Hello Guys, welcome to the Fintech Espresso Break. I’m your host, Isabelle Castro. This week, I sat down with Daniel Ballen, Co-Head and Companion at Portage Capital Options, to speak concerning the startup funding surroundings.
Startups have been going through a frigid local weather for funding, exacerbated by March’s banking disaster and ongoing charge hikes. Demand is excessive, however provide is low, and VCs have needed to regulate their methods. I spoke to Daniel about his outlook for fintech funding and the way Portage has tailored its strategy.
Isabelle Castro
Hey Daniel, how are you at present?
Daniel Ballen
Hey, nice. Nice being right here. Thanks for having me on.
Isabelle Castro
Yeah, good to have you ever right here. I’m actually comfortable to welcome you to the Fintech Nexus places of work. So to start with what will get you up within the morning?
Daniel Ballen
Nice query. I feel there’s a literal and figurative reply to that query, figuratively. I really like what I do. I really like fixing difficult issues, advanced issues. I really like the daily of investing in, within the fintech world. Actually, it’s my three and a half 12 months previous toddler who remains to be leaping up on me within the mattress every morning and waking me up at ungodly hours within the morning. So
Isabelle Castro
nicely, that’s a stunning solution to get up.
Daniel Ballen
It had its appeal for the primary few months, and now it’s extra tiring.
Isabelle Castro
Yeah, I can think about quite a lot of lack of sleep, proper?
Daniel Ballen
Sure. Not as dangerous because it was when he was an toddler, however
Isabelle Castro
Okay, good. Okay. And so inform me a bit about your profession journey and the way you got here to Portage?
Daniel Ballen
Yeah, you understand, I’ve spent most likely about 20 years simply investing in and round monetary companies and fintech labored at a wide range of companies began off on the advisory aspect at Bear Stearns, method again when, after which, you understand, moved to a couple companies in between Bain Capital Companions, after which I used to be at PIMCO for various years. And I’ve all the time been investing in, you understand, sort of progress oriented companies, thrilling tales in North America and Europe and round monetary companies. And I used to be trying to do one thing a bit extra entrepreneurial. With my profession, actually constructing a brand new platform, I assumed it was a very fascinating time to construct this type of later stage technique had gotten to know the the management at Portage, Portage a part of the Sagard ecosystem is absolutely been some of the profitable fintech buyers over the previous decade. And it was an ideal place to launch a later stage effort. So that you spent quite a lot of time with the staff. Devin, my co lead within the technique joined across the identical time, and it’s been a very nice story ever since.
Isabelle Castro
Good. Yeah. I’ve talked to some folks from Portage earlier than. And I really like your technique and the way in which you strategy fintech investing. Okay, so let’s get all the way down to it. What’s the outlook in the meanwhile for fintech investing? And fundraising on the whole?
Daniel Ballen
So you understand, we’ve, we’ve sort of drank the Kool Help when it comes to you understand, fintech and the long-term secular developments across the business. You recognize, clearly there’s been a dislocation over the previous couple of years. However over the long run, there are nonetheless so many truly antiquated areas of economic companies, you understand, the areas of insurance coverage, Wealth Administration, banking, lending funds, that also are ripe for disruption. And there are simply fascinating new applied sciences and companies and merchandise that you understand, are born each day that may proceed to take share from sort of the old-fashioned on-line monetary companies corporations that dominate. So long-term very bullish. Clearly we’re in a interval of a little bit of a dislocation. Within the close to time period, it’s more durable for for companies which can be attempting to innovate and put money into r&d and progress as a result of the that liquidity is rather more scarce. However you understand, I feel they’re nonetheless actually fascinating corporations which can be doing nicely proving their enterprise mannequin have reached sort of profitability and will likely be independent. And people will succeed the place that liquidity strain isn’t as acute have
Isabelle Castro
the current sort of macroeconomic situations for the fintech surroundings, have they modified the way in which that you’re approaching? The way you fund corporations and fund progress?
Daniel Ballen
Yeah, completely. There are quite a lot of concerns, I’ll say, you understand, the macro image is general destructive for lots of those fintech companies, however there are additionally sort of, I wouldn’t name them unintended penalties. However there are industries which can be really benefiting fairly a bit from larger rates of interest which can be benefiting from inflation which can be benefiting from elevated mortgage charges. And simply to present you an instance, you understand, housing within the US drives quite a lot of monetary selections that you understand, some folks’s houses is the most important asset that that they’ve as pertains to their web price. As a result of lots of people are actually anchored to extraordinarily low mortgages, two and a half p.c. Housing mobility has dropped dramatically, proper? i The power even to improve my residence, if I’m paying a 7% mortgage, you understand that that monetary math simply doesn’t actually work for most individuals. So what do you do when you’re caught in your house? Nicely, you might have further liquidity, you’ll be able to enhance your house. So there’s really great demand for Dwelling Enchancment lending, Dwelling Enchancment, your services in and round that ecosystem. And there’s additionally quite a lot of demand for merchandise that can help you faucet into your house fairness if you wish to make an enormous buy if you wish to consolidate bank card debt or, or different liabilities. So there are quite a lot of corporations, whether or not it’s, you understand, providing HELOC or second lien mortgages that don’t contact, you understand, the actually treasured two and a half p.c first lien which can be benefiting so I feel we, you understand, the macro image will not be black and white, there are sort of nuances to, to how sure industries are affected. However I feel general, I feel as different buyers have performed, there’s undoubtedly an elevated emphasis on decreasing burn having, you understand, runway and liquidity wanted to proceed working and rising for an extended interval than would have been, you understand, worth environment friendly within the 2021. Code bubble, however you might have 2021 macro image, within the sense which you can actually assure that you just’re going to have the ability to increase cash and in, you understand, a 12 months from now as that was sort of a really predictable end result for corporations of that measurement. So that you deal with liquidity. However you understand, there are nuances in between.
Isabelle Castro
I’m glad you introduced up the sort of change in how individuals are like they’re not taking it as a on condition that they’re going to have fundraising subsequent 12 months. Have you ever seen within the founders and the entrepreneurs that you just work with? How have they modified their strategy to take account that they won’t get funding subsequent 12 months?
Daniel Ballen
Yeah, it’s that is most likely essentially the most fascinating facet of the present market and Portage that our chief stage fund will not be a standard Development Fund, within the sense that now we have purposefully in-built quite a lot of flexibility to construct in bells and whistles to our funding that might counterbalance a possibly a better valuation than then we’d be accustomed to investing behind if we had a standard progress fairness fund. So constructing in issues like draw back safety, you understand, return safety, different kinds of governance options, the place let’s imagine, hey, we expect this firm is price in actuality 600 million, however we’re high-quality investing at 700 800 million. So what that does, is definitely given us a very nice purview into the thoughts of those entrepreneurs, administration groups and shareholders as a result of we’re giving them the flexibleness and so they can sort of decide and select which method they wish to go. So I feel there are some things that they’re doing. One is that they’re specializing in much less dilutive capital, I feel our fund would qualify, however they’re taking a look at enterprise debt, they’re taking a look at different forms of sort of credit score merchandise that possibly don’t in embrace promoting or diluting the fairness, that are round however difficult to search out in your organization has to suit a sure profile, we’re seeing inside arounds, the place an organization will go to market, they don’t actually get the valuation that they need, present shareholders will put cash in most likely a lot much less so than that they had anticipated elevating within the exterior market, simply to sort of kick the can down the highway and say, we’ll put in sufficient to handle by way of a time frame when till the markets get better. We’re seeing extra of that as the general public markets begin to get better a bit, it’s giving folks a bit extra optimism round, you’re having a greater fundraising surroundings a 12 months from now and sort of stalling in a sure method. After which we’re seeing folks minimize, you understand, riffs are quite common slicing bills, you understand, it’s, it’s, it’s laborious to say whether or not, you understand, they’re doing it in an applicable method, or in a method that’s not sacrificing an excessive amount of progress charge, you might minimize, you understand, 80% of the employees of an organization and it’ll like sort of chug alongside for a brief time frame earlier than issues collapse. So there’s sort of a cheerful medium of how to try this appropriately. However I feel individuals are attempting to sluggish burn as a lot as possible. And generally it’s a mix of all of the above,
Isabelle Castro
what do you assume are going to be the important thing differentiators are their key differentiators? Or does it actually depend upon the enterprise? The place they’re? And the way to begin with? Okay, that’s my query. To start with, are there key differentiators between those that may do nicely, and those that received’t? And what are they? If there are.
Daniel Ballen
I feel the traits of profitable corporations to truly doesn’t change a lot in several environments. You recognize, I feel you’re in search of sustainable enterprise fashions, nice unit economics, actually nice groups, I feel, you understand, the standard of administration is as vital now as ever. After which, you understand, areas the place there’s an actual sort of barrier to entry. Yeah, I feel these are these are nonetheless basic traits of companies that may succeed and issues that we search for as different buyers do. I feel in 2021, and 2020, and answering that sort of bubble interval. It’s it’s not that individuals weren’t in search of these. I feel it’s simply that the bar was a lot decrease for what would sort of qualify as as an investable firm after which you understand, at Extra folks than not have been in a position to increase capital. So I feel there’ll be sort of a flushing of the system. Persons are extra selective. There’ll be a flight to high quality, however I feel they may nonetheless do nicely.
Isabelle Castro
Okay. Yeah, I’ve talked to a couple folks. And so they’re saying there’s a shift from progress in any respect prices. I imply, you might see that in a few of the people who have launched earnings lately, they did an enormous quantity of cuts. And now they’re really doing actually, rather well. I’m not gonna point out them. However yeah,
Daniel Ballen
nicely, I feel we’ve all seen the press round individuals who labored at Fb and made like, a whole lot of $1,000 a 12 months and simply mentioned, Oh, really, it actually didn’t do something all day. I imply, it’s simply, it’s sort of astounding, the fats and the system. And I feel individuals are nonetheless attempting to determine that out. And, yeah, and, you understand, the AI part is, you understand, provides an fascinating overlay to that, like, what’s the applicable staffing stage to, to maintain, you understand, progress and to take care of my operations? However, yeah, I imply, essentially, progress will not be the tip all be all in the meanwhile.
Isabelle Castro
Do you see AI? Now that you just’ve talked about it? Do you see AI affecting quite a lot of these companies that you just’re investing in? How they strategy the place they’re rising? I do know, quite a lot of them are placing it into their methods. And everybody’s obtained some sort of AI technique. However is that this like, with the workforce? And all of that? Do you assume that’s going to actually have an effect on how they develop going ahead?
Daniel Ballen
Yeah. So you understand, I don’t have a crystal ball as to how AI develops over the subsequent 10 years, I feel it’s clearly an interesting expertise, it appears to have sort of hit everybody sort of blindsided and got here into nowhere in some respects, however it’s been sort of a expertise has been talked about and labored on for many years. You recognize, I’d simply say, I’ve actually seen AI be integrated into managing displays and fundraising displays, I feel, folks, you understand, when there’s a very scorching space of the enterprise world, or a scorching space of the expertise world, folks attempt to sort of leverage that sort of glow into their very own enterprise. And, and you may sort of cheaply and incorporate AI into your present operations, it doesn’t matter what you do, you are able to do it right here and have aI provide you with questions and say, Oh, I’m an AI pushed podcast, proper. However, however I feel it’s within the close to time period, we have been simply undoubtedly seeing corporations experiments. In on sort of the engineering expertise aspect, you understand, with like software program improvement, you might have talked to engineers who could have sort of sure AI pushed instruments provide you with options, and then you definitely’d have you understand, engineers evaluation it. And so it’s considerably of a time saving measure, they are saying, 5% of the time, the AI software will provide you with one thing intelligent that they hadn’t considered. So it’s been useful. I don’t see it, I haven’t seen it but. Like actually, essentially modified the the staffing of companies have like, I don’t want a sure division or I can minimize issues dramatically, as a result of I’ve now you understand, an AI software that may change that functionality. However you understand, the long run might change issues change issues dramatically. So it’s undoubtedly talked about extra sizzle than steak in the meanwhile, however that might change.
Isabelle Castro
Okay, I like that saying extra sizzle, that steak. It’s good. So that you talked about earlier that you just noticed sort of firm is concentrated in direction of sort of residence enhancements, that sector is doing fairly nicely on this surroundings? What are the opposite sectors that you just’re seeing that, uh, maybe doing higher at this than others?
Daniel Ballen
Yeah, so there are within the close to time period, there are, there are undoubtedly quite a lot of companies that could be counter cyclical in and round like shopper credit score. So like debt decision, debt restore, I imply, shopper credit score ranges are, are fairly excessive from a historic foundation, like they may and are positioned to do nicely, when when issues doubtlessly flip or if individuals are over levered. You’re servicing collections companies as a result of there’s only a bigger sort of principal steadiness of these receivables out on the earth. There are additionally different corporations that maintain shopper deposits or money that aren’t actually within the enterprise of paying out curiosity and get away with out paying curiosity that profit tremendously when when charges are larger. So there are a few public corporations within the US one known as the Bancorp as soon as referred to as was referred to as meta now it’s referred to as Password monetary. And when you purchase like a present card, or you probably have a now we have like these well being financial savings accounts within the US the place you simply have cash sitting someplace, it’s not quite a bit. And it’s your helps you pay well being bills. customers aren’t actually accustomed to getting curiosity off of that as they’d a standard checking account. So you might have an organization that possibly aggregates quite a lot of these well being financial savings accounts. In order that they have a bunch of money that sits there they’ll predict when it’s going to be wanted. To be dispersed, they’ll take that money and, and make investments it in danger free as a substitute of 0%. Now it’s sort of 5%. Proper? So all of that’s margin that goes to the underside line of that firm, that that sort of manages that. That account and, and the HSA is one instance, there are quite a lot of completely different accounts like that within the pay as you go world and, and their banking as a service suppliers that maintain money in a sure method the place they’ll get that margin. So there are different corporations that may do nicely, due to that.
Isabelle Castro
And fundraising as a complete. It’s not that this this what you’re saying?
Daniel Ballen
It’s debt is a powerful phrase. I feel issues go in waves, proper. I feel everyone seems to be anchored to what fundraising was like in 2021. That was an enormous historic aberration. Really, when you have a look at the degrees at present, it’s not just like the lowest in 20 years, we’re sort of again to the mid aughts, like 1415 ranges of fundraising. So I feel it’s, it’s most likely overshot the opposite method a little bit bit, particularly in sort of a later stage aspect. You recognize, I feel the seed a world is mostly okay. You’re the BC D pre IPO has been more durable, which is a part of the thesis of why we got here in in that space. However, you understand, it’s, it’ll most likely come again, you understand, I don’t assume it’ll ever get again to the degrees of 21. However, you understand, who is aware of? No crystal ball?
Isabelle Castro
That’s precisely no crystal ball. That’s a disgrace that I received’t return to that, once more, no crystal ball. So let’s go previous this 12 months. I do know you don’t have a crystal ball. However you’ll be able to see sort of what’s occurring. What’s your outlook? What’s your outlook for the fintech sector and the fundraising surroundings? For fundraising?
Daniel Ballen
I feel, I feel it can enhance within the areas that it’s been tough, once more, in this type of mid to late stage, maturity of firm, I feel it can enhance. And I feel it’s, if you undergo these, your largest areas, I feel there’s simply the uncertainty will create quite a lot of simply apprehension from anybody, any investor and LPs, which has a second order impact on buyers have identical to, we don’t actually understand how that is going to get settled. We don’t wish to catch a falling knife or pause. So, you understand, fundraising was was extraordinarily low, you understand, earlier this 12 months, as folks attempt to determine what’s taking place, you understand, inflation charges stored going up. Now we’re seeing that sort of stage off, I feel folks will search for stability. And I feel we’re beginning to see the weather of that. So I’d count on in two, three years that, you understand, I feel there’s a lot much less apprehension, there’s nonetheless, you understand, I feel, choice, you understand, hiding of sort of choice standards. However I feel it’ll it’ll sort of be on the upswing at that time.
Isabelle Castro
Okay, that’s optimistic. That’s good. Are there any elements that may have an effect on that? Do you assume
Daniel Ballen
it can, after all, I imply, the macro image may change dramatically? You recognize, I feel there’s geopolitical occasions that might even have have an impact. If China invades Taiwan subsequent 12 months, like, I feel all bets are off, you understand, there are issues which can be tail dangers that, you understand, I feel folks are likely to, you understand, possibly have a decrease sense of the likelihood than the fact of of that the likelihood of that occasion in Russia and Ukraine, and nobody would have predicted it. And it’s, I feel these items are all the time going to be on the market. However you’re the macro image. I feel there’s nonetheless uncertainty. Inflation appears tame, however that might change. We now have an election developing subsequent 12 months that some folks have heard of, however which will influence how folks view the sort of subsequent 4 years no less than of sort of the financial regulatory surroundings. So we’ll see.
Isabelle Castro
I suppose, like, for the reason that pandemic something.
Daniel Ballen
Yeah, like who would have predicted that?
Isabelle Castro
yeah. Okay. And what’s a bit of recommendation that you’d give to founders to anybody actually inside this surroundings.
Daniel Ballen
So that is, is a very biassed and self serving. However you understand, I’m interacting with administration groups on a regular basis. And I after all, as soon as somebody, if I current them a deal, like they need to take my deal, we needs to be companions and make a bunch of cash collectively. And I’ve seen some administration groups and shareholders probably not settle for the fact of the place the phrases and valuations are. And so they say no, nicely neglect, it can return out in six to 12 months. There are examples. And I get will give a few seconds of corporations that, you understand, they didn’t get precisely the valuation they needed a 12 months in the past, and so they did a little bit little bit of an inside spherical or possibly they raised a little bit little bit of enterprise debt. After which you understand, they went again out once more to lift cash. They didn’t get precisely what they need is that they mentioned no. And there have been a pair examples of these corporations going bankrupt, proper, you simply it with out the liquidity is the most important existential threat for these sorts. as a result of when you run out of cash, there’s nothing you are able to do. And as you get nearer to working out, really your choices change into extra restricted since you change into a distressed state of affairs and issues change into rather more fraud. And, you understand, I feel, you understand, these capital raises elevating 50 or 100 million. It’s, it’s, it’s dilutive, however in some instances, you’re promoting, you understand, 510 15% of your of what you are promoting, you understand, when you thought what you are promoting needs to be valued rather more extremely, possibly the variations you promote 15% as a substitute of 10. However you’re getting the liquidity to actually survive and doubtlessly thrive and go on offence in a market the place that that really has a very good ROI on it, as a result of others are pulling again, I feel. Yeah, my recommendation is to consider carefully about saying no to liquidity on this on this surroundings. Okay,
Isabelle Castro
cool. That’s a very good piece of recommendation, I’d say. Your curveball query. Okay. What would your life’s music
Daniel Ballen
be? Oh, boy. So I’m really going to see Billy Joel tonight, which I’m very enthusiastic about. I don’t know both. Perhaps an enormous fan of yours on the piano man. Yeah, I don’t know. I feel simply serving to sort of orchestrate all facets of my life and possibly through through music. It simply feels that’s what I like doing simply being concerned in quite a lot of various things and whether or not it’s household work, in any other case, however I feel that’s simply so pushed by my live performance tickets tonight, however
Isabelle Castro
it’s a very good reply. I’m gonna hearken to it afterwards, as a result of I don’t know. However
Daniel Ballen
oh, yeah. It’s a traditional music. You’ll actually take pleasure in it. Okay,
Isabelle Castro
cool. Nicely, thanks. Thanks for coming in. Yeah, I actually loved speaking to you, and have an ideal remainder of your day.
Daniel Ballen
Thanks, Isabelle. Actually respect it. Actually excited to be on. Recognize the time.
Isabelle Castro
As all the time, you’ll be able to attain out and chat with me on my private LinkedIn or Twitter @IZYCastrowrites. However for entry to nice every day content material, take a look at Fintech Nexus on LinkedIn, Twitter, Fb or Instagram. You too can join our every day publication bringing information straight to your inbox. For extra fintech podcast enjoyable, take a look at the web site, the place yow will discover extra fascinating conversations hosted by Peter Renton and Todd Anderson. That’s it from me. Till subsequent time, take pleasure in your downtime.
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