Transcription:
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Penny Crosman (00:04):
Welcome to the American Banker Podcast. I'm Penny Crosman. It's been a rough year for fintechs and for venture capital funding of fintechs. Venture capital flows into financial technology companies dropped by about 36% year over year to 6 billion in the third quarter of 2023. According to S&P funding, deal volumes dropped 39% to 484 transactions. Can we expect things to look up in 2024? We're here today with Amy Nauiokas, the founder and chief executive officer of Anthemis Group. Welcome, Amy.
Amy Nauiokas (00:41):
Thank you, Penny. It's so nice to be here.
Penny Crosman (00:43):
Thanks for coming. So in case people aren't that familiar with Anthemis, can you tell us a little bit about Anthemis' approach to funding and philosophy toward investing in its mission?
Amy Nauiokas (00:58):
Yeah, well, it's such a great way to open. Just kind of give me that sort of giant softball of sorts.
(01:05)
Well, we embarked on the journey of Anthemis just about 15 years ago now, and it was at a time when the financial services industry generally, and certainly the wider financial system was in desperate need of an overhaul. All the technological signs were there, 2008, smartphones, social media changes in regulation. It was all sort of bubbling around, but it was really clear to us, my partner, Sean and I, that how this transformation occurred and how this evolution started to happen would have a lot to do with who drove it and the way they drove it. And so I guess our premise then is very similar or almost exactly same as our mission today, which remains unchanged. We deploy financial, human and intellectual capital in service of a financial system overhaul in a way that makes the markets more fair, transparent, and therefore resilient. And in doing so, we think we are trying to strengthen the global economy, and I think more specifically, we invest off of a thesis.
(02:17)
Our thesis, it's sort of a general embedded finance thesis that enables us to deploy capital across stages of different parts of the investment cycle against companies that are evolving both the industry itself, so your traditional arcs like banking, asset management, capital markets and insurance, but also deploying in a way that supports the infrastructure layer that enables multiple industries to be supported along those financial rails. And we do it with a very deep understanding of the ecosystem of financial services with a very deep level of connectivity. Many of us, if not all of us, are our financial financianal services professionals, and so we guide ourselves with a really clear understanding that any evolution that happens in this marketplace will happen at the hands of the insiders as much as the outsiders. And so a big part of our strategy is around collaborating with the industry to see the change that we believe can happen.
Penny Crosman (03:18):
It's interesting because I've been kind of watching this space since 2008 and I am actually doing another podcast on this topic, but what do you think about the way that the whole FinTech movement has evolved over the past 15 ish years? Do you feel that because in the beginning there was a lot of that idealism and some of that you expressed making financial services more fair and more efficient, easier to use and giving people a better deal. To what extent do you feel like those ideals have been realized?
Amy Nauiokas (03:55):
Yeah, I love that you used the word movement because that's sort of the mindset that we try to keep ourselves in, particularly on days when it gets really tough. In the last couple of years, it's been particularly tough. I don't actually believe, if you go back to 2008, and I had the benefit of having been here from the beginning really of what has become this FinTech revolution of sorts. But also even before that, having worked through the nineties and the naughties in financial services and in around technology, I don't believe that the early players in this space had any indication that there was a movement happening or that a movement could happen and that it would be about changing the system for better. I actually think for a very long time we were singular in that effort and it was actually really difficult at times to get people excited about what we were doing because it didn't make a lot of sense.
(04:55)
What do you mean you want to try to do more than no harm in this industry? What do you mean you want to deploy capital in a way that is more fair and equitable? What do you mean? You want to put it in hands that have never seen the likes of venture capital equity before? These were all ideas that were not unique to the world, but they were certainly unique to the industry when we got started. And I think that period between 2008 to 2015 was raw with a lot of pushback and a lot of frustration. And so any movement that we thought we were igniting or that we were hoping to be a part of felt really lonely. I think in 2015, what changed was you had this sort of uptick in the both availability of capital in the industry and the kind of sexy factor of being in FinTech and being an investor in FinTech or even being an entrepreneur in FinTech.
(05:53)
And so it brought a number of people out. That part of the movement I think was important because the more people began to understand the importance of change, no matter how you do that change, the more the industry became mature in its sort of ability to sort of suggest that there could be a different scenario. But I don't believe many of the people in 2015 that jumped into the market and really the ones that we saw from 2015 to 2020 were necessarily doing this with a purpose that was better than just making money. What changed though was that because we could now talk about FinTech, we can now talk about the fact that things could be different. It enabled people who were working at incumbents, people that were thinking about doing something in this industry from another industry to actually think that it could happen.
(06:47)
And that was a great lever because it gave us as sort of movement early adopters of a movement or early movement participants, a lot more confidence that we weren't alone and there were a significant number of people that felt like a tribe could be formed. And so that was actually really exciting period of time. I think for me, my favorite period of time in this was around 2020 when the conversations that we used to have and either get laughed out of rooms for or we'd have a conversation and would be questioned, well, how's that going to work? Or there aren't enough women to go around or there are not enough people of color to go around. None of the things that people would throw at us felt legitimate. They just felt like reasons to block doing things better. And I think in 2020, the world opened up a little bit more to appreciate this is a thing that does take a movement and it does take a lot of people and it's not going away.
(07:50)
Now we could argue that where we landed at the end of 2023, which isn't much better in the service of putting the capital in different people's hands or creating companies that are better for the industry is exactly where we want to be. But systems change takes a really long time. We did not go on into this in 2008 thinking this was going to be a five year, 10 year, 20 year, 30 year game. We were in it for the long haul. And I do think that there is genuinely a movement afoot now that didn't exist in 2008. And that gives me hope and confidence that there will be more of, and I don't want to say not every company that's ever going to be built is going to be built with the same core tenets of the Anthemis mission in part right to do more than no harm. But I think the more people that are keeping one another accountable and in check and recognizing that there's a responsibility for those of us who are deploying capital or building companies to support something that helps make the economy more resilient, not less resilient. And that's a big, big, big change I think as we go into 2024.
Penny Crosman (09:09):
Well, the last year was pretty tough for a lot of people in this movement, if that's what we call it. We had the banking crisis where Silicon Valley Bank, which was the bank to a lot of fintech and other startups collapsed and Signature and First Republic and a few others also went through their struggles. And you also have seen a lot of fintechs, especially the ones that are customer facing and what I think of as challengers where they're trying to offer something different to consumers like digital banking, early wage access, consumer loans and things of that nature. A lot of those companies have had a rough time. We've seen a lot of layoffs. We've seen a lot of analysts questioning business models and the idea that you could just live off of the interchange fee income from people swiping their cards. So it's been challenging and I think it's been challenging for some of the venture capitalists too. What do you think about when you reflect on the past year and do you think it will bring about any change for venture capitalists or for you and your company? Yeah,
Amy Nauiokas (10:40):
I mean it already has. I think when I look at the last, I would actually say probably the last two years, 2022 for me was a year that I think represented a significant amount of reckoning. That was where we saw the days of free money dry up, the pressure and the stress on private equity across the board really beginning to happen. And I think that some of the events of 2023 that you point out the collapse of SVB, some of the other treasure points in the industry had a lot to do with the exuberance and overexuberance of 21 and 2022. And as you started to see people back off in 2022, and we looked at the beginning of 2023 is really a reset, a lot of reflection this year and a lot of reshaping. So I actually think that some of the things that you're pointing out that have been the problems of the industry are also the biggest opportunities as we move into 2024.
(11:39)
So in 2023, we saw from the asset management perspective, a lot of the venture capitalists that were deploying were gone. Many of them exited completely. Others have reshaped or shrunk their platforms or determined that they weren't going to go for the next round. They've shrunk or reshaped their teams. In many cases, their thesis tightened and they're no longer deploying capital against certain parts of the thesis. Your point around these sort of big branded consumer focusing businesses are getting a lot of attention, have gotten a lot of attention, and we're the driver of a lot of the exuberance of 21 and 22. But now they're also the biggest losers when you look at the end of 2022 and into 23. And I think there's reason for that, right? Because a lot of the people that were in that industry from that sort of period that I categorized as sort of like 2015, saw a lot of experts from the industry come in 2020, saw a lot of everybody come in.
(12:39)
And I think we have to appreciate that this industry is unique in the power of its incumbent community. It is still very concentrated. And a lot of the big banks, the big insurance companies and the big asset managers, the big wealth managers, they live in a highly regulated, highly complex structure that is not always so easy to understand. And it actually, part of the way most people in this industry make money is keeping it complex. And so the folks that have been playing in this space, and I do mean playing up egos of founders to make them think their companies are worth X billions of dollars when they haven't even figured out a product yet, this is the type of stuff that needed to go away. And so for me, 2023 was a bit of a breath out. We could sort of see the dust settling, we could see the froth disappearing.
(13:38)
We can see a return of rationality in this space. And even those who had capital to deploy this year went very slowly, went deliberately slowly because they could, it was sort of as if we were all waiting to see who was left at the end of this year. And I think that that's a really good sign for 2024 because when I look around the industry and I think about who the change makers and the deployers of capital are going to be from January onward, it's a lot of the original guard. A lot of the folks that have only done FinTech investing or only been in this sort of financial services space and know it really well that we are, are incredibly well networked. We are incredibly well aligned with what's happening in the larger industry. And so I think we are going to be the best chance for the future of the evolution. And I think that in most cases, I wouldn't say that having an insular smaller community with less diversity of types of people is good. But in this particular moment in FinTech, I think knowing that the folks that are going to be leading in 2024 and beyond know what they're doing in this space is a high probability that the industry and the sub-sector of the industry is going to recover and recover in a way that is really powerful.
Penny Crosman (15:09):
It's interesting this, it's been kind of a shakeout and an appropriate one. It is a little bit of a tangent, but someone here is working on a card show about FinTech layoffs of the past year because there've been many. But I have a hypothesis that a lot of these companies just overhired in the wake of the pandemic and that again, they're getting to a more appropriate level of staffing in some cases. And some
Amy Nauiokas (15:36):
Of them are I hundred percent, right? Yeah, I think that's right. I mean, there was a lot of over-hiring. I think there's also a lot of, we also just we're coming off of, not even coming out of, but still very much coming off of the pandemic and the backlash of burnout that people are feeling. And so I think there's a lot of folks who have wonderful jobs who during the sort of height of 2016, 17, 18, 19, 20 had a wonderful job. They were getting paid, they were getting raises, they were being told, do whatever you want. It's your game. And there's been a lot of pressure now for those folks because it's time to actually tighten the bell and really dig in, and we don't have a lot of time or energy to take as many chances and play as many games anymore. And I think actually that has a huge impact on employee base too, which I would point out that the growth of VC generally and certainly in FinTech has been in such a short period of time that the majority of the employees that are working in VC have not yet seen or lived through a down cycle.
(16:45)
And I think it's another reason why I'm feeling emboldened and enthusiastic and frankly encouraged that 2024 is going to be led by people who have done this before and who have been around the block, so to speak, because it's going to take that level of leadership to help folks that have to learn how to invest in a down cycle to do exactly that. And I think that's why you saw a lot of nothing in 2023. A lot of folks in the industry close some pretty big pots of capital in the last couple of years, and many of them are being very slow to deploy that capital. And part of that is about seeing where the market plays out. I think another part of it is recognizing that some of the junior investors, or even folks that have only come up in the last five or even 10 years, haven't had yet an opportunity to understand what it means to look for trends and opportunity inside of a correcting market.
Penny Crosman (17:43):
You spoke of the survivors being the people who know what they're doing. How do you as a venture capitalist determine who really knows what they're doing and who's kind of a, I dunno, fly by night or whatever the right word is?
Amy Nauiokas (18:01):
Well, I mean, I think when it comes to looking at entrepreneurs, the nice thing that's happened in 2023, and I think we'll continue in 2024 is because the exuberance and irrationality of the last few years is dissipated. You see a lot of more somber rational leadership. And I think if you could only imagine building a company inside of that, everything is coming up rainbows space, you probably aren't going to survive the next wave of growth. And so I think it's separated the pack a little bit from those who have there both in a sense of a leadership style, a balanced amount of rationality, the ability to take feedback, the ability to pivot. And the companies in our portfolio certainly that have survived, look, some of them have had all of those things and still just haven't made it. And that's what happens in cycle turns like this.
(19:07)
But for the most part, the companies that have persevered and that have made it have done so because they've come to the game with a inherent amount of resiliency in their teams and in their selves as leaders. And I think that's what it takes to make it through a cycle like this. But no, I unfortunately do not have a crystal ball and therefore cannot automatically assume someone's going to be a good bet, either as an employee or as an entrepreneur. But I think that it's easier to see now that the dust is cleared because there's not as much to hide behind. And I think there were a lot of entrepreneurs and investors hiding behind a lot of things in 2021 and 2022.
Penny Crosman (19:54):
Interesting. Another thing that happened this year is that the whole ESG investing movement, I think you could call it, which was going strong, got a lot of pushback from anti woke factions and surprising amount of pushback I thought, because I kind of feel like how do you argue with the idea that there should be fairness and diversity and you want to protect climate. But anyway, my personal feelings aside, what do you think about that and do you think that ESG investing could see a resurgence?
Amy Nauiokas (20:35):
Well, in many ways, I think the industry that supports the moniker of ESG didn't do itself any favors, right? Because I think in the moment when the world was paying attention to themes and ideas and responsibilities that they hadn't paid attention to in a very long time, instead of creating a mechanism to ensure that real things happened, the entirety of the ESG industry leaned on a very pragmatic kind of checking the box system that made it really hard to prove real impact. And so we've always steered clear at Anthemis away from the sort of concept of ESG for ESG's sake. And big part of that is because our core guiding principles from very beginning were in large part grounded in making true impact a reality. And in that vein, I'll just give you a perfect example. I'm a female founder of a company Anthemis, a founder of Anthemis.
(21:48)
I am a female investor, kind of a GP of alternative asset manager, and I am deploying capital actively against women and minorities. So much so that in the industry of FinTech, which is by far the worst perpetrator of diversity that there is in any industry, we have always heard that there's a pipeline problem. But anthemis capital, half of Anthemis capital is in the hands of women or people of color. So clearly, if this is all we do is FinTech and we're managing to find half of our portfolio around the world to put our capital in the hands of, there's not a pipeline problem per se. And with all those sort of wonderful things going for us, check the mark, check the mark, woman, founder, woman gp. 65% of our investment team are female, have had a consistency of plus 50% of our team being female from day one.
(22:50)
We still have not been allocated one dollar of ESG or impact money for emerging managers or for folks doing things that is specific to ESG around diversity. And I actually think that that says a lot about the industry and about what is and isn't happening. I mean, we have a beautiful product, the Female Innovators Lab that is backed by some amazing partners. And I want to give a shout out to Visa and Barclays and BMO and Aviva who have backed this fund. It's $50 million of pre-seed studio money to female founders in FinTech, and it is the largest fund by far of anything in the industry thus far. And that doesn't seem right to me. Those two stats, the fact that we've never received capital in the ESG Spain and we've got the largest fund by that feels to me like there's a lot of virtue signaling.
(23:48)
And I think there's a responsibility in the industry to call people out for that. And I think unfortunately, I don't know that it's going to come from the ESG allocator line that it's going to happen because I think they've got a model that works with check the boxes and that's all it needs to do. But for those of us who are trying to really make a difference, I think we have to hold each other responsible. We have to call for more, not less of this, and then we need to actually make it actionable. And one of the things we've addressed or agreed to do in 2024 is we're going to go out of our way to make sure we're giving people credit who are doing good things, because we want to make sure that more people are shining lights so that we can continue to create this community, certainly when it comes to diversity. But I do worry about it. I think it's been really easy to just say a thing. It's a lot harder to do the thing.
Penny Crosman (24:46):
Sure. I mean, I think you're absolutely right. At the last time I looked at the numbers, the percentage of VC fintech funding that goes to female founders was around 3%. I know that was several months ago, so it may be a little bit better now, but I
Amy Nauiokas (25:04):
Think it's closer to 2.8. But yes.
Penny Crosman (25:08):
What do you think it would take overall to move that needle and sort of get more, as you said, you're kind of not being slotted into the ESG bucket necessarily. What would it take to get more people interested in that? Yeah, I
Amy Nauiokas (25:24):
Mean, I don't know how to get more people interested, right? I mean, there's so much data out there that supports the performance and the returns associated with women investment managers with diverse portfolios. I mean, everything about it is in, I could spend all day just quoting statistics that prove the point that having a diverse portfolio and a portfolio that is in the hands of diverse founders is a good thing for business. But the thing that I think we have to remember, and it always comes down to when everybody pushes back and says, oh, well, is it just about giving more money to women or giving more money to people of color? I do think there is a need to over index on certain areas in order to make a huge difference. One of the things that we just put out, this equity entrepreneurship report, I dunno if you saw it, but you should take a look at it because I think you'd enjoy some of the sort of arguments in it.
(26:17)
But the assumption is that in order to get 50% of the money in the industry, in the hands of women, you need to give 50% of your capital or invest 50% of your capital to women as an example. But that's actually only half of the problem. You actually need to deploy 70% of your capital in order to guarantee that at some point, 50% of the population who are sorry, percent of the VC population who are women, get that capital. And that's because we have multiple co-founders. There's a whole bunch of fantastic statistics in the report that explain how it works, but that's a great way of calling for more changes to say, let's over index. So what's the real number? And we've done the work. So for women, 70% is the amount of your capital that has to be allocated to women in order for us to reach gender parity in the numbers of women who have capital. And that's a big number, but we're getting started.
Penny Crosman (27:22):
Amazing. Well, that's a statistic I hadn't heard, and I would like to read that report. Will that be on your website?
Amy Nauiokas (27:30):
Yeah, it's on our website and we can absolutely get you a copy of it.
Penny Crosman (27:33):
Okay. Awesome. Well, Amy Nauiokas, thank you so much for joining us and all of you. Thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kellie Malone Yee. Special thanks this week to Amy Nauiokas at Anthemis Group. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe for American Banker, I'm Penny Crosman, and thanks for listening.