Regular Family Wealth Report contributor Joe Reilly recent sat down with Logan Allin, head of FinVC, a global fintech venture firm specializing in B2B enterprise Software-as-a-Service companies with more than $1 billion in assets under management. We talk about how fintech is affecting the RIA world, alts going mainstream and why Logan avoids social media.
Joe Reilly: Give us the skinny on why VC firms should register as RIAs.
Logan Allin: So we believe that all VC firms should register, full stop.
I think the SEC certainly has been making the right moves to support that view as well. The ERA or exempt reporting advisor requirement is, forgive me, a kind of a joke. You’re filling out a Form ADV with very basic information that could fit on a post-it note, and that’s it.
That doesn’t provide LP protection. It doesn’t provide comfort for founders, and it certainly shouldn’t provide comfort for regulators given that those companies are raising hundreds of millions of dollars and deploying them to private companies that could have systemic risks. And so, with an RIA, it’s the right thing to do as you institutionalize the business and want to take on more institutional capital.
As long as we’re talking about RIAs, what are your thoughts on the whole alternatives going mainstream movement and platforms like iCapital and Opto?
We think that certainly for accredited QPs [qualified purchasers] and RIAs, it’s an important move.
It’s a great time to be considering alternatives given the market correction and the likely vintage success of 2022, 2023, and 2024 funds. Much like some of the best vintages in venture were 2008 to 2010. RIAs and these high net worth individuals are going to look at diversification away from the 60/40 model which obviously dramatically underperformed last year.
They need to look for uncorrelated Alpha where they’re getting diversification across a whole host of alternative asset classes, and it’s going to be venture and private equity and real estate and credit, although certainly some hedge funds started to reperform last year like Citadel.
We think that’s an important trend line. It’s very difficult from a diligence, subscription, and reporting standpoint for those larger players and alternative managers to provide access to RIAs and to HNWs. And so having a technology intermediary really makes sense.
And Opto, where we’ve investors led by Mark Machin, who has deep credibility as an LP himself, I think it is the future, particularly for that RIA channel who have really struggled to not only allocate and figure out what an alternative asset allocation looks like, but then go out and find best-in-class managers.
You don’t want RIAs out there having adverse selection problems and simply taking the managers that are coming into their doors. You’d rather they have the tools that they need to make those decisions. We believe that democratization of access is healthy for the industry and will obviously require regulation and infrastructure, but those will all come through traditional RIA constructs, and we think that’s terrific.
We’re also investors in another company called Bite Investments which is more focused on QPs and accredited access to funds. Goldman and Carlyle and others have already listed on their platform.
What do you think of the businesses themselves from a competitive standpoint? Does it become a race to the bottom fee-wise?
Fund-of-fund businesses have always been challenging, I believe. I think they are good businesses so long as they’re selling software first and access second. If they can build the technology tools for data rooms, diligence processes, facilitating FAQs and Q and As and content, and then the ongoing reporting and management of that portfolio, then that’s a huge positive.
And they will need to be charging for that software first and then access overlay fees to the manager’s second, which [referring] to your point, I think will get compressed and have been compressed historically. So that’s why we invested in both Opto and Bite, it was a view that this is important software and there’s going to be a strong willingness to pay by the managers, by the institutional distribution channels, and then ultimately via the end investors themselves.
So Marcus at Goldman is very much in the news. How are the big banks staying relevant in the neobank era?
I think all the banks have realized that they can’t build these neobanks themselves.
Acquiring a consumer fintech business is fraught with issues. We’ve had Marcus being formed by the acquisition of Clarity Money. The minute you acquire one of those B2C businesses, the value of that business evaporates as soon as the founders leave, right? Because you can have very cool I-frames and products and apps, but then you lose all the talent and extraordinarily talented fintech entrepreneurs who absolutely do not want to work inside banks.
Banks will never be able to affect the culture that is needed, the compensation that is needed, and the upside incentives and wealth creation. That the best entrepreneurs need to thrive and scale. And acquiring consumer businesses is hugely problematic. Clarity Money at Goldman, Frank at JP Morgan where it turned out, the CEO, who we passed on by the way, was lying about the makeup of her consumer base which is just completely inexcusable.
Both inexcusable on her and the company’s part, but also inexcusable on the diligence that was not done. Secondly what I would say is that the banks realize that they need to partner and license software from fintech B2B software providers.
In JP Morgan’s case, the very successful partnership with Greenlight is interesting. They first built a product for Gen Zers and families, and then they just canceled it and blew it up. And then they went and partnered with Greenlight because they recognized that in serving families, serving Gen Zers, they were far better off renting that technology.
And that’s been a hugely successful partnership for both sides. And the same can be said across the board in terms of banks partnering, especially from a revenue distribution standpoint. These are more revenue-oriented opportunities for the bank where they’re leveraging technology to go out to their built-in customer base to make them stickier, and more profitable.
What advice do you have for a fintech founder?
Start a B2B SaaS plus business. Do not start a consumer business. Do not start an SMB business, and certainly right now, do not start a crypto business.
If you want to be a fintech founder and you have a passionate idea, figure out ways to make the business model work. I think founders will often just run after an idea and not think about the long-term consequences of the actual business model, and that is fundamental. Secondly, in terms of our market outlook, we think 2023 is going to be more pain.
There’s going to be significant force consolidation in M&A that will be driven by both strategics and buyout players. We’ve already seen Tomo and Vista be very active here in the last year. Third, IPO markets are largely going to be shuttered except for highly profitable businesses in tech. Cash burning businesses need not apply.
And, as a result, we think the IPO market this year is going to be very limited.We see that recovery both from a rate compression relief on inflation kicking off in the first half of 2024, and the next market cycle starting in 2024. Which means that in 2023 you must continue to play defense, be thoughtful about runway, be thoughtful about burn, raise bridge rounds, whether those are flat or recapped, or a SAFE note or a convert and or layering in venture debt.
Be thoughtful about the rest of this year and, as we’ve seen that tech cuts are a fact of life right now, and I think very necessary in sustaining these businesses for the long term. And the leaders at these companies are having to make those hard choices but their boards should be fully behind them.
I find it interesting that you have a low profile on social media. Is it not a VC truism that you have to be very online?
I use LinkedIn only, I deleted Facebook, Instagram, and Twitter a year or so ago. All three felt like noise and when logging off I always felt energy depletion and a lesser view of the world given the FOMO, negative sentimentality, and “dunking” culture of these platforms.
As far as getting our message out, on LinkedIn I focus on supporting founders and our companies first, because it’s ultimately not about us, it’s always about them, their journey, and the small part we play in their success. We share domain content, in many cases that our team creates, in a quarterly Navigator which provides our perspective on the Macro, Micro, VC/FinTech world, as well as portfolio updates, and firm updates, a version of which we provide to LPs and then two further iterations for our founders and the public ecosystem.
The takeaway on social media is that building brand equity and reputation is important but at the end of the day, your consistent performance metrics are all that matter to the long-term success of the firm – you can argue that the former can support the latter, but that those metrics are more about disciplined sourcing, diligence, portfolio value-add and management.
SOURCE: FamilyWealthReport