A significant digital shift is currently underway throughout the financial services sector, and is also being observed in numerous non-financial businesses as they integrate financial products into their offerings.

Despite this trend, Sheel Mohnot, previously a general partner at 500 Startups’ fintech fund, and Jake Gibson, a co-founder of the personal finance platform NerdWallet, were surprised by the level of investor enthusiasm for their early-stage venture firm focused on fintech, Better Tomorrow Ventures, or BTV.

The firm recently finalized its initial fund, securing $75 million in commitments, surpassing their initial goal of $60 million. Even Michael Kim of Cendana Capital, an early investor, noted the unexpected success. “Notably, a substantial portion of this funding was secured during the COVID-19 pandemic,” Kim stated.

Yesterday, we spoke with both partners, who have already made investments in 13 startups, leading nine of those deals with the fund’s capital.

TC: Given your focus on fintech, and the current surge in fintech valuations, how do you maintain a competitive edge?

SM: It’s accurate. Following exits like Plaid and Credit Karma, many investors have aligned their strategies with our long-held beliefs. This widespread interest has naturally driven up valuations. However, this isn’t entirely negative; one of our portfolio companies has already experienced significant value growth as a direct result of this trend.

We also believe our backgrounds as founders give us an advantage in securing favorable deal terms. [Mohnot previously sold FeeFinders to Groupon in 2012]. Because our sole focus is fintech, we often possess a deeper understanding of the innovations founders are developing compared to generalist investors.

JG: We’ve found that our experience resonates with entrepreneurs, allowing us to negotiate prices that we believe are reasonable and secure the level of ownership we desire. We aren’t participating in the highly competitive investment dynamic where VCs invest $4 million for a 20% stake. The vast majority of our investments involve repeat founders who recognize the benefits of collaborating with partners like us.

TC: What percentage of ownership do you aim for in your initial investment – around 10%?

JG: Precisely, 10%, although we ideally target 12%.

TC: And will you utilize [special purpose vehicles] to protect your investment as certain companies demonstrate growth?

JG: Yes, I have considerable experience with SPVs. As an angel investor, I’ve invested in 90 companies and deployed over $40 million of my own capital, including SPVs alongside angel investments, over the past five years leading up to the formation of BTV. [Editor’s note: some of those earlier deals include Chipper Cash, Albert, Clear Cover and Hippo.]

TC: Could you share details about the companies currently in BTV’s portfolio?

SM: We haven’t publicly announced any portfolio companies at this time.

TC: Not a single one?!

SM: Founders are increasingly hesitant to announce seed rounds publicly. When I launched my previous company, I actively sought media coverage, believing it would benefit the business. Today’s founders often have a different perspective, with few wanting to disclose details at this stage.

TC: However, there are advantages to gaining visibility and attracting the attention of later-stage investors. Why avoid publicity altogether?

JG: There’s a competitive aspect to consider. Founders don’t want competitors to learn about their work, as a publicized seed round can quickly inspire similar startups. Additionally, the benefits of announcing at the seed stage seem diminished; most founders only announce when they are preparing to raise their Series A. The data available in sources like PitchBook is typically several months [outdated].

TC: Who comprises your investor base?

SM: Our investors include founders of fintech unicorns, several fintech-specific venture funds, GPs from later-stage funds specializing in fintech, a few insurance companies, and individuals from Wall Street who provide insights into that market.

JG: We are also supported by a network of fund of funds focused on emerging managers, including Cendana, Industry Ventures, Vintage [Investment Partners], and Invesco.

TC: Were you already acquainted with many of these investors prior to the pandemic-related disruptions?

JG: Some, but we had to initiate conversations with many others remotely via Zoom. We secured our first close last December, funded by Cendana and individual investors. We had begun discussions with other institutions at that point, but were told that institutional investment typically occurs with a second fund, so our expectations were modest.

Unexpectedly, as March and April arrived, we anticipated needing to raise a smaller fund. However, as conditions improved and activity resumed, we were able to finalize commitments from institutions we had previously contacted. Furthermore, interest surged as the technology sector, and particularly fintech, experienced rapid growth due to IPO and M&A activity. Investors expressed a desire for fintech exposure immediately, seeking a fund specifically focused on the sector, and we were the primary option available.

TC: What criteria must be met for you to make an investment?

JG: Our core belief is that everything is becoming fintech, so we invest broadly across the landscape: payments, lending, banking, real estate, insurance, B2B, consumer – any area that can be considered fintech. We anticipate that many companies not traditionally categorized as fintech today will evolve to incorporate financial services, as more tech platforms enter the financial sector. We focus on pre-seed and seed stage investments, but also engage with founders at the idea stage, sometimes advising them against launching another neobank. [Laughs.]

TC: Do you? I often hear investors say that even capturing a tiny fraction of the market – even .00001% – could result in a multibillion-dollar company with a neobank.

JG: No. The majority will struggle to achieve profitability. Many investors argue that neobanks operate on a model of losing money on each transaction but recouping losses through volume. However, very few have a clear path to positive economics, requiring massive scale and substantial venture capital investment in marketing. Moreover, many are targeting audiences already adequately served by traditional financial products.

SM: The same applies to companies aiming to be “Plaid for X.” Following the announcement regarding Plaid’s acquisition – or what was initially understood to be Plaid’s acquisition – we evaluated five companies, many pursuing similar concepts and competing for the same customers.

TC: Will the Department of Justice’s lawsuit to block Plaid’s sale to Visa, alleging Visa’s monopolistic power, have a discouraging effect?

JG: We haven’t observed that. Many are dismissing the complaint, anticipating a resolution through a SPAC. The company was generating over $100 million in revenue, and given current market valuations, Plaid could successfully go public.

Furthermore, there are currently 40 SPACs specifically targeting fintech. Consider the outcomes that must materialize over the next two years.