Nigel Morris thinks a lot about language.
A common language — a lingua franca, as Morris calls it — is what allows the former co-founder of Capital One to collaborate effectively with his partners and employees at QED Investors, the Alexandria, Va.-based venture capital firm he founded in 2007.
Banks typically don't share a language with the fintechs in which he now invests, says Morris, and this difference lies at the heart of the disconnect he often sees between these two groups.
As QED's managing partner, Morris has made it his mission to bridge that linguistic and cultural divide, connecting the firm's portfolio companies, which include Credit Karma, Prosper, GreenSky and SoFi, to financial institutions.
"There was no grand plan," he said of his decision to become an investor after a decade building Capital One and two subsequent years spent broadening his outlook on the boards of The Economist and London Business School. "I'm making this up as I go along."
The truth is that he was too much of an operator to have felt fulfilled doing anything but helping companies grow.
American Banker recently caught up with Morris to learn more about the lessons he took away from Capital One, his view of the fintech space and QED's efforts to connect fintechs and banks.
What follows is our interview, which has been edited for length and clarity.
How did you become a venture capitalist? What did you learn at Capital One that has helped guide you as an investor in disruptive fintech startups?
NIGEL MORRIS: The Capital One diaspora is incredibly rich and vibrant, and here in Alexandria we are in the epicenter of it. Ideas started to come to us, and people started to come to us, and I said, "Look, maybe we should learn how to be investors." I knew how to recognize and enable talent, because that was a key pillar of Capital One's model. And I knew enough about financial services to recognize where the profit pools were. We started to make some investments in 2006, 2007 — but only on a very small scale, all our own money. I teamed up with Frank Rotman, the chief risk officer at Capital One. We started to put together a crackerjack team at QED — all ex-Capital One operators, all bringing incredibly unique, functional skills to the table, and who all speak the same language. We're able to use shorthand to communicate with each other, and we all grew up together and have an incredible bond of trust. That, to me, is incredibly important in an investment environment where you have to trust people's judgment.
What are some of the key investments QED has made?
We led the Series A round when Credit Karma had only a very small number of customers and a valuation that was only a few tens of millions, which was fantastic. Now, of course, it has 63 million customers. We saw the incredible benefit of it, creating transparency and empowerment for the consumer and a way of being able to deliver that consistently and monetize it.
In that same era, we invested early in SoFi—we saw the power of that model, of being able to offer student-loan consolidation to people who have gone to great schools and did very monetizable college degrees.
We invested in GreenSky very early—we led the A round there. That's gone incredibly well. We were an early investor in Braintree, which developed Venmo, so we got to see that in action and were part of scaling it.
We've been really lucky. We get tremendous positive selection of really great companies coming to us, and saying, "I think you at QED offer something really unique, given your backgrounds, and we're in the mood to listen."
You still see yourself as a kind of operator masquerading as an investor. How does that stance show itself in your relationships with QED's portfolio companies?
We are very open with our portfolio companies about our modus operandi during the mating process. I will sit down and say, "Look, if you just want money, we're not the place to go to. Other people have much deeper pockets and may be less vigilant and much more willing to take bets. But if you really want partnership, and you want to have people come to the table with you in a really open, positive way and look to help you build your business, and take the risk out of building something out of the ground, this could be a useful conversation."
The best relationships we have are where the CEO can call me up and say, "Nigel, I think I've really screwed up." Or, "Nigel, I don't know what to do." Those conversations are often very hard to have in the boardroom, and as a company matures and you have more professional money that's invested, it's even harder, and board meetings sadly become more perfunctory than content-oriented. We work a lot with our portfolio companies on what are the really big issues, how can we help you navigate them? What resources can we bring in terms of experience, analytical skills, relationships and partnerships? The ones who like that approach come to us, and the ones who don't like it, I think that's great, they can go off and do other things.
What are the major opportunities in fintech right now?
What we're seeing, when we really have unbridled, genuine conversations, [is that] people will say, "Look, the banks have some really important assets." What do they have? They've got low-cost, robust deposits. Many of them don't know how to lend very well, but they have deposits. They have regulatory access and, by and large, very effective compliance machinery, which is really important in this environment. They have customer bases. Now, some of them are good at selling, some of them are not; they're a whole lot more nervous about their cross-selling practices post-Wells Fargo, but they do have large customer bases. And, lastly, they have lots of earnings and have high profitability.
But what they don't have is a lot of things that the fintechs have. They start with, "I've got branches. What can I sell you?" rather than "Who's my potential consumer and what problem am I trying to solve, and can I do it remotely via a mobile phone?" Historically, the banks' strategy has been to be all things to all people, everywhere, all the time. That's not a strategy. A strategy is what you decide not to do.
Fintechs are increasingly playing in parts of the value chain where the banks aren't so good. Here's an example — 25 years ago, when Capital One came out of the ground, the national players like Capital One—followed by Citi and Chase and Bank of America—put many of the megaregionals out of the consumer lending space. They just couldn't compete in credit cards and installment loans. They never developed the DNA. A generation has gone by and they don't have that in their repertoire. But they have lots of deposits. So what we're seeing is the banks, particularly the big regionals, are beginning to team with the fintech companies that are originators of loans—think Lending Club, think Prosper, think OnDeck Capital. The value chain is starting to splinter, and the progressive banks are starting to say, "We don't have to be all things to everybody. We can recognize that other entities, fintechs, have enormous skills and we're going to figure out how to get two plus two to equal five." There are reasons why that hasn't taken off in quite the way that some people had predicted, but it can be done.
So what we have now, I think, is two very separate ecosystems that have very complementary skills and that are attempting to talk to each other. But it's a real challenge, because the banks fear the fintechs, because fintechs don't speak the same language, they don't have the same history, the same DNA, and they fear that the fintechs will cause downstream issues with the regulatory climate, and any force majeure with the regulators has to be avoided at all costs. And, candidly, the fintechs have real trouble relating to the banks. They can't navigate them well, they don't understand the banks what the banks are saying. The fintechs can often come off as arrogant and complacent with banks that are really fearful about looking after the family jewels. They don't speak the same language.
So you see opportunity for QED Investors in trying to bridge the two.
At QED we have a foot in both worlds. We've forged in the last six months two groundbreaking relationships—one with Fifth Third in Cincinnati and one with ScotiaBank in Toronto. We recognize the tremendous assets that they bring, we trust them and know the people there, and they recognize that we have a view into and an ability to curate fintech ideas and companies that they should be looking at and figuring out how to leverage, rather than them attempting to de novo all of this themselves.
Banks have tremendous assets, but they can't compete easily with the fintechs. The fintechs have tremendous assets, but they don't have the things banks have that can help them scale. Starting from that fundamental premise, we've said, "At QED, how can we be catalysts to create a win-win-win?" It's a win for Fifth Third because we can bring curated, evaluated, fintechs to the table, where we can say, "Look, this is what these folks are really good at and here's why you should listen; and here's how the assets you have can enable them and you can profit from it and it can bring real value to your customer base." There's also a win for the fintech, because the fintech covets the assets of Fifth Third but doesn't know how to navigate Fifth Third very easily, and doesn't know how to tell its story in a way that facilitates the digestion of what the startup's business model is. The fintech is often much more adroit at pitching venture capital than at pitching banks, and they're very different story lines. And the third win is for us, because if the portfolio company wins by being able to grow and scale, then we've added value to our portfolio, and we've built tighter relationships with the Fifth Thirds or the Scotias, and therefore they're more willing to listen to new ideas that we bring to the table.
How are the bank partnerships going so far?
We have relationships consummated with both of them. This is a pretty innovative structure, so we didn't forge it overnight. Fifth Third has invested in GreenSky, one of our portfolio companies; they made a large investment there. They've also invested in ApplePie Capital, which is another portfolio company—one that we curated and brought to Fifth Third, which is a franchise lending model, and that's gone very well. Fifth Third just invested in AvidXchange, which is a payments business, and they invested there alongside us. So I can point to three in the last three or four months where Fifth Third has engaged.
Our focus with Scotia is much more on Latin America. Scotia has an enormous footprint in all of the LatAm and Central American countries outside of Brazil. We've made four or five investments in Brazil solo, but we're looking to partner with Scotia in LatAm, and we're talking about half a dozen really interesting companies that we are looking to have work with Scotia as we speak. So I can't speak to specific consummations with Scotia, but I can tell you that there's an enormous amount of energy and commitment. They have dedicated people who are working with us, and we're spending quite a bit of time up there in Toronto. My partner, Bill Cilluffo, just spent two weeks running around Latin America talking to Scotia people on the ground in Peru, and in Colombia, and in Mexico, looking for those kinds of opportunities. It's got a lot of promise.