Oak HC/FT’s Matt Streisfeld (Normal Associate) — on M&A in FinTech, AI/ML & Digital Belongings | by Kailee Costello | Wharton FinTech | Aug, 2023


In at the moment’s episode, Kailee Costello sits down with Matt Streisfeld, Normal Associate at Oak HC/FT. Oak is a enterprise and progress fairness agency investing in corporations driving transformation in healthcare and fintech. Oak was one of many earliest enterprise buyers in fintech, and now has over $5B in belongings beneath administration. Matt joined Oak in 2015 and was just lately named one in every of Insider’s Rising Stars in Enterprise Capital.

“Consolidation occurs pre large waves of progress after which occurs publish large progress … I believe we’re at this era of the wave the place M&A will take the forefront of natural progress methods”

Within the episode, Kailee and Matt talk about:

  • The outlook for FinTech in 2023 and past — what sectors will proceed to develop, and what sectors will discover it tougher within the present local weather?

Matt: Firstly, FinTech has historically been outlined because the verticals. You’ve obtained funds, banking, lending, capital markets, asset administration, insurance coverage, and so forth. However simplistically talking, FinTech has developed to horizontally delivering monetary companies, or driving a monetary consequence through software program. If you concentrate on vertical SaaS, for instance, you’ve obtained your system or data, workflow and automation instruments, buyer onboarding, fraud identification, verification, and embedded funds all wrapped beneath one umbrella. Ten years in the past, that might not have been factored into FinTech. At present, I’d say practically each FinTech investor would name that FinTech.

I say that as a result of what we’re actually bullish on is how the evolution of monetary companies is being delivered and who the shoppers are which can be absorbing these monetary companies. And so when you concentrate on, broadly talking, vertical software program, you concentrate on the embedded monetary companies infrastructure, you concentrate on commerce infrastructure, fraud, identification verification, authentication. These are horizontal fashions which can be relevant to companies that don’t simply appear to be conventional fintechs however are literally rising corporations or SMBs that should be absorbing monetary companies. That’s what’s actually fascinating to us. The areas that I believe are probably the most regarding or I believe have probably the most work to be performed is round client fintech, notably these which can be single-threaded purposes, that could be targeted on banking accounts or funding merchandise. I believe that these will battle to amass prospects, differentiate in proposition, and scale effectively long-term until they give you their act twos and act threes and that’s actually absorbed and consumed by their finish buyer.

  • Anticipated consolidation throughout the FinTech panorama

Matt: I believe there shall be some consolidation. Traditionally, for those who have a look at the aftermath of ’99 to ’01, and even publish the good monetary disaster, there’s at all times a interval of aggregation of capital, de-aggregation, or deceleration of capital, after which consolidation. And consolidation occurs pre-massive waves of progress after which occurs post-massive progress. So, I believe we’re at this era of the wave the place M&A will take the forefront of natural progress methods and I believe these single-threaded purposes shall be absorbed by those who wish to diversify their product portfolios.

  • The M&A setting for fintechs

Matt: On one hand, I believe there’s going to be an enormous alternative on the acquisition aspect for the growth-funded corporations which have grown and have achieved fairly good scale and possibly have worthwhile underlying economics and mixture companies, possibly they’re form of breaking and shedding a bit of cash. I believe there shall be a mixture of public, personal, and even personal and personal that assume one plus one may equal three. I’m occupied with this purely from the B2B and the infrastructure aspect of it that may create a catalyst for acquisitions.

The second aspect of it’s you’ve some actually nice corporations which have gone public in 2020 and 2021 which can be, I hate to make use of the phrase “orphaned”, within the public setting, however they’re actually depressed. I’ll offer you an instance: it’s mid-pandemic. The general public fintech corporations (as in, funds, B2B, SaaS, and lending) — the ahead income a number of for these corporations had been buying and selling at 12.7x. Put up-pandemic, these corporations got here down and the median valuations of that very same subset at the moment are 2.9x. So you’ve this degradation of multiples of round 77%. And also you’d say, “What’s the catalyst for this?”. So, progress has decreased by over 50% for these companies. And look, as an alternative of rising at 50–100%, possibly they’re rising at someplace between 15–30%. And traditionally, these steady companies which can be rising 20–30% and are worthwhile and succeed the rule of 40, are actually good public-stage corporations. However, no matter that, they simply don’t have sufficient maturity within the public markets. Their inventory costs are down. You might have employer retention points. I believe there shall be a chance for these corporations to determine to go personal. There’ll be consolidation, possibly a public-to-public sort of acquisition. However there are some actually nice corporations which can be on the market with valuations that don’t essentially match historic fundamentals, which signifies that both one thing has to vary to get the basics proper or to create probably the most shareholder worth, there’ll most likely need to be a change of management.

  • What stands out in distinction between this most up-to-date boom-bust cycle in 2021–2022 versus the cycles that FinTech has gone by way of previously

Matt: If you concentrate on the FinTech cycles, like 1.0, 2.0, 3.0, there’s been an evolution of how the product has developed and who the top buyer is. FinTech 1.0, everybody would say, was round altering client conduct, adopting a greater UI, creating a greater buyer journey, and simply being a greater customer-facing resolution than historic monetary establishments. Now, that has labored to a level, however I believe the speed at which, for instance, AI and know-how goes to evolve, will allow these FIs to catch up.

Fintech 2.0. is absolutely across the enchancment within the infrastructure and shifting from legacy options and legacy infrastructure to extra modernized options, extra scalability, and higher modality. You’ve obtained extra relationships, and dynamics the place you possibly can create a greater relationship between the top buyer and the corporate delivering the service. That being stated, sitting right here occupied with the three.0, I’m going again to that current instance, which is I believe monetary companies have gotten more and more extra horizontalized.

One factor so as to add, you had a brand new true product providing, BNPL, which has been round for some years, again to Invoice Me Later and the acquisition by PayPal. You had these corporations that had been priced at 20, 30, 40X income multiples, as a result of they had been considered as higher, extra like funds companies. Nonetheless, that increase ended up creating an enormous downfall in public valuations as a result of they ended up reverting again to being perceived as client fintech corporations. And for those who return to love the unique, like 1.0 and Lending Membership and P2P, these are corporations that had been buying and selling at 10, 15X, ahead income multiples; I believe they got here again all the way down to 1–2X. I believe that’s a very fascinating element. What we’ve been seeing on this cycle is, you’ve these new actually nice FinTech corporations, however they’ve been perceived and reverted again to one thing that an investor may relate to; taking a agency that actually has created large client consciousness, service provider consciousness, it’s additionally a real ache level, is another cost schema, however is now being checked out as a client lending enterprise, which I simply assume is misunderstood. And I believe that’s essentially an instance of what’s been occurring in these cycles. The opposite factor that we’re seeing too is the PSPs and the service provider acquirers that had been buying and selling at 10+X multiples at the moment are reverting again to historic technique of anyplace from 2–5X income. I believe that additionally shifts not simply the general public markets but in addition impacts the personal markets and the way we understand funds and cost infrastructure companies.

  • Whether or not fintechs are misunderstood by the market with these present valuations, or whether or not a number of the corporations are true fintechs whereas others are extra like an ordinary monetary establishment

Matt: I believe the general public investor is fairly good, however the public investor can also be fairly fickle. They see the differentiator within the providing, they see the market share accretion, and so they see the way in which that the providing is being delivered in another way. These are all nice. These are corporations that would develop. However on the finish of the day, a public investor remains to be making an attempt to determine the way you’re going to make me cash. So, what we’ve seen within the cycle is there must be a transparent profitability proposition or a capability to realize market share at a speedy price with out deteriorating monetary profile. I believe we’re nonetheless actually early within the ’21 and ’22 cohorts, to indicate the long-term skill to generate profitability, and I believe that would be the level the place public buyers come again to the area.

By way of what occurs from a cycle standpoint, I believe you see the increase cycles, you see the degradation cycles, , we’re form of at this plateau relationship. You’ll be able to see that truly within the FinTech index for those who have a look at what’s gone up and what’s come down after which type of the plateauing of that relationship. I believe we’re at that first inning of the place FinTech 3.0 is heading and it’s actually thrilling. That’s why we as Oak exist and why we proceed to put money into the area.

  • Probably the most promising alternatives in FinTech in the meanwhile

Matt: For those who assume the shift within the skill to construct software program, new capabilities for probabilistic computing, if you concentrate on quantitative outputs — there’s a lot extra information and shifts within the underlying methods. Serious about the broader AI area, the fashions that we’re coaching information on, in addition to the power to construct higher software program sooner, are rising at an exponential price. Going again to love fintech 1.0 and fintech 2.0, there are nonetheless loads of kludgy processes that exist inside the monetary companies ecosystem, there’s nonetheless loads of type of inertia when it comes to adjustments in processes. And I believe there shall be this technological shift that reduces extra of that inertia and goes to scale back loads of that lack of automation and lack of innovation that’s occurring from a processes standpoint. I do know that will sound a bit of generic, however what I believe you’re really seeing is each single enterprise mannequin in monetary companies goes to undergo some sort of evolution. And it’s not saying, “Hey, an organization that was constructed 10 years in the past goes to be disrupted by the subsequent firm within the subsequent 10 years”. I really assume the businesses which have been constructed within the final 10 years which have nice buyer relationships and traction are going to proceed to evolve and develop at a reasonably engaging clip as a result of the moat that they’ve created has been on the shopper aspect. The distinction is that they’re constructing off of legacy methods, however I believe know-how will allow them to take away their legacy methods and construct on extra modernized options. And once more, it’s like we need to be enjoying in an area the place we’re offering the picks and shovels to the FIs or to the rising enterprises or to the SMBs that want these know-how options to supply higher merchandise to their prospects. And it actually does stretch throughout these horizontals that I used to be referring to earlier.

  • AI and ML, and what makes a fintech stand out on this area

Matt: These are corporations that aren’t simply superior of their learnings and their capabilities and their datasets and the variety of information parameters which can be enter into their fashions, however, extra importantly, it’s the way in which they’ve approached their markets. For instance, elevating their palms and saying, “Hey, we need to show you how to and your buyer or finish accomplice, and we need to do it in the proper manner”. So, when you concentrate on AI in monetary companies, there’s going to be loads of pushback for those who’ve obtained the “black field”. What we get enthusiastic about is the whole reverse. We might help resolve actually essential points for you utilizing AI know-how to foretell outcomes, utilizing majority voting prompts, utilizing fashions which can be enabling billions of information parameters and , not simply that, it’s additionally determination timber and stack rating, probabilistic outcomes. All these issues are useful to the underlying prospects to say, “Hey, hear, we’ve methods that can assist you drive a greater outcome”. And I believe that’s the place it will get tremendous thrilling round the place we’re at as a result of this know-how requires billions of information factors and people that know the way to make the machines work. So corporations like Pagaya and Justt are ready to say like, “Hey, we need to show you how to and we need to allow you to profit right here.” That’s the place there’s simply a lot alternative.

  • Use instances for generative AI in fintech

Matt: We’re nonetheless early innings right here. So you concentrate on the vertical utility of the generative AI capabilities. After which you concentrate on quantitative evaluation, like the place we’re at like with Minerva or PaLM and type of new methods that complement GPT-4. You’ve obtained the power to coach information units with NLP plus quantitative reasoning or deduction.

I’ll offer you a great instance. There’s a level to which generative AI is useful in advancing or bettering the end result. However there are additionally monetary companies the place you must have a deterministic consequence, it must be 100% proper. It’s like within the healthcare area, I can’t offer you a prognosis that feels proper or appears proper. It must be the proper prognosis. In monetary companies, it’s the identical factor. I can’t let you know that I assume you’ve a thousand {dollars} in your checking account; you need to have a thousand {dollars} in your checking account. Particularly relating to cash and what it means to people. So, one mannequin doesn’t do all of it. I say that as a result of what’s actually, actually thrilling is we’re nonetheless at these early use instances, getting nearer and nearer to deterministic outcomes and the brand new fashions which can be being constructed, not simply on textual content and NLP-based fashions which can be primarily based on textual content and pictures, however actually moving into quantitative evaluation, like what’s being constructed off of Minerva that may assist us take the content material plus the quantitative evaluation to drive the subsequent era of outputs.

  • Rising corporations that Matt is happy about

Matt: I believe I’m biased as a result of we’ve invested with them for about 4 rounds, however Pagaya is one instance. It’s nonetheless tremendous early innings of the place they’re from the info units and the power to make use of AI to generate higher credit score decisioning and outcomes and their skill to construct this community of consumers and companions to originate extra loans. It’s higher for the underlying buyer. It’s nice for the companions. And it’s nice for those who like to purchase these loans, which is a world that has existed for many years and can live on. And so the power to do higher matching and to construct that community connectivity is fascinating. And for those who have a look at some other public info, they’re explaining increasingly more about what they’re doing to the underlying market due to their need to be extremely clear with how they use AI and the way it advantages the top buyer, their companions, and the consumers of those loans. And once more, I believe it’s early days.

  • Dangers of generative AI, such because the elevated threat of fraud

Matt: It’s an excellent query and I believe frankly no person is aware of, but it surely’s a very nice alternative as properly. I’ll offer you an instance. So we’re seeing in a few of our corporations you can construct higher guidelines to file chargebacks on the service provider degree for e-commerce purchases, the place the query is, “Is it pleasant fraud or is it official fraud?” The power to tell apart and differentiate and course of that influx is definitely a fairly daunting problem.

The burden lies on the service provider who doesn’t have the time or effort or capabilities to deal with it. Even giant retailers have vital chargeback points, however they’re dealt with most likely in-house. That being stated, having an answer that is ready to speed up that course of as a result of fraud is extra rampant and fraud appears newer is essential. We haven’t seen a lot of this similar fraud as a result of it’s really being pushed from a generator functionality, which signifies that you’re getting extra quantity or it appears completely different from historic fashions. Each problem creates a brand new alternative. And I believe that’s form of a singular side.

The opposite space round that is artificial fraud. We all know that the place AI can shift voice and shift picture and act extra equally to, or look equally to one thing that’s actual as a result of it’s actual, however in a unique assemble. And that’s going to create much more identification fraud that’s going to have an effect on commerce, can have an effect on banking, or have an effect on funds. It may have an effect on the legitimacy of all monetary companies.

  • Monetary companies incumbents have gotten a serious increase with GPT-4 and different open-source software program — does this damage startups with tech moats?

Matt: I believe it does, to a level. I believe it positively shrinks the innovation hole. I don’t assume it means, “Hey, the incumbents are going to stay the incumbents and win”, however I do assume it means, “Hey, that nimbleness and that skill to concentrate on execution must be prioritized” and must be performed effectively, as a result of that tandem can outperform the company implementation and company supply and regulatory paperwork, for lack of higher phrases, that exists in these organizations. So there shall be a singular push-pull threshold right here within the subsequent handful of years as incumbents are ramping and scaling up sooner, however, the rising corporations providing these options are competing, but in addition accelerating due to their nimbleness.

  • Digital belongings have gained traction lately. What areas of crypto and blockchain do you assume are most investable?

Matt: So what’s fascinating about this area is for those who separate between DeFi and CeFi and all the pieces that’s occurring in and across the broader digital infrastructure area, loads of the ache factors that we’re seeing in monetary companies and the broader fintech universe are relevant and actually mirror what’s occurring within the crypto and blockchain area. Fraud is a big concern. The power to concern, settle, switch, and make funds, notably round utilizing stablecoins the place you’ve obtained a digital forex that must be exchanged with fiat and vice versa. These are actual, tangible ache factors that as these companies, as these industries, as these markets broaden, stablecoin utilization for funds is barely going to speed up. Fraud because of this is barely going to speed up. And people are possibly a bit of bit just like the much less horny of concepts within the area, however they’re going to be important to the success of that ecosystem.

DeFi has labored, , vis-a-vis CeFi, particularly within the wake of a few of these bankruptcies that we’ve seen within the collapses out there. What I believe could be very promising is, it’s not an if, however extra of a when — when chain oracles and scaling enhance DeFi as a viable various cost or finance community. That, I believe, is the half that turns into extremely thrilling. I believe there simply must be more and more extra belief within the decentralized providing of monetary companies. And that takes time, but it surely’s confirmed that it’s labored at the very least on the present scale.

It’s unclear if this occurs within the subsequent sub two years. I believe between the subsequent two and 5 years is when it occurs. I don’t assume it takes 10 years for the complete market to catch up, however I believe there’s nonetheless going to be sufficient regulatory overhang, notably till we get by way of an election cycle in ’24, the place there’ll be actual perception into the oversight. However the promise and the applicability of this know-how and what it does and the way it’s supposed to raised serve and rework the monetary companies ecosystem nonetheless applies. Everybody that was enthusiastic about it two years in the past ought to nonetheless be enthusiastic about it. However adoption is essential and rising capabilities wants to enhance. However these are issues that may occur and are going to, and one will kind the others, and then you definitely’ll have a snowball impact the place I believe over the subsequent two to 5 years, you’ll have a lot broader adoption.

Try the Episode on the platform of your selection right here: Spotify | Apple Podcasts | Soundcloud

About Oak HC/FT

Oak HC/FT is a enterprise and progress fairness agency investing in corporations driving transformation in healthcare and fintech. Oak HC/FT companions with main entrepreneurs at each stage, from seed to progress, to construct companies that make a measurable, lasting affect on these industries.
Based in 2014, the agency has $5.3 billion in belongings beneath administration. The companions on the agency have had 46 realizations and 35 corporations reaching valuations in extra of $1 billion.

About Matt Streisfeld

Matt Streisfeld is a Normal Associate at Oak HC/FT. Matt joined the agency in 2015 and focuses on progress fairness and early-stage enterprise alternatives in FinTech.

Matt presently serves on the Boards of AU10TIX, CLARA Analytics, Highnote, Justt, Namogoo and ZenBusiness. He’s additionally a Board Observer at Ocrolus and is actively concerned with Mix (NYSE: BLND), Pagaya Applied sciences (NASDAQ: PGY) and Paxos. His prior investments embody FastPay (acquired by AvidXchange), Groundspeed (acquired by Insurance coverage Quantified), Kryon (acquired by Nintex) and Urjanet (acquired by Arcadia).

Previous to becoming a member of Oak HC/FT, Matt was a Vice President with LLR Companions, a middle-market progress fairness agency, the place he targeted on investments in monetary companies know-how corporations. Matt was beforehand a Senior Affiliate at Lightyear Capital, a personal fairness agency targeted on middle-market monetary companies corporations. Matt was additionally an Affiliate within the insurance coverage funding banking group of Keefe, Bruyette & Woods.

Concerning the Writer

Kailee Costello is an MBA Candidate at The Wharton Faculty, the place she is a part of the Wharton FinTech Podcast staff. She’s most obsessed with how FinTech is breaking down limitations to make monetary services extra accessible — notably within the private finance area. Don’t hesitate to succeed in out with questions, feedback, suggestions, and alternatives at kaileec@wharton.upenn.edu.

As at all times, for extra FinTech insights and alternatives to collaborate, please discover us beneath:

Wharton FinTech: Medium Weblog | Twitter | Our Web site | LinkedIn

Recommend a Podcast Visitor | Rent Wharton FinTech MBAs



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