Meet the Buy Side: Investing in Early-Stage Fintech and the Opportunities in the Space Featuring Logan Allin from Fin Venture Capital

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

We’re proud to feature our next guest in the “Meet the Buy Side” series, where we feature Logan Allin who is the Managing General Partner of Fin Venture Capital, which is a VC firm that specializes in FinTech investments. He shares some of his thoughts on investing into early stage ventures, especially in the FinTech segment where the industry is prone for disruption and incumbents need to innovate, due to new technologies inclusive of blockchain, enterprise SaaS, and mobile-first models.

Prior to launching Fin Venture Capital, Logan Allin was the VP of SoFi Ventures & Corporate Development, his second stint at the company where he played a role early in its inception in 2012. For those less familiar with SoFi, the company provides full stack digital financial services to Millennials/Gen Z leading with student lending, the company was recently valued at $4.3B. We’re proud to feature Logan Allin in our series.

Q&A Section with Alex Cho and Logan Allin from Fin Venture Capital

Alex Cho (CEO and Founder of Cho Research) – Hey Logan, thank you for taking time out of your busy schedule to host this Q&A, I know how busy you must be given the holidays, and the busy travel schedule and all.

So, I wanted to start this Q&A, by discussing how you got involved with Venture Capital, I’ve read your biography, and I was hoping to get a couple more insights that you might not have shared publicly, so people can get a better sense of where you come from, and how your career has evolved over time.  

Logan Allin (Founder and Managing Partner of Fin VC) – Started my career in management consulting helping financial services companies innovate, which is a bit like making an elephant dance, but learned a significant amount about enterprise SaaS, cloud migration, and front/middle/back office FinTech. Moved to the industry side at City National and then Invesco and was running around Silicon Valley meeting with VCs and entrepreneurs and recognized they were having more fun than I was in the corporate world and took the steps to transition to SoFi and then Stanford GSB as a steppingstone. After operating and advising for several years, I began Angel investing and that naturally led to formal VC seats, which ultimately led me back to SoFi and after building Corp Dev and VC, decided to spin out and start my own firm.

Alex Cho (CEO and Founder of Cho Research) – Pretty fascinating, and so can you share your approach to early-venture investments, and how your VC firm does it differently than other VC firms?

Logan Allin (Founder and Managing Partner of Fin VC) – We are top-down macro thinkers focusing on greenfield sub-sectors within FinTech and exclusively on enterprise SaaS and B2B models. Within FinTech, we believe there are 6 sub-sectors currently that have material greenfields and VC return opportunities, those include: Alternative Lending, Asset Management, InsureTech, RE Tech, Blockchain Enterprise Applications, and Enabling Tech/Infrastructure. In addition to our disciplined macro approach, deep industry expertise, and corporate/start-up operating experience, we work hands-on with our portfolio companies principally on business development in helping them get access to global customers and closing ARR (annually recurring revenue). Further, we support follow-on capital syndication through our LP base and close co-investment partners.

Alex Cho (CEO and Founder of Cho Research) – When it pertains to investing into the early-stage segment, it’s obvious that it’s fraught with risks, so how do you filter out the wannabes from the legitimate disruptors in the fintech world?

Logan Allin (Founder and Managing Partner of Fin VC) – We start with the greenfield sub-sectors and we proactively go out and source the 3 top early stage companies that are solving for that problem. We then take a bottoms-up score carding approach to evaluate the companies and we also make business development introductions to our network to show value as well as support our due diligence process – observing the sales and implementation cycles firsthand. Furthermore, we have developed proprietary private company SaaS metrics based on our research, data, and experience to benchmark companies from Seed onwards, which gives a quantitative edge in evaluating and determining our follow-on approach.

Alex Cho (CEO and Founder of Cho Research) – So, let’s turn the conversation over to your existing VC portfolio. From conversations we’ve had in the past, I recall this unique start-up tied to the creation of new software tools for fundamentally oriented investors. I believe the start-up was called Aiera, and you participated in its early investor rounds, can you share some more thoughts on Aiera and why you thought it was a great investment?

Logan Allin (Founder and Managing Partner of Fin VC) – When I was in my management consulting and industry roles, I observed that equity long only and hedge fund Portfolio Managers and Analysts were held back by two big issues:

1) Aggregating all publicly available market data in a single solution – typically they were leveraging 5-7 market data and analytics providers, none of which were integrated and the raw data ended up in Excel and they were making decisions via Excel macros ultimately.

2) ~30% of the market volume is quant-driven trading, leveraging typically proprietary black-box tech, while the rest of the industry struggles to garner a quantitative edge. Aiera solves for both of these problems, using AI/ML, NLP, and other frontier tech to provide a center of the desktop solution for investment research and decisioning. One other differentiated aspect of their solution is “events” in which they are transcribing and annotating quarterly earnings calls and key investment conferences.

Alex Cho (CEO and Founder of Cho Research) – Okay, so the other two companies that come to mind are blockchain start-ups, and from my experience blockchain is still a work in progress. How do you kind of differentiate from blockchain-enabled platforms from crypto-assets, or crypto-coins? And then, I’ll ask you abut two of your blockchain investments as a follow-on.

Logan Allin (Founder and Managing Partner of Fin VC) – Our view is that the biggest opportunities in blockchain, taking a long view, are enterprise applications, using blockchain technology as a better tech stack over traditional databases and SaaS modalities. The primary use cases for blockchain and distributed ledger technology are in cases where you have expensive rent-takers sitting in the middle of a process collecting fees and slowing things down. Our upfront work is in identifying these use cases and methodically sourcing companies creating solutions and we take a position in both corporate equity and in the digital asset/token produced by the protocol. We are less bullish on crypto coins/currency, as we don’t believe they will achieve material scale as stores of value or transaction/commerce mediums.

Alex Cho (CEO and Founder of Cho Research) – So, I recall a conversation pertaining to Figure, which is a start-up focused on enterprise blockchain applications, starting with the ABS (Asset Backed Securities) market.

So, can you elaborate a bit more on that?

Logan Allin (Founder and Managing Partner of Fin VC) – Figure’s a game changing company that has built an enterprise blockchain solution (Provenance.io) to solve for the securitization process, a ~$3T market in the US that is highly inefficient “off chain.”

With their protocol they’ve also identified a number of other use cases they can address more efficiently, achieving significant time and cost efficiencies, along with greater transparency, security, and global scale.

Alex Cho (CEO and Founder of Cho Research) – Okay, and so this is another one that I found interesting, which is Braintrust, this particular start-up recently received $5M in total funding as part of their Seed Round. They have a blockchain powered freelancer platform, and given the efforts in that segment, which would be inclusive of Fiverr, and UpWork, can you explain the differentiation?

Logan Allin (Founder and Managing Partner of Fin VC) – BrainTrust is solving for the future of work using a decentralized network of employers and top tier freelancer tech talent, creating a tokenized network effect. When we speak with financial services CTOs, their top pain point is typically a lack of access to tech talent and thus the blockchain use case of talent networks arose and BrainTrust emerged to solve for this universal challenge.

Alex Cho (CEO and Founder of Cho Research) – Pretty awesome discussion tied to your portfolio investments, so let’s turn the conversation over to something broader, and I know this might be a little controversial.

But, let’s talk about Softbank Vision Fund, now a lot of VCs have had colorful things to say about their strategy lately, and the recent woes pertaining to WeWork, and Uber have created this black cloud over them, can you kind of elaborate a bit more on this?

Logan Allin (Founder and Managing Partner of Fin VC) – There has been sufficient coverage on Softbank’s investment and operating challenges, the issues of over-valuing companies, providing more capital than required, creating misalignment with founders and subsequent culture/governance issues, etc.

What has not been covered is what we’re calling the “Softbank domino effect” on the fundraising environment and that impact on the LP community. Indeed, Softbank went out and raised $100B which drove top tier VCs and growth PE players to raise larger funds on an expedited re-up basis which created significant dry powder globally, competitive rounds in scarce quality opportunities that have driven up valuations, and a focus on growth/late stage rounds where more capital can be put to work.

Moreover, the LP community has become over-exposed to VC and the traditional LPs (FoF, endowments, foundations, and pensions) have felt pressured to re-up at larger levels to maintain the long term manager relationship, leaving less room for emerging managers, and a tilted asset allocation to VC which could prove problematic given where we are in the cycle, particularly for the beneficiaries (universities, charities, retirees, etc.) of those investors.

Alex Cho (CEO and Founder of Cho Research) – This ties me into another point, which is the ethics tied to the VC industry. Now, my experience may vary from others, and given the fact that I’ve worked the public markets angle for so long as a publisher, I find the lack of transparency a difficult hurdle. More specifically, the masking of portfolio returns, simply because large VCs are able to assign private valuations at much higher premiums, because they continue to participate in these private investment rounds that continue to push valuation higher, though in some cases, with very little fundamental justification.

Can you clarify your thoughts a bit more on this, and share some unique insights?

Logan Allin (Founder and Managing Partner of Fin VC) – Valuations are certainly toppy currently and multiples at all-time highs in growth/late stage PE and public market TMT (technology, media and telecom). For the private markets, “mark-ups” (subsequent priced rounds led by new follow-on investors, setting terms independently) are the standard for VCs to hold their positions at, but would agree that this leaves a lot to be desired both in terms of governance and fiduciary management as well as in creating transparency with LPs.

We have a valuation policy that we developed with our fund admin and auditor in which we re-assess FMV (fair market value) bi-annually and ensure the marks are aligned to company performance and multiple comps, and that if there are marketability or impairment issues, that we weigh those in recalibrating the valuation. We believe in transparency, quantitative benchmarking and analysis, and ensuring we’re grounded in the reality of the micro at the company level and macro conditions.

Alex Cho (CEO and Founder of Cho Research) – Salient points, and thank you for shining a bit of a brighter light on that specific issue, now let’s return to a topic that’s perhaps a bit closer to home, and this pertains to SoFi, or Social Finance, the company has gone through quite a bit of a transformation from being an innovative financing platform to then becoming a one-stop-shop for all things financial, so can you kind of share your thoughts on this transformation and what differentiated the company vs. newer players like Robinhood and Acorns?

Logan Allin (Founder and Managing Partner of Fin VC) – SoFi has scaled because it is a high affinity brand that is generating network effects through the “community of Members” it has built, provides multi-product solutions delivered through mobile/web tech supplemented by centralized human resources (alternative lending across mortgages, student and personal loans, wealth management and trading, insurance, banking/checking, credit cards, etc.), and is multi-channel (direct, through affiliates, and employers with [email protected]).

If you compare that to both incumbent and new players, it’s challenging to compete with that breadth of product and diversity of distribution, as well as the moats it has built as a first mover and in the tech stack the team has developed, attracting the most critical consumer demo’s going forward (Millennials/Gen Z).

The CAC/LTV (customer acquisition cost/lifetime value) dynamics of the peer set are challenging and highly capital intensive, they are also not positioning a “high affinity and sticky” product as a starting point (as we did with Student Lending), with checking/savings products that are highly commoditized and have low switching costs.

As it relates to valuation, public market investors have treated “comps” as book value businesses, making an IPO exit a challenging proposition for any player like SoFi or adjacent, which is why we believe these businesses will be acquired by incumbents and you’ll see continued consolidation in the financial services industry broadly.

Alex Cho (CEO and Founder of Cho Research) – Who do you look up to in the industry and how has that shaped your approach to building your firm?

Logan Allin (Founder and Managing Partner of Fin VC) – The VC industry has gone through tremendous change in make-up and approach in the last decade. The top generalist VCs have largely remained in place, with some exceptions like Kleiner Perkins Caufield & Byers, which has since split up, they have raised significantly larger funds driving them to partition their funds by stage and creating “mixed stage” vehicles which have been more challenging to deploy and drive consistent Alpha.

We look up to firms like Benchmark that have taken a macro/thesis-driven approach and remained disciplined around fund size ($500M) and stage focus (Series A entry point), despite pressures to change, and they have consistently outperformed as a result. Andy Rachleff who co-founded Benchmark was a professor of mine in business school and I admired his and the team’s mindset and approach as well as the culture they have built at the firm.

As a result of Benchmark and others who have stood the test of market cycles, we believe in a specialized, disciplined and fiduciary investment approach, coupled with a highly team-based and consensus decision making process.

Alex Cho (CEO and Founder of Cho Research) – And so, as a follow-on to that question could you clarify further the performance of VCs as an asset class and what types of managers tend to outperform?

Logan Allin (Founder and Managing Partner of Fin VC) – For those LPs or co-investors considering VC as an investment vehicle: 1) Early Stage has outperformed Growth, Late, and Mixed stage funds for over 35 years across several cycles and we see this persisting; 2) Smaller funds outperform larger funds, the inflection point has historically been $400M+ where you see a drag on performance; 3) Emerging managers are outperforming established managers; 4) Specialists are outperforming generalists; and 5) Co-investment rights for LPs is hugely important as they scale exposure to the space.

Alex Cho (CEO and Founder of Cho Research) – Okay, so how do people get involved with Fin VC, and how do they get in contact with you, assuming they want to invest with you, or if they’re seeking capital from your firm?

Logan Allin (Founder and Managing Partner of Fin VC) – Thanks Alex, appreciate the question, they are welcome to reach out to us at [email protected].

Alex Cho (CEO and Founder of Cho Research) – That was a great Q&A Logan, and I’m glad you could share your thoughts, and I’m sure the readers will appreciate your insights as well. You’re welcome to share your thoughts on this platform whenever you want, and I’m sure we’ll stay in touch in the coming years.

Logan Allin (Founder and Managing Partner of Fin VC) – Pleasure was all mine, thank you for hosting me, and I look forward to the new year. Hope you have a great Christmas holidays as well.

***This concludes the Q&A section with Alex Cho and Logan Allin from Fin VC***

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