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Why I like Financial Services in 2013, and in 2014, 2015…

When I look at financial services, I see opportunity. Period.

Industries that Need to Change
Companies that literally handle the money, and most haven’t changed much in 30-40 years. Do you know how many major financial services companies are still running programs on mainframes from the 70’s? You should be frightened. I have worked in multiple financial services firms, and seen a lot of dysfunction– my years at Ditech were most illustrative of why I see so much opportunity; they were the most frustrating, stagnant years of my life. (Others high on the frustration meter include my stints in investment management, banking, consumer lending and insurance). And Ditech was considered the most “innovative and leading” in the mortgage industry.

Ditech was ahead of the curve– 70% of our applications originated online, and it is one of the few companies that was solid through the crash. All that said, I felt like I was in the stone age. We had just figured out how to build simple tools. When I joined, we had over 200 software applications in production, some that did almost nothing, but were integrated into a spiderweb so ugly, it was almost impossible to sort. We had critical systems built in Delphi (look it up :-)). A huge accomplishment for us was moving to Java, and retiring well over 100 applications, getting down to only a handful of critical systems. But candidly, we didn’t innovate; we didn’t change the way we did business. We made one giant effort to adapt our business as other mortgage companies were swimming in subprime profits. We tried hard to launch subprime lending back in 2004-5 from our historical base of doing A paper mortgages. The customers were different, the processes needed to change, and our agents needed to change to address the different section of the market. We couldn’t. We failed miserably, and did only a handful of subprime mortgages, which was a blessing we didn’t realize at the time. Bottom line is we performed our normal operations well, but we couldn’t change. And we didn’t really have any pressure to change.

In the mortgage industry, the biggest innovations in the past 30 years have been DU (Desktop Underwriter – note the name) from Fannie Mae, and mortgage-backed securities. Not bad ideas, but missed a few details on the implementation (see 2008). This is just one industry under the financial services umbrella, and there is plenty of room for change.

My Fin Serv Investments
From banking and asset management to consumer lending and insurance, my career has led me through several financial services industries, and this is a key area of expertise and focus for me at Blumberg Capital. We are very active investing in financial services. I closed 9 investments in the past 18 months, and all of them have one thing in common: they are trying to change their industries and attacking outdated systems and capabilities:

– Addepar – next generation wealth management
– Credorax – acquiring bank built as a technology platform
– Lenddo – emerging market lending using social media
– Coverhound – car insurance 2.0
– ZipZap – global cash payment network (pay cash for online purchases)
– PaidPiper – payment messaging system
– Zanbato – infrastructure investment software platform
– Kreditech – advanced short-term loans using big data
– Paymill – simplest payment solution for merchants globally

And there may be one or two more coming :-).

Just Getting Started
This is just the beginning, and I’m not the only one thinking this way. When I speak with the big incumbents, they know. These are huge markets, and financial services is by definition in the flow of money– very attractive targets for entrepreneurs. As I said above, there isn’t much innovation from incumbents. Turning an aircraft carrier is not easy, especially if the steering is old. The most forward-looking financial services firms are spending a lot of time with entrepreneurs, seeking new opportunities for their businesses. If you think for a minute that financial services will look the same in 2020 as it does today, you are mistaken.

Opportunities for Entrepreneurs
Financial Services is a complex arena, full of regulatory pitfalls, difficult customer patterns, and structural roadblocks. These complexities make it difficult for new companies to succeed, and there are more than a few failures that burned through inordinate amounts of capital without success, plus a few public companies that are now roadkill.

However, the structural, regulatory, and inertial challenges make financial services a very attractive market. Sure, you have to run through a few brick walls, but mortar loosens with hammering. And, the same challenges make it very difficult for competitors (it’s like the walls reappear). The incumbents don’t innovate much, and the markets are huge, so if you have the guts to take on the establishment, there are some massive opportunities.

In each industry I’ve mentioned, the potential for game-changing innovation is off-the-charts. Underwriting needs to change. Lending and access to capital needs to change, both for businesses and individuals. Emerging markets are completely under-served. Insurance has plenty of room to improve, and asset management, for all of the complexity it has at some levels, is still using Excel in many areas.

If I am an entrepreneur looking to build a very big business and change the world, financial services is a great place to look. These markets are measured in trillions of dollars globally, and there are myriad places to find people who are under-served. You don’t need to displace a huge incumbent or take huge market share to build a great business. That said, if you can really disrupt the industry, you will be a huge company. HUGE.

The opportunities are flat out immense, and a few of us are looking carefully for people who want to take these challenges and build the next generation of financial services companies.

In future posts, I will talk more about some specifics, but suffice it to say that as an investor, I love financial services!

Brazil: Just Getting Started

I just returned from Brazil this week, and it is an amazing place. Beautiful. Full of life. Welcoming. Filled with Huge Opportunities.

My first thought is “I need to go back soon!”

My second thought is “I really need to spend more time, and it should be soon!”

I had the privilege of meeting some amazing people, including founders of top technology companies, and investors who were investing in Brazil long before the hype. This was not a long trip, so I am the first to say that I am just at the tip of the iceberg in terms of my knowledge of the market and the opportunities. What I really learned on this trip is how much more I need to learn…which means I need to go back- sensing a theme? 🙂

I spent a few days meeting with many people in the ecosystem, and my biggest takeaway was similar to what I felt when I was first looking at investing in Germany– this market won’t behave the same as ours, so understanding the structure, behavior patterns and the people is critical for success.

A Few Statistics

Let me give you just a few examples:
– If you want to ship to all parts of Brazil, you work with about 15 different delivery carriers
– At least 20% of people pay with cash (COD or with boleto)
– Order furniture online (only one or two online stores) and you can expect it to arrive in…… wait for it……… 37 days.
– About 82% of people with mobile phones in Brazil are on prepaid plans and don’t have smartphones
– Sao Paulo orders more pizza per capita than just about any city on earth
– It is easy to make a $12 purchase in $1 installments for a year
– Brazil has the world’s first sustainable biofuels economy, and most of their cars can run on pure ethanol

In the next 10 years, the equivalent to the population of France will move up into the middle class!!

Opportunities and Challenges

When you read a few of these stats, you can see why there is huge excitement about Brazil. Opportunities everywhere, and their natural resources, demographics, and the fact that things are just starting to ramp make the story extremely compelling. In many industries, there are no online incumbents, so there are plenty of first mover opportunities. And these exist in places you might not expect. Lead gen is barely started, commerce in some categories doesn’t exist. Companies like Google and Microsoft are very active in their outreach and assistance for startups.

Brazil is also attracting talent from many places. I had one dinner where I think almost the entire group of 15 was from Germany! Less snow in Brazil…:-). Brazil reaps the benefit from experienced entrepreneurs coming and training other entrepreneurs; the ecosystem is developing quickly. And of course, the kingpin here is Rocket Internet, which has over 2,000 employees in Brazil and has launched more than 14 companies. This isn’t going to take long.

On the flip side, for all of the top line stats, the blocking and tackling of execution is tough, and adoption of technologies and habits won’t happen overnight. Sure, smartphones are becoming less and less expensive, but what if excessively high cost for data and poor capacity slow adoption, or change usage patterns? The last mile in eCommerce is absolutely critical, and it isn’t easy in Brazil. For many eCommerce companies, a significant percentage of their sales are to people buying on the Internet for the first time. Patterns are just developing. It was also noted that Brazilians will move from one service to another quickly. See Orkut. It is not easy to scale a company in Brazil and there are only a handful of big successes to date.

Good Until Page 5

I had one particularly enjoyable meeting with an extremely impressive founder, and not only is he one of the most impressive founders I’ve met, he is one of the most insightful and market-aware people I have met anywhere. He has done some angel investing, and he says that many startups in Brazil are “good until page 5.” He made a few angel investments and has since stopped because to steal another beauty from him, “many founders haven’t been in the pool before.” He sees the ecosystem developing very quickly, but thinks that there are only a small number of “investable” companies at this point.

Investment Waves

One consistent conclusion that most shared was the fact that there was a big wave of investment around the end of 2011, and a big hype cycle that went with it. Since then, the investment pace has slowed quite dramatically, and people see it in more of an equilibrium now than it was previously. Some are waiting for valuations to come back down a bit as they said that they “hit US levels.” Everyone believes there is amazing long-term opportunity, and some companies that will be huge successes. I met companies that made over $100M in revenue in their second year. I also spoke to quite a few who think there will be a lot of failures this year, and in the next couple of years. They think too many people were funded and the market won’t support very many. It remains to be seen how the investments already made will perform, but the consensus seemed to be that there would be a lot of failures and a few big winners. Sounds familiar, doesn’t it?

I want to give money to…Staglin

Those of you who know me well know that I am a big fan of good wine, and it isn’t often that I’m blown away by a wine or a winery. This past weekend I was.

Staglin Family Vineyard is my new favorite winery, and not just because they have great wines. They give 100% of the profits from their Salus wines to mental health research.

Not 10%. Not 25%. 100%. Their efforts haven’t just raised a couple of million, they have raised nearly $725M!! Beyond impressive, and true commitment.

Let me get back to the story. I took some friends to Napa for a winery tour last weekend (for Mari’s bday), and Staglin was our first visit. They made special accommodations for Mari’s birthday, and the family was there in person to host us. They were exceptionally gracious. They have a gorgeous vineyard, immaculate production facilities, and when they describe how they choose the berries by hand, making sure there are never any stems, you can’t help but be impressed. Their bottling facility and caves are immaculate. You would feel comfortable eating off the floors. And the wines… amazing. All of them. Most rankings put them in the mid-to-high 90’s. For those who don’t care about rankings, I can just tell you that the nose, mouth feel, levels of complexity– all beautiful.

Then they told us about their philanthropy, and I think you could have heard a pin drop in the room. Their son Brandon was diagnosed with schizophrenia in 1990, and they started a non-profit to raise money for mental health research. Brandon is doing extremely well today, and they are every bit as committed now as they were then to the cause. Hearing their story and witnessing their commitment will bring tears to your eyes– this family is literally changing the world for the better.

Supporting this worthy charity AND drinking amazing wine? I’m in.

The Immeasurable Value of Great Friends

This past weekend my wife, Mari, celebrated her birthday. I won’t say how old she is, but she looks half her age anyway, and seemingly doesn’t age while I do…

We had the pleasure of spending the weekend with some dear friends, and had one of the best weekends of our lives. It is not often that you get extensive time together with a diverse group of people interacting, sharing views, stories, and just enjoying each other’s company. What was especially cool to me was the fact that we brought together people from different chapters in our lives, from locations as far away as Australia, and everyone meshed like they had known each other for years.

As I think back on the experience, I am struck by the immeasurable value of friendship. It is really what life is all about– relationships are what we are here for. However, if you look at the way many of us spend our time (I am for sure in this group), most of it is likely dedicated to work and generating income, and for those with kids, the endless juggling of divergent activity schedules. It is easy to neglect important relationships. But, there is an elasticity in strong friendships that can stretch, morph and change over time, while always staying connected. Even through neglect, great friends are always there when you need them, and after time passes, seamlessly pick up where you left off.

Really great people seem to connect quickly, and often very meaningfully because they immediately recognize the value of the other people. I saw it this weekend, and I see it in business as well. I travel all over the globe, and I can’t tell you how often good solid relationships are built through a simple warm introduction. This weekend I had friends from business school meet friends from undergrad for the first time, and at the end of the weekend, they seemed like long lost brothers. It was amazing.

It is not an accident that as a VC, one of the key values that my team and I bring to the table is a strong network. Entrepreneurs look for it, and they should. A great network is one of the most important assets that exists, and the value of the network becomes exponentially higher if the people are truly friends, and not just acquaintances. You can never invest enough time or energy into building great relationships.

The most moving part of the weekend for me was having one friend put an arm around me, and say, “I just want you to know how much I love you. I will always be here, and don’t ever forget it.” Have to say that there is nothing in the world worth more than that kind of friend.

2013 – A Year for Balance

First, I want to wish everyone a very Happy New Year! I’m excited about 2013, and the opportunities coming this year.

As I think many of us do at this time of year, I’ve been doing a lot of planning and goal-setting for the coming year. I’m not a New Year’s Resolution person, but I usually try to look holistically at the year ahead, set some overall goals for myself, and then work toward them.

This year my theme is balance.

I’m seeking balance not just in my own life, but also for the companies that I work with, and I’m hoping against hope that our dysfunctional government will seek some true fiscal balance this year.

For those who know me, and know that I love yoga, this is very much in line with my goal of keeping mind, body and spirit in balance. My issue is that I am not nearly as good at the practice as I am the theory. But, as with all things, I’m a work in progress, and this year my intention is to keep making progress.

Personal Balance

Personally, balance mostly comes down to time management, and aligning my time with my priorities. I’m going to run a few simple experiments following the templates provided by Stew Friedman in his Total Leadership Program. For those who haven’t read it, I highly recommend his book, and the program!

My simple experiments are:
– Shut off my computer and phone for 2 hours/day when I get home so I can spend some quality time with my family
– Leave a little food on my plate at each meal, and eat fresh greens every day
– Put one hour per day in my calendar to reach out to people I should be staying connected with. This will be a mix of personal, community and work, with the goal of doing a better job of staying connected and contributing this year than I did in 2012.

These are fairly simple experiments as you can see, and should be quite achievable. (I have much bigger goals behind these, but the theme is achieving balance in a stepwise fashion). That said, I keep a very taxing schedule, and don’t often leave much room for things that should be priorities, so it won’t be as easy as it may sound.

As I look at 2013 beyond my own personal goals and experiments, I’m hoping for balance in many areas.

At Blumberg Capital, we have been and are very active in funding seed-stage companies for the past few years. As we look to the new year, we expect to continue to be active investors, and are working hard to find the right balance of support for our portfolio and finding new opportunities. Our expanding team is giving us more bandwidth, and we very much pride ourselves on always being available for our companies. We strive to be the best partners that we possibly can be, and we are looking to continuously improve in 2013 and beyond.

Balance for Founders & Financings

I recently wrote a post on Venture Beat, “An Investor’s Guide to Surviving the Series A Crunch”, where I gave some tips, and all of my advice can be linked to balance as well. It is imperative that founders take a close look at their plans– make sure there is enough time and money to get the company to the next level. CEO’s don’t have the ability to kick the can down the road the way Congress does. Balancing the resources available (which are often scarce) with desires and opportunities is a difficult thing. I find myself continually impressed by the CEO’s I work with, who are on top of all facets of their businesses and execute at high levels.

I expect this year to be one where there is a healthy balance in financing. There will be some Darwinian forces at work due to the large number of previously seed-funded companies, some of which will not be able to secure their next round. But, as my article in Venture Beat said, I see plenty of activity in Series A and later financing, and the very good companies will continue to find financing available. I believe there will be fewer seed deals done this year than in 2011 or 2012, but I expect some great companies to be started and funded this year.

Hoping for Balance at a National Level

I would be remiss if I didn’t mention that my sincere hope is that we can also find some balance in our country. I cannot say that the recent “fiscal cliff” negotiations have me very optimistic, but maybe we can find a way to break through at least some of the partisanship. I want to leave my daughters with a stronger and better country than we have today, but it will take a lot of work, some sacrifice and a bunch of balance to get there.

Bullish on 2013
I want to end by saying that I am very bullish about the opportunities for entrepreneurs in 2013; we are in the middle of a great wave of innovation, and I am fortunate to meet amazing people who want to change the world every day. I am optimistic that some of them will succeed, and 2013 will be a year of great progress.