies we think of as practice management companies. Often they're vertically oriented. So in every, if you Google in florist software, you're going to get 15 results, right? Every category, whether it be retailers like florists or doctors or dentists or lawyers or accountant. Like any field of endeavor, there are dozens of practice management software suites and they've got modules that include often some form of a CRM, some form of at least rudimentary invoicing. If it's that kind of field of endeavor, like accounting, where you're sending an invoice versus just presenting a checkout experience. And in our experience, almost all of those practice management software packages have payments acceptance opportunity because you're the kind of system of record for that business. You may not be the accounting package, but you're controlling the ledger basically of how that business is run. And so you've got that opportunity to get your customer to use you for payments acceptance. So I think that's the sort of classic archetype is that yes, as you point out, anything involving the last leg of commerce, like a shopping cart system, but also anything really in the practice management suite, it might be B2B payments like an accounting firm or a law firm. And you need to have different types of payments acceptance. You need to allow for bank transfer style payments in addition to card payments, for sure. Or it may be B2C like a florist where it's generally speaking card payments. But any one of those companies has a real opportunity. When we talk about payments, we generally think about payments acceptance. But obviously for better or for worse, most companies turn around with 90% of the revenue and then they pay somebody else. So there's also that leg of payments that your customers are using someone for. So the biggest chunk of that in most cases is payroll. And many of these software companies have an opportunity to embed payroll. We have a company called Homebase that started out as scheduling software for retailers. How do you schedule your shifts? How do you manage your workforce? Then they layered in payroll and they found that their relationships with the retailers they worked with was sufficiently intimate and they had all the data about all the employee census and all the shifts they were working. They've been able to displace ADP and paychecks with their embedded payroll offering, which is in their case infrastructure company called Checker or called Check rather is the embedded payroll vendor. But Gusto just announced this week that they have an embedded payroll offering for software companies that want to offer payroll to their customers. So think about your whole payable stack starting with payroll and then vendor payments. We have a company called Avid Exchange that makes their whole business automating accounts payable and making vendor payments. And so these software companies that are again doing practice management generally have an opportunity on the procurement and AP side of the house to manage outbound payments, try to put those on a card or on other bank transfer rails that they can monetize and make life better for their customers. So it's not just payments acceptance, it's also the full all the payments from payroll onto vendor payments that get made by a business.

When do you recommend a company make that decision? Because if you are an early company, maybe seed Series A, it's important to stay very focused on that one thing you're offering and doing it really well. And all these other things could be distractions. When do you see it's companies doing this well and succeeding versus trying to bite more than they can chew and fail?

I would say the classic answer is kind of series B. When you see stage, I would recommend that you frame it up for your investors and your team as where you're headed. So I don't think you can just park the idea. I think you should have it be part of your game plan from the very beginning and think about it as you do your hiring, et cetera. But until and unless you have customers, you don't have a cross sell opportunity. So I don't think it is job one for most companies. I think it is you raise the seed to build your team and get early customers, raise your A to really prove you can grow fast. Then you could raise your B to think about kind of product proliferation. So that is my general answer. But what's really interesting now is we're seeing the rise of companies that are basically embedded financial services first. And so there are companies in the spa and salon software space called Fresha. They don't charge for the software. Their point is if you add up the revenue of payments and lending and insurance, just globally, it's 17, 18 times bigger than the entire software industry.

Wow.

And if you think about the customer economics of a florist, how much can you really charge them for software monthly? 1200 bucks, 800 bucks, maybe 2000 depending.

On how big they are.

Yeah. But if they're bigger, that means their payments opportunity is even bigger. Right. That's a million to $2 million retailer. If they're paying you that much for software, they don't have very high margins, but they've got a lot of transaction volume going through there. So you think about how you can monetize their customer, spend their procurement, spend their small business insurance, their merchant capital needs. You can make 6.7x off them, as Shopify has proven from financial services and you can from software. And so again, companies like Fresh are saying, like, let's screw that. Let's not introduce any friction. Let's get this software and as many customers as possible and we can monetize on payments.

That makes sense. Even if you look at something like a Honeybook or Shopify, the max they charge is probably $300 a month. And so this. So you say 6.7x. If you look at the whole payment stack, like payroll and accepting payments and then insurance and lending, I want to get your thoughts on insurance and then embedded lending. What are some examples you've seen? Because it probably doesn't always overlap, but now that you're giving, give the first example, it's crystallizing for me. But what are some great examples of insurance and embedded lending you've seen?

So starting with lending, the first example of this was really Square Capital. Square you think of as a payments company, but really they're a software company whose software helps retailers run their entire business. They started life monetizing through payments. Another example of a company that did charge for software particularly. They do now charge for some of their advanced features, but monetized through payments acceptance. And they came to the conclusion relatively early on that they had a massive unfair advantage in lending. They knew everything about their customers, all of their revenue. They were managing payroll, they were managing inventory. They literally could construct a full P and L for all their customers every day if they wanted to. And you contrast that to what a bank knows about a bank knows about a retailer, but the retailer wants to tell them, basically. So they had this massive unfair advantage, A. And then B, they, because they're the payments provider, they control all the money into that business. So their ability to service that loan, as it were, to recollect their principal and interest is just unparalleled relative to. Again, a bank is hoping that the customer pays them monthly as scheduled. Square can just collect the money. So this framework became obvious to them and they launched basically a merchant cash advance product. So they would target their customers in the product. That's another Beautiful thing you can do here. You're a square merchant. You're using their checkout, their register, their dashboard, their back office modules all day, every day. And then you just see this button that says would you like, you're approved for a $30,000 cash advance. Are you interested? No human beings involved. Literally press a button and the next day or instantaneously $30,000 in your bank account and then you pay square back over time from your receipts. So that was a very disruptive embedded lending product where you've got all the ingredients, you've got the sticky data rich software connectivity to the borrower, you control the rails, the payment rails, so you allow for this instantaneous servicing and you've reduced not just credit risk in that everything about the company, but also fraud risk. It's like a sneaky dark secret of lending is that a massive amount of the losses are not. I made a loan in good faith to a borrower who borrow it in good faith and then she or he couldn't repay it. But rather I just sent money to a fraudster and I'm never going to see a dollar. Nobody sets up a square merchant and runs it for three years in order to defraud Square out of $30,000. So they have taken borrower fraud to zero and dramatically reduced their credit losses. So the P and L of Square Capital is, I know On Deck Capital quite well, a company that was a public small business lending company before they got bought. They just had even relative to On Deck which was way better than a bank. Their advantages were they were running an 85% contribution margin lender where on deck was kind of 35% contribution margin on its best day and it was a great company in my view. It just didn't have that incredible unfair advantage. So that is like the prototypical embedded lending example where again you have this practice management software, whether it be a retailer or otherwise. You have an incredible unfair advantage in terms of what you know about that company. You have that connectivity with the decision maker in the finance office or the business owner and you've got the ability to reduce fraud to zero and reduce credit risk both through what you know about them and through controlling the servicing rails. And so it has gotten started in retailer focused software packages. Toast Capital was a fast follower of Square Capital, Shopify Capital, but another fast follower. So serving retailers again is where you've seen the most dramatic payments acceptance penetration amongst software companies and also the most dramatic small business lending penetration. But it's now spreading out. I think there are, you know, you think about trade finance and supply chain finance. That seems like the next front here. Again, because this is an audience of practitioners, I'll go into a little bit more detail. You think about a company that does accounts payable automation. So they control, they understand when invoices come into your business, they understand when you're likely to pay those invoices, if you're likely to pay them, they understand how frequently you've worked with that vendor in the past if there's ever been a dispute. So they have this incredible database about these invoices and about all of your vendors and then if they're doing their job, they're the ones who pay the bill. So every AP automation company worth their salt has introduced B2B payments. And so they have this opportunity to go to those vendors and say, hey, you're probably get paid in 45 days, I'll pay you tomorrow for a 2% discount or whatever it is. Think of it as factoring but in reverse because the AP automation player is coming from the buyer with full knowledge of the intent and probability and timing of the buyer to pay that invoice. And so they have this incredible nearly risk free ability to advance the payment to the vendor. So that's another version of kind of lending as a service opportunity into not payments acceptance, merchant cash advance, but trade finance and supply chain finance. So that's probably going to be the second domino to fall in this sort of lending as a service category.

We talked about some examples of some great companies. When they have the volume, they do it. But coming back to your series B company, they likely can't go and take a whole bunch of money and put it on their balance sheet. They might, that might also kill their valuation a bit. How should series B companies think about this?

Yeah, so this is an interesting topic. So what are lending companies worth? I look, I have to be opinionated in my business, otherwise I'm super boring. So I have been opinionated on this topic and making the case that over the arc of human history, lending companies are not that valuable. The perfect business in the world is software. Basically like incredibly high margins, very sticky, the customers grow, very low risk. And lending is the opposite, it's generally transactional. There's all these risks, credit risk, fraud risk, capital availability risk, an inevitable boom bust economy. When you're a lender and your main input is money, that supply of money can get choked off to you. And so throughout time lenders have traded at at book value multiples, maybe earnings multiples, but rarely revenue multiples. All the time there'll be a new one, like whatever upstart or a firm will be a high flyer for a while and I'll feel wrong and my friends will tease me and then they inevitably come back down to earth. So far anyway, I think I'm undefeated in this prediction. Which is all to say that if you're a software company, you should be very careful about becoming a lender. And so what are the first principles here? Your first principles are your customers want these loans, they want this access to capital because you can provide them with a product that they can't get anywhere else because you have this incredible unfair advantage. You know they're credit worthy even though the rest of the world doesn't. So it's solving an incredibly important customer need. That's a big vote in terms of getting into this business. And you can do it in a way that no one else can because of the sticky data rich software relationship. And so then the question is how? And that's where I think these lending as a service vendors come in. I mentioned if you want to get into accepting payments, you could start with Stripe, or you could start with Finics, or you choose your partners. But then eventually you may want to become your own payments. That's why you would choose a Finix if you thought that was your game plan. I think almost no companies in my view should do what Square and Toast did, which is become lenders. It has even been a drag from time to time, like when the pandemic hit Square got hit worse than the payments universe because they had this lending business also. And when you're worried about the economy, you're doubly worried about a lending business. So I think there's a big opportunity for infrastructure providers to allow software companies to offer a lending value proposition without becoming lenders. But it's not easy because I'll just give you one example. Like you're a software company. What you care about is retention. You care about your NPS score, you care about your customers being delighted, you care about your net retention and your gross retention. How is that experience when one of your customers applies for a loan and it appears to them like you just turned them down? Not good for your retention to be systematically declining your customers for loans. And so when you outsource this function to a lending as a service company, you're not going to control the approval rates. And so you need to make sure that partner has the same idea you do about basically universal approval rate of yes, 100%. And that means only offering this On a Pre approved basis, etc. So lending is complex, not for the faint of heart. That may be a series C or series D move. I think you should use a partner, not become a lender. And even then you got to remember that what you should be most focused on is preserving your customer relationship, enhancing it and never harming.

Now, how many basis points you talked about adding? 15, 20 basis points. When you look at the whole fintech, I mean payments ecosystem, from payments to embedded payroll, what do you see? Embedding, lending, bringing in additional value.

You know, I haven't negotiated one of those deals in a little while and it does vary depending on the financial attractiveness of the loan. These, these lending companies, lending and service companies are think of it as them paying you a bounty. They're going to fund the loan and enjoy the ongoing loan economics. Usually they're going to pay you a percent of face value for a loan originated. If it's these merchant loans tend to be relatively high apr, high interest rate loans. It's a pretty risky category. And back in the day anyway, there were bounty rates in the 3 or 4% of face value that the software company could enjoy. So if you say 100 customers and 10% of them qualify for loans, they're on average 30,000 each. You've got 300,000 outstanding. Therefore of loans you're charging say three and a third percent. That means that you've got 10, 12, $15,000 worth of revenue up against that hundred customers. So you've increased your ARPU against that universe by 100 bucks, 120 bucks. Think of it as an annualized basis because a lot of these loans renew and you can go back to that base of 100 annually. You get an extra 10 bucks a month of 100% margin revenue by introducing a lending product. And if you do it right, you actually increase your retention because part of the deal is you can't bail on the software and the payments while you're still paying back the loan. And so you've added an element of stickiness to your product and a value proposition for your customer. Yeah, you think about like 10 bucks a month of high margin ARPU plus added retention. And is that worth the effort and risk of putting this all in place?

And in some cases you might see that as a net new acquisition. We started offering R and D financing and we're seeing customers just coming from that, not for the core product or in the case with Lenflo, a lot of their customers are coming through for the lending aspect and then end up buying the core product. So there's a few opportunities there. Let's switch to, to insurance. It seems like a non obvious one to me. It seemed like payments now seem like just very relevant.

Right.

Like the way like I am convinced that payments make sense, I'm convinced that lending makes sense. How does insurance fit into this landscape? It makes sense in the scheme of probably your system of record type of company that we talked about practice management, but it's not the most obvious one.

It's certainly not caught fire yet. Insurance always goes last. But let's do some sort of mind expanding exercises. So as you say, these practice management companies have a similar opportunity with small business insurance because of what they know. They just have so much knowledge. They know that their restaurant customer in this particular case is basically a bar because they see where the revenue is coming from and has events. That is a way worse customer for small business insurance than a white tablecloth restaurant. So they have an incredibly nuanced underwriting knowledge about their customer base. And again this really privileged channel through which to offer this insurance at what will be better premiums for the good customers because they can screen out the bad customers. But people don't buy insurance that frequently and they often have a relationship with a broker. Small business insurance is still an offline business and they're dealing with a human being who's quoting them. Insurance of a lot of different types. Right. It's not as simple as payments acceptance or a $30,000 cash advance. It's like you need a business owner policy, you need some slip and fall insurance, you need some workers comp. Oh, you probably need some health insurance. That's a big bundle of stuff that a software company is not going to displace anytime soon. It's slow. It's a real opportunity. The unfair data rich opportunity. That connection still exists. But insurance is still sold by hand right now. And so it's hard to displace using this sort of touchless software. But I think inevitable but not quick. Where we're actually seeing it is there's a company called Spot Insurance, very cool company in Austin, Texas, great founders. And they're selling what we think of as accidental death and dismemberment would be the term of ours. They're selling accident insurance. Think of it as like health insurance, but just for a day. And they're selling it through ski resorts and athletic events and through US cycling and all of these channels where people are going to engage in risky activities. And if you don't have good health insurance and you're going to go do an Ironman or you're going to go spend the day skiing. And telluride, like actually, $4 is a really good use of money to make sure that you have comprehensive care for that day. And in the, yes, unlikely but really problematic case where you end up with a massive injury, you want to make sure that someone else is paying your health care bills and you're getting the best care. So that's a great. Like if you went out and you started buying ads on the radio and saying buy daily accident insurance for $4 and it would be the most inefficient marketing funnel you could possibly imagine. I'm hearing that you're hearing that and the bounty is $4. So like the LTV is not worth buying a single ad anywhere. But being embedded in the checkout flow of a ski resort is free and hyper targeted. So I think you're going to see really distinctive insurance value propositions. Actually there's a company called Tomorrow that basically is a will product. So it enables you to, in this beautifully designed thing, set up a will or a trust or any one of the end of life planning documents. Like when you have a kid or whatever you're thinking, okay, I need one of those now. And it loops in your spouse and your beneficiaries and you create this network of all the folks who are germane to the process of setting up a will. The way they monetize is through selling life insurance. So they have all this data about you. You're thinking about end of life. You've just told them who your beneficiaries are and what your assets look like. You really opened your kimono to them and they're like, by the way, you could get a million dollars of term life for $32 a month in premium and that would feather directly into this will and trust and estate you're setting up. And their attach rates have been great. So it's very hard to sell life insurance. It's still sold at the kitchen table. But that's a really elegant, sticky, data rich moment to sell somebody life insurance. So I am long term bullish on unembedded insurance. But it is early days and I like that theme.

I think with everything is if you can bring it into the experience where somebody is already using your product, you already have their data and at some moment where they experience a point of value, then you upsell them, then that's the easier game with insurance though, is it you sell once and you make money on it. Commission on it, perpetuity Is that still the game with most of them?

It depends. Most of them I would say are still brokers, meaning ultimately the insurance products are being manufactured by insurance companies. These companies that are, these brokers that are creating this opportunity, that are selling the insurance generally are eager to collect all that money up front from a working capital perspective and the carriers are happy to pay up front. So I'd say in general the deals I've seen in embedded insurance are more bounty style upfront payments and same is true in lending on average. Now I think that will change over time because I think both in lending and insurance, which relative to payments are actually way more risk bearing fields of endeavor. And so I think the performance delta of the loans that are issued through software platforms and the insurance policies created through software platforms, they're going to perform so much better than other loans that the software companies are going to get more and more of the economics over time. And it'll be not just upfront but running economics against both the loans and the insurance policies. But where we are today in the early innings here is, it's more, I'm just originating this stuff. Pay me when I originated. You take care of all the servicing and managing the customer life cycle relative to this loan or this insurance policy.

How does the rise of crypto and decentralized finance play into this whole game of embedded fintech?

It's interesting. So I wrote this article in 2019 about embedded financial services and it really was positing that there were these two phases of the fintech market. Phase one was this analog to digital phase. So let's take a bank account, a wealth management account, a small business loan. Let's turn it from a paper based in person thing to a digital thing. And then phase two is now that these products are digital, they can be embedded in software and so they're going from being sold as discrete products. I'm going to go get a bank account at Revolut to being, I have a bank account at Starbucks and I have a bank account with a firm and I have all of these account based relationships with as a consumer, the sort of merchants I work with or other people that card from Apple. Now I don't need to go to Citibank to get a credit card. It's part of my phone. This phase we've been talking a lot about B2B embedded financial services as a whole consumer embedded financial services movement as well, and that's where we are today is these products are moving from discrete, even digital products to being embedded in Software. And I wrote something a few months ago that sort of like for the first time I can see what happens next, which is that these products are still very centralized. As I mentioned, there is still probably a bank doing the lending, right? These lending as a service companies get their money from somewhere, their wholesale funding from somewhere, or they may even sell off the loan. But at the end of the day, there's generally a bank involved. If you're going to store money, you're storing it in a bank. If you're going to issue an insurance policy, the regulators insist that it be regulated insurance carrier. And at the end of the day, even in payments, at the end of the day, Wells Fargo or Chase is probably actually the merchant processor, even though Stripe is who you deal with. So. And Visa and MasterCard control the routing and switching and authorization and authentication and settlement of all these card transactions. So it's all very centralized is my point. This is just a digitization and then a sort of embedding process in software. But it doesn't change the fundamental nature of this, which is that banks are still calling the shots, and through them, governments are controlling it. And we've all been through a lot in the past half decade where at least there's a segment of the population that wants decentralized versions of these things that want to use stablecoins for payment transactions. They're fast, they're cheap or free if you do it right. And they're not controlled by governments, they're delinked from fiat, inflation, et cetera. Now, when I say there's a segment, it's a tiny segment, but it's growing fast. And as it relates to lending, decentralized finance has provided these pools of capital where you can borrow and lend without an intermediary, without a bank. And I don't think it's tomorrow, I'm not even sure it's in the next five years. But ultimately the lending as a service chassis that a software company would plug into will very likely be a defi chassis where the pools of capital are sourced from these decentralized cryptography cryptographically secured accounts versus from a bank through one of the existing lending as a service companies. Now, I think the lending as a service vendors can harness defi. I'm not saying it puts them out of business, but my view strongly is that over the next 20, 30 years, decentralized forms of payments, lending and insurance will take share from the existing kind of universal centralized forms.

Now what do you think will be the biggest impact or what are you seeing in the fintech space in 2022, maybe this year, next year, coming out.

Of COVID The stock prices have gotten my attention. Lloyd, I Look, the beauty of being a founder is you don't have to care what's going on in the stock market if you're private, whatever. Let the craziness. You didn't have to care that Bill.com was trading at 50 times revenue and you don't have to care that it's now 25 times, except when you go out to raise money, because the audience you're speaking to will be paying attention to one extent or another. And so we do pay attention. And I'm personally of the view, if you had to ask me, that things in 2021 were unreasonable. Things look a lot more reasonable today as I look at the fintech universe of public companies. But they could go down another 50% and maybe then they'd start to look cheap, but maybe not. Again, you can find lots of people who think everything is still very unreasonable at these levels. And so I mention it because I think it is somewhat of an existential question for all of us whether a company that we're building, you're building, I'm investing in, we're all very much involved in. At the end of the day, if that company's going to be worth seven times cash flow is very different than if it's worth 25 times revenue. You would make very different decisions if you actually knew that it was the one versus the other. And so I think there is a way in which you should not let the stock market paralyze you and there's no point in spending negative energy on it. But it is an ongoing referendum on what your company's likely to be worth at some point. And I think you need to pay attention to that. And I do think the private funding markets will react to it eventually. I don't see it quite yet, but I. But it's. So, I guess wasn't exactly the question you were asking in terms of fintech trends, but to me, I think that is something that fintech founders need to be hip to.

A lot of fintech companies raised at massive 20, 30, 50x valuations in the last two years. And so this is good advice here. How should founders in general think about fundraising and valuations in this environment? I think last year, I know friends of mine who raised like two, three rounds, hundreds of millions in a matter of weeks to months. But is that mindset changed and maybe what are the metrics at each stage?

Yeah, I don't know that it's changed dramatically. We raise capital. And I know Alan Patrickoff is here and I'm honored that he would join. He raises capital. There's thousands of venture and growth firms who've raised capital. And we, it's not our job to time the market. We're going to invest that capital. That's what not only we're paid to do, but we're expected to do by our limited partners customers. And that company has that capital hasn't gone away. And all you need in the private rounds is one firm to lead you around generally. And so I don't think the prices are going to public market valuations are off 40 to 60%. We're not seeing that in the private market for the best companies. But I think the animal spirits have died down. And so I think that for marginal companies, for companies that have a good story but don't quite have the metrics and data, I think it will be harder. And I think for the very great companies, I think it was getting a little bit, I would say unprecedented in terms of multiples. You'd have four or five million dollars ARR companies raising at north of a billion dollars in value. And that's pulling forward a lot of growth. I would say that even if the growth seems likely and it's going to be hyper growth 4 to 25 to 75 to 150 or whatever, still when you pay a billion two for that company, you're believing a lot and pulling forward a lot. And so I think some of the steam has come out of that end of the market a little bit. But what's still the case is that we're paid to make predictions about the future not based on your sort of last month's reality. And you asked what are the metrics by stage, we're still doing plenty of pre seed and seed investing. I think pre seed, when you really have nothing but a few people founding the team had gotten to the point where sometimes pre seeds were being done in the teens or even 20 million. I think that's come in a bit. I think pre seeds that small, half a million to a million 5 pre seed will now be more in that 7 to 15 versus the 15 to 25. I think a seed round, 3 to 6 million dollars seed round had gotten to where 50 post was normal. I think that's already come back in a little bit to where 30, 35, maybe even lower into the 20s depending on what you've proven and who you are as a founder. Series A's had gotten huge $20 million, $18 million Series A's that were being done at 100 to 150 posts. I think that's got some room to come in and shrink a little bit to where series A is more like 12 to 15 and where it's more 60 to 80 post. At a series A now you should have revenue.

What kind of revenue I think a.

Million of recurring is. You're clearly ready for an A. Yesterday I looked at an A that was three and a half million of revenue. It's just what we used to call a B five years ago. Lloyd so that's kind of now your A because seeds have gotten big and pre seeds have emerged. I think what's interesting is going to be the B, C and D where you're talking about at a B sort of 5 to 10, at a C kind of 15 to 30. Those tend to be still like what is the metric? The metric is what do I think ARR is going to be at the end of the year? What do I think forward ARR is going to look like? I can look at the pipeline. I can understand sales realization. So I can actually pay based on maybe 12 month forward ARR. That's where we've been and we may stay there because I think the methods of forecasting have gotten quite good. So what do we pay on that? What's the multiple? I've seen it got as high as 20 to 30 times a year forward ARR feels like that's come in a little bit already. We've seen let me say two term sheets here recently that I've heard about that are more like that kind of 10 to 15 times year end error for companies that are to the point of predictability where we can be thoughtful about within a band what that number is going to be. I think the other thing we're seeing is that margins matter. We have some companies that because they're a tech enabled service or because they're a marketplace where GPV is passing through or because they have a lot of payments revenue where their gross margins are in the 30s and 40s. Those companies you should really look at on a net revenue basis if you're going to look apples to apples and revenue multiples. So I'm seeing sharper pencils in the start of 2022 than I did in 2021 on some of these.

And what sort of growth rates are appealing from C to A, A to B? Is it 200, is it 300? Is it 100? And then NRR?

I guess 100 plus percent, certainly NRR, 100 plus percent. It really depends on size. The we think of a company that's below 10 million in revenue should be tripling or better between 10 and 20. We still like to be more than doubling. We consider hypergrowth. And then when you get 30 and beyond, if you feel like you can double for a long time. We looked at a company yesterday as 30 going to 70. That's still squarely in hypergrowth. And again, that's where these incredible valuations come, is in that hyper growth. So north of 2x, when you're above 30, that gets people's attention. South of 2x, when you're even if you're above 30 people, it's a great company. Don't get me wrong, that's a really healthy company. Company. But then you're starting to talk about 10 times current ARR, which is again, where things had been and I think where things will be again now.

How much Runway do you want founders to be asking at an A or B? Is it because I feel like the dynamics have changed. People are always raising. It used to be like 18 months Runway. Now it's people are not raising for Runway raising whenever they can. What is the best practice around that?

Yeah, that has changed in the past two months. I think 18 months now feels like a minimum. I think annual raises were a nice luxury and even multiple times in a given year with many of our companies. And that may well still happen, but your job as the founders and CEO is to manage that risk, and so counting on that happening is not prudent. So I think if you're doing a raise now, you want to, at a minimum, feel very confident that it gets you 18 months. And frankly, I'd recommend 24 months. We don't know how long this lasts, whatever this is, and we don't know how deep it goes yet. We may have inflation, we may have huge rate cuts. We may then have a recession. There's a lot of forks in this tree. And your primary job is to stay alive, survive in advance. So I wouldn't cut it close on the fundraiser.

Keep it moving a little better every day and a little better every day.

I love it.

What's the one piece of unconventional advice founders typically ignore that you've seen, but shouldn't?

You know, I recommend radical candor. You know, I mean, there's a lot of schools of thought, but I would say in general, we're in the bullshitty phase of entrepreneurship, at least. You know, 27 years I've been doing this, and I definitely want to see that a founder can be persuasive and can sell and has a vision. What I really need is trust. And I think a lot of founders have been faking it till you make it swimming naked and this kind of market, I just think what you never want to lose trust. And there's no better way to gain trust than to tell things that seem like bad facts, but to tell them plainly and then go ahead and contextualize them. And more often than not, I think whatever the audience is, your employees, your investors, new investors, partners, customers, they'll actually give you massive points for telling the plain truth. And then they will believe you when you tell them why it's going to get better or why it doesn't matter or et cetera. And so I tend to be like a radical candor and transparency guy. And I think that's fallen a bit out of favor in entrepreneurship and I'd love to see it come back.

Any favorite books that grace your shelf or something you're reading, you recommend to entrepreneurs? And where can we follow you?

You can follow me attcharris on Twitter. That's the primary place. So this gonna come across like a little bit of bias, but my favorite book for founders is called 10% happier. It's about mindfulness. I think the thing that all founders know, that not everybody else knows is how hard it is, just how brutally hard it is, how buffeted you are by all these exogenous factors, by everything that's going on in your company, how few people you have to talk to about any of it. And so finding ways to manage your own brain, which can be your worst enemy sometimes, is, is a superpower that all founders need. My, my brother Dan Harris wrote this book 10% happier and has an app and a podcast and it's about meditation and mindfulness. And so I don't care if it's calm or headspace or 10% happier. But if you're a founder, if you're a senior person in one of these fast growing companies, find a way to get the self care you need. And to me that starts with mindfulness.

If you don't put the oxygen on yourself, you can't save the person next to you. What a great pleasure, Matt. Thank you so much for joining us. Wishing you great success. The next few decocorns in your lap.

Thank you Lloyd. Great to be here. I need some traction. You need some traction.

Thank you for listening. Listening and we hope you enjoyed this week's episode of the Tracktion podcast. If you enjoyed the show Please leave us a five star review and you can find more information and all the resources mentioned in today's episode at Boast AI. That's b o a s t AI blog.