Finding Great Founders in the Ever Changing Fintech World with Megan Kao of Contrary
Have you ever wondered how venture capitalists evaluate investment opportunities? In this episode of PayPod, host Jacob Hollabaugh sits down with Megan Kao of Contrary to discuss the potential growth in B2B due to outdated systems. Contrary is a venture fund that identifies and invests in the world’s top talent. Watch this episode for a fun and interesting dive into this latest development in payments and fintech.
Payments & Fintech Insights In This Episode
- The significance of experience and operational expertise in the early stages of a company’s growth.
- The potential for innovation in B2B industries and the untapped market waiting to be disrupted.
- The need for CFOs to adapt to new technologies and tools to stay competitive in the ever-changing business landscape
- The significance of experience and operational expertise in the early stages of a company’s growth
- B2C is 25 trillion in online and offline sales, compared to B2B’s 120 trillion, and there is still potential growth in B2B due to outdated systems.
- Many exciting companies are chipping away at incumbent solutions in the space.
- And SO much more!
Megan Kao : Contrary
Contrary is a venture fund that identifies and invests in the world’s top talent. Backed by iconic founders from Tesla, Airbnb, Facebook, and more. They combine a sophisticated software platform, a world-class talent team, and scouts to identify and invest in the world’s top talent – first – and then relentlessly support them across stages as they scale.
Featured on the Show
PayPod is the leading voice in the payments and fintech industry, covering payments, risk management and new technology. Host Jacob Hollabaugh interviews leaders who are shaping the payments and fintech world, as they discuss the latest developments in the payments and fintech industry.
Jacob: Welcome to PayPod. The Payments Industry Podcast. Each week, we’ll bring you in-depth conversations with leaders who are shaping the payments and fintech world from payment processing to risk management and from new technology to entirely new payment types. If you want to know what’s happening in the world of fintech and payments, you’re in the right place. Hello, everyone. Welcome to PayPod. I’m your host, Jacob Hollabaugh. And today on the show, we are putting our investor caps back on as we once again look to answer some questions around what kind of companies, what kind of leaders, what kind of ideas are worth investing in in today’s fintech world? We’ve got an amazing guest joining us who happens to be one such person leading investments into this space. We are joined by Megan Kao, principal at Contrary Capital. Megan, welcome to the show. Thank you so much for being here.
Megan: Thanks for having me.
Jacob: Pleasure is all ours and I’m very excited. We’ve begun a little bit of a streak here. I think this is going to be the third month in a row that we have brought someone on in similar shoes to yours of looking at things through the investment lens. And they’ve been fantastic conversations. And I’m really looking forward to another one here with you. So to give us started, could you just give us a little bit of a background and general overview on who Contrary is what you do there and your role as principal, the companies you work with, etcetera?
Megan: Yeah, of course. I’m Megan. I’m a principal on our investing team. I’m mainly focused on our later stage investments. So depending on what type of VC you talk to, sometimes later stage of series and beyond. And for us, at Contrary, that’s series A and beyond. So quickly about Contrary. We are a multi stage VC firm today, but early stage VC is still the most of what we do. It’s in our roots, it’s in our fundamental philosophies. And so for us, Contrary talent is at the core of everything we do. And so think of our philosophy as making a bet on the person before the idea. And so you’re like, What does that even mean? And so for us, over the past six years, we’ve built a community of 500 folks across product engineering design, you name it. And oftentimes we meet these community members when they’re 18 years old in undergraduate in graduate schools, and we try to find these really exceptional talent early in their career and be with them through these critical decision points in their journey, whether it’s how to incorporate company like, which idea should think about how do I find a co-founder? And so the bet is that we’ve been with them through these different stages.
Megan: And so when they do want to found 4 to 6 years later, we want to be their champion and their first check. Now, on the flip side, most of these people actually just want to go work at awesome early stage companies. And so we’ve been able to help companies like Ramp, who we invested in hire six of their first 40 to 50 engineers. And so my background, I come from a more later stage world from Goldman Sachs and DoorDash. It was never really apparent to me how hard it is to hire not only your first five hires, but maybe your first 20 or first 25. And so helping companies from that angle is something that we do from day one. And as you can imagine, this kind of thesis is a very bold bet. Sometimes you’ll work with someone exceptional, but you never know what ideas are going to come out with. But it’s something that we very much believe in, something that we’ve held core to our thesis.
Jacob: Wow, that’s fascinating and a really cool approach to it. And that was one of the things I was going to ask is I had seen your personal profile within the company was a little more in the later stage, but that the company was built on this seed stage and the fact that you actually truly mean seeds like some people say that, but like in your case, it actually means like it’s so cool to build the idea of building that community of like, we want to get with these people early, these talented people that could one day be founders for companies we invest in or could be. Then the other half I think that is probably not thought of by many investment firms or anything of like, what if we have a relationship with someone who’s never some big founder of a company but is just an amazingly talented person who can then be the help that a founder? We do work with needs because yeah, those first few hires, it’s as simple as just the if you’re hiring your first five people, the value those people need to bring is way, way more than when you’re some massive corporation. You’re like, We’re hiring one person. It’s a very important role, but there’s 5000 of us here. Ultimately, if this doesn’t work out, it’s not going to ruin the business. If your second high or third high or fourth high or fifth hire doesn’t work out, it very well may ruin that business. So that’s a fascinating approach and that’s obviously a differentiating factor for the firm. Are you one of the few out there approaching the landscape in this way, or are there others like you at all? And is it just a brand new approach to me? So I’d guess that’s what makes you stand out.
Megan: Yeah, I’m going to be honest, every single VC has a talent function, but most of the time when you do get exposed to the talent function as a founder is usually when a company has already invested in you. And so there’s so many VCs out there, right? Money is green when you just go meet the founder when they need the money, they’re not going to necessarily take your money, especially when you’re new VC. Who are you? What’s your brand like? What are you going to bring to the table? And so we try to meet them very early on. Others do remember when you help them hire their first founding engineer, founding designer and all those things. But. It’s now six years later. The reason why we started building out our later stage practice is because now our founders are entering Series B and Series C, and if they’re successful, the company is like 200 people and honestly, like they don’t need the talent function as much. And so when we thought about reshaping the firm last year, we went through a massive exercise. I think everyone’s seen the stats from Twitter, some people saying 50 to 75% of active private market investors will disappear in the next 2 to 5 years. And so we took a step back and started thinking from first principles approach. Right. If you can meet the founder, first of all, very early. So we’ve cracked that part for the most part. But now you’re moving towards later stage startups where founders not just new talent, but maybe what they need is distribution.
Megan: So is distribution just getting the word out through company memos, pieces, events and all those things? Maybe that’s more important for them at this series B and Series C And so as you saw, we started contract research last year in September. It’s been less than a year, and we published 200 memos on companies. And sometimes we even interview the founders and sometimes we do deep dives like the CFO, dev ops, cybersecurity and all those things. And so it’s a great way for founders to get their stories told, their incentive to maybe talk to us, share the story, and we try to have a pretty bipartisan view about the company, the competitive landscape and all those things. But it also ties into what we call the Contrary flywheel. And so if we think about our offerings, we have three core offerings, like one is talent, two is research, and three is events. So depending on what the founder needs, how do we pull them into this flywheel, introducing them to other parts of the offerings that might be helpful for them. And so for something like contrary research, we might have a memo on X company, but now you can go on there and be like, if you like this memo, you think this company is interesting are the open roles. And so it’s great for founders because they can also share this memo with prospective candidates. If you’re excited, you can apply here. And so it gets a whole flywheel spinning and it’s been less than a year, but we’ve had resounding positive feedback from folks.
Jacob: That’s amazing. And I’ve got to say, as someone who works in the content space, mostly the that amount of output, especially on things that are like need to be researched and thought out and are intelligent briefings and reports and things to be put out. That kind of output in your first year is pretty amazing. So hats off to you in the team for doing that. And then just love overall, the idea of all of that. To me rings is like you’re providing value out instead of being that firm. That’s like, Yeah, we meet you when you walk in our office one day with an idea and want money from us. And we have all of this homework to do to figure out if we like you, we like the idea, everything. You’re like, No, we’ll build a community. We’ll provide value to that community in many ways, whether you’re actually working with us or not. And that also, though, gives us then the head start of if we do want to work with you, we know you better, you know us better. We have a relationship. So I think that’s a really cool setup and I’m glad to hear it’s so far it is going successfully. Now, you’ve obviously through these first couple minutes here laid out one of the questions I like to ask someone in your position is, are you when you’re considering an investment, are you looking at the idea or the founder? And I’m guessing based on everything we’ve talked about so far, you’re looking at the founders. So if I could tweak that question a little bit then in looking really at the financial fintech kind of industry, more specifically here, when you’re looking at that founder, what are like the types of characteristics you’re looking for? Is there specific skill sets? Is it like personality traits, how they think about things? What are the things that draw you or attract you to someone who you’re like? They don’t have an idea right now, but I want that person to be in our community because I feel like they could be someone who does something really amazing, create something really amazing.
Megan: Yeah, it’s a great question. I think there’s a chart that shows you from left from seed to later scale or later stage. What are the characters you look for? And at first always a founder. I’ve been we’ve been I think VC has been burned. Everyone knows oftentimes like you have a okay founder, but a great idea. But that alone great idea is not alone to save the company when the company the founder isn’t a visionary leader execution etc. and all those things. And so so it starts with the founder, then starts with the founder idea, founder idea, team, founder idea, product market and execution. And so at contrary, it’s interesting because I kind of straddle both sides. And so you have to put both hats on in the later stages. Obviously you have the product. I want to see the financials like all those things. But in the early stages, as everyone knows, there is nothing. In fact, like sometimes you might even have a slide, which is like 1 or 2 pages or maybe a memo at best. And so for characteristics I look for in a founder, at least for the contrary, at least to be completely honest, because our. Is much smaller than, let’s say like in and they have $3 billion in the growth venture fund.
Megan: We have to keep our bar very high in terms of founder caliber. When we interview founders or we talk to founders, the number one thing I look for is clarity of thought. I want to make sure the founder is deliberate and intentional about why he’s building it this way. And so questions I ask are things like why is this the first wedge into your broader vision? Why is this the first step? What are the risks and considerations that you have thought about? And all those types of banter like back and forth. I want to see that the founder has thought about all those different considerations. Am I going to hold him to his product roadmap? No. Like all those things can change so much in six months to one year or two year. But I’m trying to understand your logic, your train of thought, how you will hire that great team. Are you a great storyteller? What’s your vision? If you can’t even articulate that to your master, you’re not just selling to investors, but you’re also selling to your future hires. How do you motivate your employees that it’s worth it going through this with you for 2 to 4 years because you’re getting Northstar in all those things? So clarity of thought is one thing that I look for.
Megan: For two, I think this is my personal opinion coming from a lower later stage world without the DoorDash execution and operating experience is so important for me. There are a lot of great young founders and especially as contrary to told you, a lot of kids are like 18 years old and they’re starting companies. That’s awesome. But I think it takes time and experience to understand how do you actually build a roadmap? What are fires that are worth putting out and what are fires are not worth putting out. Obviously a young founder can file find that, figure that out through time, but especially for fintech industries or enterprise solutions, it just takes time to understand who the buyer is. How do you sell to them, what are they looking for? And oftentimes that just takes time, experience and wisdom. And so I might press more about, Hey, you want to go from 0 to 1? What is your overall plan and what is your goalpost to get there? And maybe some other VCs will say that’s less important. It’s going to change anyways. But I think that intentionality is really important to me because if you don’t even have that in mind, there’s going to be very hard to communicate to your future employees.
Jacob: Yeah, love that. And you use the word roadmap in the first one, which I really I remembered an entrepreneur class way long ago but wrong this memory of think of having the roadmap but knowing, yes. That you’re going to be driving down the road and there’s going to be a construction that you didn’t know about and you’re going to have to reroute, like you said, like, we don’t have to follow that. I’m not going to hold you to this is the only path. But I want to know that, you know the path, you know, where you’re trying to get. I want to know that you have a clarity of what is the path to get there If we have to change along the way, great. But it’s a lot better to know that versus I know we want to get here. Like, how are you going to get it? I don’t know. But I know we want to get there. It’s like, okay, I need the first version, the first idea. So I love that. Let’s drill into fintech a little more concisely here. It’s a very broad category. Obviously lots of sub industries within the financial world. It’s more and more every day with how niche down everything has become. Are there any specific areas of the world of finance that kind of stick out to you as maybe the most ripe for change or improvement right now? Or maybe viewed another way, an area where you’re most commonly being pitched new companies of like, we could solve this. This isn’t well is there any area within the financial world that stands out to you as that kind of hot sector?
Megan: Yeah, it’s an interesting question. I was having a debate with a friend at another VC. Everyone says they’re a fintech investors, but there are so many ways to slice and dice it. You can go very, very deep into infrastructure. You can go deep into payment fraud and like all those things. But when I talk to founders, or at least I want to look at an investment opportunity, I tried to take a step back and actually just look at fundamentals from the top down. What does it take to actually become a venture scale business? And I think I agree with A16z They put out a take on this like every single company needs to be a global company. So what do I mean by this pre-COVID? Most of the systems were or most of the startups. Were you build a company in San Francisco, wherever you hire a team within San Francisco, it’s all very localized now. Post Covid. Now you see distributed workforces in Canada International, like all those places. The fact is, for most of the solutions, whether it’s in fintech or beyond, they are great. If it’s like sales marketing, they are able to localize for these global outputs. But in terms of internal systems, if you think about accounting, HR and all those things, none of them have had to deal with this Hail Mary, which is like Covid and distribution. So when I think about the opportunity or like the right way, not necessarily right way, but the opportunity at hand here, I think about companies. Is that are ultimately trying to grab for this global pie. So that’s the macro. But drilling down a little bit deeper, I think a simple way to divide it, at least in tech applications, is B2B and B2C.
Megan: A lot of VCs have looked at the B2B e-commerce route and they’re like, digital adoption is too slow. The penetration is only like 5% out of like 120 million, 120 trillion in sales. It’s not worth my time because the time to ramp is too slow. Yes. And I think like in the times of 2020 and 2021, when everyone was trying to do markets more quickly, like an area like B2B, e-commerce just isn’t as attractive. But if you just look at these two categories combined together, B2C is 25 trillion in online and offline sales, B2C is 120 trillion. And if you think about e-commerce adoption, just like coming online, B2B 85%. So there is 95% of solutions that haven’t really come online. And there’s obviously various ways that you can drill down on this. But the fact is a lot of these solutions haven’t come online because the systems are antiquated. Now, you talked I know in the previous conversation you talked about supply chain. That’s one component, aerospace and defense manufacturing, all these vertical solutions. I think a lot of them I’ve been talking to a lot, most of them are still dealing with pen and paper, email, communications and all those things. If you think about procurement, discovery and all that stuff, no one has really built tech for them because if you’re in the Bay Area or in the Silicon Valley, it’s mostly tech for tech people, right? You see all these market maps, but who is ultimately the buyer? How they actually gone out to talk to metal service providers? Verticalized solutions. Probably less so. Obviously, they’re VCs like TCV and Tidemark that have done amazing work within vertical solutions, but I think there’s a lot of homework still to be done there.
Jacob: Yeah, that has been one of the other themes in recent weeks and months on the podcast here is we’ve done though basically once a month having an investor on and then at least once a month we’ve had someone come in and blow my mind with their working in specific like B2B world of trying and they’ve shared some of those numbers that you just did and other kind of mind blowing like, Wow, that’s how far B2B is behind the B2C world. And there’s lots of reasons that make perfect sense once you lay them out of like how that happened, why that happened, but then you just hear the opportunity that I hear and have started to hear from speaking to people like you and folks that are trying to actively work on the problem of like, Yeah, I view that as an opportunity. 5% penetration on what you said, $120 trillion or whatever. So 95% of 120 trillion sounds like a pretty good opportunity to me to go in and find ways to catch them up in the digital age. So glad that we’re finding some consensus amongst different guests on the show here. That’s definitely the place to be, the place that needs help and that there’s a lot of value that can be brought. Let’s turn to a couple other trends and a couple other items. The first of which is something that you referenced earlier, the amazing output of content and reports and different things that the research team has had there in the last year since its founding. One of those was I was reading recently on LinkedIn, your deep dive you did on the changing role of the CFO. Could you share some of the takeaways from that at a high level, just how the role of CFO has changed and kind of what a few of the catalysts for that change have been?
Megan: Yeah, for sure. So at a high level, the CFO has evolved over the past two decades. And if you actually work in finance, it’s not new news for you, at least in tech finance. So in the old world of CFO or I wouldn’t even say old and traditional industry of CFOs, they were essentially number crunchers not to throw shade at my CFOs. I work with them across the table all the time, but their job is essentially twofold Make sure you didn’t run out of money and to make sure how you spent your money correctly. So strategic decision making in terms of the direction of the business where we should invest those dollars, go to market sales and all those things was largely outside of the scope that was given to the CFO, the CIO and all those different departments. But I think what you’re seeing is that especially in the past 5 to 10 years, there’s been an explosion of data Cambrian explosion of data. You have companies like DVT, Fivetran, Snowflake, the amount of unstructured data is unwielding. And so the question is, what do you do with all this consumer and business data? How do you drive action on that? And so what you’ve seen, especially in the last 5 to 10 years, the onus has gradually started falling on the CFO. And so the term I used is they’re no longer just the chief financial officer driven by accounting backgrounds, but increasingly the chief performance officer. What do I mean by that? Someone who is actually connective tissue across the other organizations driving change in terms of how they should think about long term trade offs. So if you want to get to, I don’t know, steady state margins of EBITDA positive, how do we actually set goal posts that encourage the different departments to work towards that goal? So essentially called them like the quarterback throughout the entire process? I think something that was interesting to me is that this kind of stuff was not new information for me.
Megan: I worked at DoorDash and I think in Silicon Valley, a lot of CFOs come from a younger persona where they understand the value of being data forward. But the fact is, some of the feedback we got from the piece was so surprising because in some older industries they’re like, Wow, this is new information. I actually still see myself in the traditional CFO roles, which is great because pieces like this is meant to have people start having conversations about where they are on the spectrum and where they should be. I think the second piece of that is ultimately CFO tooling. So financial tooling and obviously financial planning procurement, all these various buckets fit into the CFO stack. I would honestly exclude traditional the fintech products like payments, all those things because it’s less so of CFO buyer that deals more with the CIO and other like cross-functional departments. But as you look towards these tools, why do about this Now? A lot of VCs have put out pieces about the CFO stack and broadly, but there is a very real change happening, especially in the past two three years. If you look at any budgeting for like the C-suite, usually it’s always like the CIO, like cloud security spending, like all that stuff is going up, rightfully so. But in terms of the finance department, budget has never really increased because finance ultimately is not really seen as a revenue generating department for most companies.
Megan: But now there are two tailwinds, I would say actually three tailwinds. I would say that’s really driving change. One is shortage of talent. Turns out investment banking is as fun as it used to be and no one wants to go into Big Four anymore. This is a real conversion issue. This is where all the corporate finance people like Prune. They’re like X bankers, X consultants, like from. But without this top of funnel. Now you have a finance team that’s like overworked, overstretched and short staffed. So these existing tools just don’t cut it. I was at DoorDash. We were still using very old solutions that honestly just wasn’t very nimble. And so in 2020 and 2021, I think a lot of CFOs were able to get away with it because in the good times you could just hire more people. But supply chain issues were catching up. All these different structural issues were just swept under the rug. And now people are taking a hard look at new tools because in a way they’re forced to. I think building for CFO tools is tough because first of all, if you’re going to be selling to an enterprise, it’s not like a 2 or 3 month sale. You have to build trust with the department, all those things. But if a customer does convert, that is a multi-year contract, multi-billion dollar, multi-million dollars. And so that is very lucrative. And especially if you look at incumbents in the space, they’re mostly solutions from like 20, 30 years ago. And so a lot of exciting companies are chipping away at that.
Jacob: Wow. Fascinating stuff. Well, definitely. I had a great time, as I said, reading through that report and everything will definitely link to it in the show notes. Of anyone listening was as fascinated as I am with that little snippet of it and synopsis of it. Definitely use that below to go ahead and then be able to read the whole thing and everything else. Definitely follow the blog and everything else because again, there’s a lot of content coming out over there and it’s all very, very good. A couple other trends to then touch on here. One of the other big trends over, I would say the last five years, it has definitely sped up significantly. It started much earlier than that, but the speed with which is really picked up over the last few years, which is the as a service, is just the new model for everything. We started with SaaS. It was just software as a service, but now it’s everything as a service, any little thing. And especially within the world of finance and fintechs, it’s every little thing being niched down. We do one thing incredibly well. Specialization, integration. That’s the name of the game right now. Do you see that shift being one that isn’t just a shift is one that’s here to stay? Or do you think there may be a period of either consolidation or a lot of acquisition in the near future to go back against that and bring some of those niche as a service back into larger corporations?
Megan: Everyone knows every software company is unbundled. We bundle and bundle. Et cetera. Right now, especially in the past two, three years, we are already seeing a rebundling phase. And depending on who you’re talking to, so don’t want to use like a blanket statement. So for middle market buyers, so call it like 500 employees and under. When we talk to CFO or decision makers with spend being concern, a lot of CFOs are okay with one solution that has more breadth versus multiple point solutions. And this might not be the case if you’re talking to enterprise buyers, which is more complicated, but that is a real concern and a lot of startups are already taking action on it. And so if you think about like the history of why everything has become unbundled and why bundling again, it goes back to the data explosion which happened 5 to 10 years ago, SaaS application within spend management, procurement and all those things disaggregated because the mainframe systems such as like ERP just couldn’t do them as well. And so they needed more agile systems. But now these systems are getting very messy. You don’t need three different expense management tools that in fact it gets worse for you to consolidate them. And so is there a path for just picking one vendor that can do everything maybe 75%, 80% versus three solutions that does one very niche solution? Well, it’s like 100%. And so I think what you’re seeing within this stack, this CFO stack, for example, is that you’re already seeing companies like Ramp not only solve spend management, but also going into procurement, also going into are also going into payments and all those things.
Megan: And then you can make the case for rippling. Right now they have their own corporate cards. But when I talk to founders, the core thing I’m trying to understand is back to one point that I mentioned in the very beginning. Why is this the first step into your broader vision? And a lot of that comes down to the data that you are creating or you’re orchestrating, right? And so if you are just like a thin wrapper, I’m just like, oh, I’m just like organizing your data, but I’m not actually generating more data that is less compelling to me as a buyer versus something like a ramp or a rippling where everything lives within ramp and rippling. And that’s like the system of record that I can leverage other systems plug into. And so if you get that first step wrong, then you just become a peripheral feature and I think you’re going to see a lot of startups die off and they’re just like marginally making something a little bit like, Oh, I can make your expenses faster, but don’t care if I have something that can do that like 75%. And so I think that platform power that a lot of talk about is very real and a lot of startups are learning that now.
Jacob: Yeah. And when you can, you might be able to bring me this little marginal bit of improvement or value over here. But if I have to work with 20 different people who can all marginally increase the value of 20 different parts of my business, that little bit, am I actually trading off of the headache and having to hire someone to manage all of this, to be able to do all of this versus what that little marginal bit I’m picking up everywhere. And so, yeah, I’m with you. But that’s been that’s one of my favorite questions to ask both folks like yourself who are looking at it from the investment lens and kind of the whole industry wide. But then especially, I’ve asked a lot of folks who are trying to do this one real niche thing. Is the goal to get acquired or do you have that clear mindset of, as you referenced, if the size of company you’re interacting with or your clientele, that tells you whether you could stick around forever because they would tend to want you versus you get in the midsize, the bigger size, the enterprises like maybe they wouldn’t want you as much. So it’s been one of the reoccurring topics on the podcast and I liked that answer with bit.
Jacob: And you mentioned there data has come up at the end there. We do definitely live in a data world at this point. Our world is driven by data in every single way. Almost all the companies, every. It comes up, every podcast, which then leads me to the final kind of big trend I wanted to talk to you about, which comes up also on every single podcast in 2023, which is AI machine learning, other evolving technologies. I think when we say AI at this point, we mean all of the other ones. We just don’t want to give the big list every single time of machine learning. Web3 everything that falls under the big umbrella. How do you see AI and other new technology impacting the kind of financial services landscape? And then where do you think we’re at in the adoption curve of learning how to use these new technologies in actual valuable ways versus just this is cool, we’re going to play around and one day we’ll figure out how to actually do it in the right way. Where do you think we’re at in that adoption curve?
Megan: Yeah. So to preface that, I think every VC feels like they need to have they need to take a stance on AI for financial services, for CFO opinions and all those things. But the fact is if you are a bank or you are a financial institutions, you have been applying AI and ML for trading and all these things for a very long time. But I think the question is with the explosion in generative AI, what are the new risks that were unaccounted for in your previous systems? And for AI think things that are top of mind if I think about three characteristics that I think about when it comes, which segment is most ripe for adoption forAI. I think the number one question I have is what is the incremental productivity from this AI unlock? Can you measure it? Is it hours reduced per worker or is it reduction in chargebacks? All those things are need to be measured for you to actually quantify, like whether it’s worth implementing this application within my systems. Two is how acute is this pain point, right? I think within all the different features like financial planning, accounting, fraud, payments, risk and all of those things, I would say fraud and payments risks are probably most top of mind right now. You have things like for FedNow, ACH, RTP, things could be transacted within a day and those frauds are settled immediately. It’s very, very hard to correct that after the fact. And three lastly, what is your tolerance risk? Right? Within financial services? If you report something wrong as a CFO, you can get fined by the CFO, the SEC, and there are downstream implications to the market.
Megan: Or you think about something like insurance, you think me like underwriting. You cannot have a 95% confidence level. It needs to be 99.9. And so if I think about all those different categories or the three categories just ranked by like high, medium, low, it can give you a sense of which areas are looking to entertain applications or maybe it’s where it’s an area to start building in. So in terms from my perspective, I think the two areas worth looking into right now are fraud and payments risk. And then lastly, I’ll talk about some other financial planning. But within fraud and payments, for the reasons I mentioned, real tailwinds within legal and structural changes that are accelerating CFOs or CIOs to look for, like how they can prepare for these downstream effects. I think something to also bear in mind is if you look at applications like financial planning, like actually within the CFO suite, just because they have lower urgency does not mean that they’re not looking at it. I think when you look at those like Heatmaps, they’re like, Oh, like maybe this area is an area I need to be spending time in. But it comes to the question of who are you building it for If you’re trying to be the next anaplan, do more modeling, copilots, all those things. You need to be building those relationships with those buyers, if not years in advance. People are looking at it. It’s harder to build. But I think there’s also a lot of like lucrative opportunities within every single area of the finance stack.
Jacob: Yeah, Awesome. Then let’s turn our attention to one final question I have for you. From trends to kind of news and really the biggest news item of the year or I think it’s still fair to say it still has been the biggest news item of the year in the financial world, and that was the SVB collapse earlier on this year. Did that event and kind of the industry reactions to it one surprise you in any ways? And then two, did it change any beliefs or the way of thinking that you or the firm has had from an investment perspective?
Megan: Yeah, I think I would separate that one into more like existential, like tech investor existential and more about what it means for investments. I think if you been on Twitter, I think the biggest surprise to me was the degree of animosity from the non tech world towards tech. Right. You deserve this. It’s only startups. Why do why do my tax dollars have to fund like your bailout? But I don’t think what people realize is that the $140 Billion of outflows from SVB is not just venture backed startups. It’s life science companies. It’s tech companies in growth stages, it’s PE backed. And sometimes it’s even like consumers, right? They’re private business. And so the scale is much bigger than I think most people or at least realize. And so all the second order effects have been discussed by news outlets and all those things. But think about opportunities within this space. I think there are two areas that we have invested in. One is Treasury management and two is more fixed income infrastructure. And so the reason why I talk about Treasury management is actually we invested in this company even before collapse, right? If you think about all the companies in terms of like enterprises from like Apple to Mid-Market and SMBs, all these large corporations have their own asset management arm. In fact, Apple’s asset management arm is called Braeburn Capital. And some people even call it the world’s largest hedge fund.
Megan: And so they obviously have these resources and heads to make sure that they’re investing their cash flows correctly, because sometimes in Airbnb’s case, in 2018, the CFO actually created a small hedge fund and turns out that hedge fund constituted 30% of their cash flows in 2018. And so it’s not even just about cash flow preservation. Now you have this net new dollar. Where can you deploy that elsewhere to feed the machine? And all that stuff is it has compounding effects. But where we see the opportunity is mostly within the mid market in SMBs and middle market, all separate SMBs like venture backed startups market within middle market, I think there’s approximately 2.6 trillion in idle cash in venture backed startups. That’s roughly $7,750 billion. And so these companies, for the most part, have not even thought about Treasury management. For the most part, people just figured out what 250 K FDIC like just meant right. It’s completely unfeasible to actually allocate 2 million of your dollars across eight different banks just to hit that 250 K. It just doesn’t make sense. So what is the solution for these sahibs in middle markets that do want to figure out how to invest their money more correctly? I think there’s a lot of exciting startups that have been popping up, so we invested in Visto, but there’s also companies like Treasure Financial, Meow as well that essentially have been handed like a Hail Mary from the SVB collapse.
Megan: But it’s really interesting because you could also even argue that Treasury management is like the center, the epicenter for a lot of different financial workflows, whether it’s like bank account reconciliation, cash flow forecasting and all those different stuff for middle markets. And traditionally most of that is just someone dealing, wrestling, different accounts, trying to tie everything together. And no one really has like a full picture of where their cash is spent, where it’s going to, and which high yield products do you invest in. And so a lot of attention has been given to the space, obviously in the past six months. But I think something that’ll be really interesting is to see once you do have the cash onboarded onto your product, if you are a founder, what do you do with that? Do you want to expand into adjacent products? So investing is one piece. Do you want to go to forecasting and all those things? All that stuff is essentially greenfield. Depending on who the buyer is and how core your product is to their workflow. So a lot of exciting stuff still in the early stages, but that’s one category and happy to talk about infrastructure as well. But I can go about this forever.
Jacob: Yeah, all very interesting stuff and definitely an industry that it never ceases to be interesting and seemingly continue to get more and more interesting by the day. But this has been an amazing conversation. Megan A real pleasure. For those listening who may want to follow you or learn more about contrary, keep up with all you the firm have going on, or check out any new reports that are coming out. Where would be the best place for them to go to do so?
Megan: Country.com and I’m on Twitter as well.
Jacob: Okay wonderful. Are we still do we still call it Twitter? They haven’t actually changed the name yet. We don’t have to start saying X until getting people to understand what we mean. I don’t think yet.
Megan: Yeah, I’m still coming to terms with the logo and all those things. I will hold onto Twitter until it goes down.
Jacob: Yeah, I think they’re going to have to because I think the number one question is what do we call a tweet? If we don’t call it a tweet and if we don’t call it a tweet like it has to be Twitter to call it a tweet. So I think it’s just going to be a new logo and not a new name for the long haul, but that’s another podcast for another day. Megan, it’s been wonderful to have you. We will link to those and more and again, those reports we discussed a little bit earlier, all of that will be in the show notes below. Thank you so much for your time and knowledge today. Have greatly enjoyed the conversation. Hope to speak to you again sometime soon.
Megan: Awesome. Have a good one, Jacob.
Jacob: If you enjoyed this episode and want to hear more, head on over to SoarPay.com/podcast to subscribe on your podcast listening platform of choice. That’s s o a r p a y.com/podcast.