Leading fintech VC, Don Butler of Thomvest, on 20 Years of investing in fintech startups

Don Butler of Thomvest Ventures - Podcast Transcript

Scott:	Hey, it’s Scott Orn of Kruze Consulting, and welcome to another episode of Founders & Friends. Before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services in their computer, which sounds kind of like not a huge deal, but actually, we did a study at Kruze. We spend $420 on average just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal. It saves a lot of money. The dogs are eating the dogs. We see a lot of startups coming into Kruze now using Rippling. So, please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share, so shout-out to Rippling. Now to another awesome podcast at Kruze Consulting’s Founders & Friends. Thanks.
Singer:	So, when your troubles are mounting in tax or accounting, you go to Kruze from Founders & Friends. It’s Kruze Consulting Founders & Friends with your host, Scotty Orn.
Scott:	Welcome to Founders & Friends podcast with Scott Orn at Kruze Consulting, and my very special guest today is Don Butler of Thomvest. Welcome, Don.
Don:	Great to be here. Thanks for having me.
Scott:	Yeah. So, we met probably six years ago when I had a Fintech idea, and you were, I think, the nicest and one of the smartest VCs I met. I was super excited to have you on the podcast. Maybe kind of tell your professional story a little bit and how you ended up at Thomvest.
Don:	Sure. If I were to look back at the span of the career I’ve had, it started initially in investment banking back in the days at, sort of the investment banking analyst at Lehman Brothers. From there, actually transitioned into doing business development for startups. So, made a transition out to the West Coast, worked in tech investment banking for Lehman out on the West Coast after working in New York. What I really wanted to do is I want to work with startups doing BD. For me, it was actually, did a lot of work helping companies go out to Asia, because I also have an Asian background. I did that for about six or so years, and worked across many, many different companies. It was a group called Asia Pacific Ventures, and so we helped people launch out in Asia. Then during the course of that process, I met a guy named Peter Thompson who had just started a venture firm called Thomvest.
Scott:	I’ve heard of him.
Don:	Yeah, Thomson Reuters fame. It’s funny, I think Peter and I are about the same age. I would say we’re still, call it early to mid-career. I never thought I would work at any one place for more than five years. I thought, five years you sort of, you’ve had a good run and go, and February will be 20 years.
Scott:	Oh my God. Really? That’s amazing. Well-
Don:	Yeah, it’s amazing.
Scott:	You were sharing with me before we turned the mics, how much Thomvest has grown. It’s been really amazing. We’ll get into kind of the opportunity you recognized in FinTech, but maybe just share the metrics on the firm and how big you guys are now.
Don:	If you look at it today, we’re about 11 folks out here on the West Coast, and we’re organized according to verticals. We have a vertical model where these days heavily focused on areas that I cover, for instance, like FinTech. We also cover proptech, and then we also cover cybersecurity. Then in each of those areas we have teams. So, we have everything from senior people who’ve been operating executives, to investing folks like myself, and then also to principals or associates. If you look at Peter Thompson, the broader group, there’s the venture business out here, about a $500 million fund today.
Scott:	Which is kudos to you. Congratulations.
Don:	Thanks. Yeah, no, it’s grown from the very early days when we first met.
Scott:	Yeah.
Don:	That’s an evergreen fund. In fact, we’re reinvesting profits from previous investments and things have scaled up. Then he also has a couple of other businesses, one of which, and it’s kind of relevant to directions we’re going in, is a residential real estate business where he buys, renovates, and rents out residential real estate across parts of the south, southern states, southeast. You know, it’s funny, we were saying [inaudible], we had a year-end planning session, and I think we had, gosh, about 22 people in total.
Scott:	Wow.
Don:	At the planning session. Back from the days when it was sort of like two or three of us.
Scott:	Yeah, and for a venture capital fund, that’s a really good size. Venture capital funds tend to be, they tend to be lean, and so kudos to you. That’s really amazing. I’m so excited to have you on, because you just… And I’m going to speak for you, because you’re a very modest person, but you just totally nailed the first kind of wave of FinTech, as I know it, in the ‘08 to, I don’t know, 12, 14 time zone.
Don:	Yeah, we got lucky.
Scott:	But there’s luck in being right… Knowing what’s going to happen. Maybe talk about that first wave and some of those companies you invested in and the opportunity you saw at the time.
Don:	Yeah. It’s funny, the very first company we invested in was LendingClub.
Scott:	Yeah. Not bad.
Don:	Yeah, worked out well. Worked out well. It’s amazing, and that company’s sort of gone through its travails a little bit in the public market, but still it was an amazing run. As I sort of looking back at the very first, that wave of Fintech, which was sort of the online lending wave, I think we were looking at the time was we were looking at this concept of increasingly complex transactions going online and saw that happening with lending. It’s funny, I remember we actually did a study because we had a previous investment in the online travel space, and the study was comparing online travel to online banking. One of the things you saw on travel was that it had developed back at that time to the point where 70% of travel purchases were considered online and then executed online.
Scott:	Yep.
Don:	So, we said, okay, let’s look at what’s happened. You looked at National Bureau of Labor Relations metrics. What had happened to travel agents, and said, okay, let’s parlay that over to the bank.
Scott:	Bank tellers, mortgage writers or… Yeah, yeah.
Don:	Or brokers or… Said, gosh, this feels like the same thing could happen. I’ll tell you a funny story, which was when we first invested in LendingClub, we invested in the equity, and then we also at a time when the largest online investor in the company had about a million dollars on the platform, Peter put 25 and then 50 million on the-
Scott:	I remember you telling me at the time. You picked up some warrants I think in that or some equity, but you basically provided liquidity to LendingClub so they could actually do loans. That was a game-changing moment in peer-to-peer lending.
Don:	It was kind of nice, for I think about maybe 18 months, I think Peter was the largest investor in online lending worldwide. It was funny, though, I remember the day we were wiring the funds… I might’ve told you this.
Scott:	I don’t know yet.
Don:	We had a near and dear friend who at the time was managing wealth management for Credit Suisse. We were using Credit Suisse at the time. Called me up and he said, “I see these wire transfer instructions. I looked at this company called LendingClub, and I looked it up, and they do loans to people they’ve never met in person.”
Scott:	Yeah. Yeah.
Don:	I said, “Yeah, that’s kind of the bet.” It was so funny. Just completely dead pan, he said, “So, you saw the financial crisis that just happened, right?” In hindsight, it was interesting, because for me that was like a definitional conversation, because it was like one of those things where, wow, okay, this concept of lending to people online, it felt very nascent at the time.
Scott:	Oh, yeah.
Don:	The other industry we actually looked at when we were looking at this was online dating. It was a similar concept. It was like, “Hey, these are people you’ve never met in person, but you’re willing to pick out somebody you might go out on a date with.”
Scott:	I met my wife on eHarmony, which is super old school, but I’m a believer. Well, it’s the same thesis, though. You’re right in that there’s a pool of people out there that you’re never going to meet bumping into them in a street or a bar, and the same thing with lending, there’s a bunch of people who aren’t ever going to come into your branch-
Don:	You would never contact-
Scott:	But they’re great, either people to marry, in my case. I’m sure you had a moment like, “I hope this works” kind of moment, right?
Don:	We did. It was funny, because I think when he called me, and he had been a career-financial industry services professional, it was one of those ones where I remember saying, “Yes, let’s send the wire,” and there was a big check at the time. We were like, “Yeah, it will just work.” But I think we were convinced of this availability of data coming into companies.
Scott:	Yeah.
Don:	The other thing, so that led us to invest in a couple of other companies. I think Kabbage and then Sofi. It’s funny. That’s turned into a string of seven or eight companies now in this space.
Scott:	Yeah.
Don:	If I look at how those companies have fared, you know what’s interesting is, I think the thesis of more and more data coming online that you can use to sort of understand human behavior, that’s panned out.
Scott:	Oh, big time. That was the thing with LendingClub and then Kabbage, Sofi. It was all math-based. It was like, “Hey, we actually know what’s going, and the actuarial tables are saying these are good credits, and they’re going to work out, and they’re going to [crosstalk] portfolio.
Don:	Yeah.
Scott:	Each one of those companies did something really interesting. The LendingClub did peer-to-peer, like Peter’s money running out.
Don:	Yeah.
Scott:	Kabbage did small business lending, which I always thought was even riskier, for some reason in my head, maybe not.
Don:	Yeah. No, I think there’s something to that, though. It’s interesting. I don’t know if it’s depending on the credit, like the FICO band you’re lending to or the people you’re lending to, it’s interesting. I realize, especially because Kabbage loans are unsecured, because in London, so what you’re trying to sample through the data is not somebody’s personal financial characteristics, which you might pick up in a FICA score, but their ability to manage a small business. I do think it’s an order of magnitude harder to be able to do that. I think over time, as they’ve pulled in more data sources and as they’ve refined their underwriting models, they’ve gotten better and better at it. These days, I think when we look at market statistics, I think one thing that helps is scale, and I think they’re probably something like two to three percent of the US small business [crosstalk].
Scott:	Wow.
Don:	What happens is, and bear in mind, they’re also looking, for their current customers, they’re looking at all of their data every day.
Scott:	Yeah.
Don:	So, you build up this contextual view of how small businesses are doing. One of the insights that popped out of the work with Kabbage that always intrigued me was you could have a coffee shop in a given geography, a coffee shop in San Francisco, and a second coffee shop down the street in San Francisco. Normally we’d say, “Well, how strong of a factor is geography and the local economy?” Actually, we found that there’s in many instances, a stronger correlation between how that business is being managed, and that trumps geography. If the one coffee shop owner is trying to really aggressively grow his business, he’s going to look a lot more similar to somebody else in another city.
Scott:	Oh, interesting.
Don:	That is also trying to grow, versus the guy down the street.
Scott:	Oh, interesting.
Don:	Yeah. There really is something to sampling on somebody’s ability to manage a small business.
Scott:	Well, and it’s so hard to judge that. We did OnDeck Capital at Lighthouse, which was kind of a… But I think Kabbage maybe did it, maybe it was doing something, and ended up working better for Kabbage. The other thing that Kabbage did was almost like instantaneous approval. That was the thing that really got my attention. I was like, “Oh my gosh,” and it was clear, it was an algorithmic approach, but that was a game changer for the market.
Don:	Yeah. It’s almost like the automation of underwriting.
Scott:	Yeah. That’s exactly what it was, yeah.
Don:	If you look at it, and I’ve met some of the folks from OnDeck over the years. I have a lot of respect for what they build. At the same time, you look for differences between the two companies sometimes.
Scott:	Yeah.
Don:	I got the impression that Kabbage has very much tried to also go build a direct consumer brand, where OnDeck, I think, also had, used a broker chain.
Scott:	They were buying a lot of… Yeah, yeah, yeah. It worked out for both of them. Then Sofi was … And I was too chicken. Remember how they did those, some of those debt, investment-
Don:	Yeah.
Scott:	Individuals can invest. Christina Kramlich came and told me I should invest in Sofi at Series A or Series B, and I was too chicken, but you obviously did it.
Don:	Yeah.
Scott:	They were onto… I don’t know how to say it, but there’s a word for it, but specialty groups and recognizing how specialty groups behave in different ways sometimes and how you can underwrite a specific specialty group that you couldn’t do with someone else.
Don:	Yeah, no, that’s right. You look at their concept of, was it high earnings, not yet rich, like HENRY.
Scott:	Yeah. Yeah, yeah, yeah.
Don:	I think they sort of figured out how to do cash flow underwriting for that segment. What’s funny is actually we’ve also followed Mike Cagney into his next company.
Scott:	Oh, you’re bigger, yeah, that’d be cool.
Don:	Now working with him again at the next, the next couple of-
Scott:	I’ve met him a couple of times, and he’s as real as it gets, good and bad, you know?
Don:	That’s right.
Scott:	You know exactly how he feels.
Don:	Yeah, yeah, yeah, that’s right. I’d say he’s almost like an iconoclast.
Scott:	Oh, totally.
Don:	He will tell you exactly what he feels. The thing that’s interesting is that he’s not afraid to sort of call out financial institutions sometimes, but I think he’s proven himself kind of a rare entrepreneur in financial services.
Scott:	Yeah, yeah. He’s so smart. He was doing, trying to do Black-Scholes in his head on startup warrants while I was talking to him, and arguing with me about the value, and I was like, “Mike, you’re going down…” But I knew I could tell, I was like, “This guy is like 30 IQ points higher than me,” you know?
Don:	It’s funny. You take somebody who’s both smart and then also knows the industry.
Scott:	Yeah, yeah, and he saw it. That was the first… You guys, I mean, kudos. You nailed it.
Don:	Yeah, thanks. Thanks. But there’s also plenty of other great fields than FinTech that are out there as well.
Scott:	That’s the first wave, and then maybe talk about what you’re seeing over the last three or four years and the stuff that you’re investing in nowadays.
Don:	It’s interesting, because there’s been like this I’d say proliferation in all sorts of areas of FinTech. We just came through this review of a… Gosh, I think it was like 10 different sub-segments, and all of them were sort of doing well in growing and everything from what you’re seeing, like, the consumerization of finance. Companies like Dave.com or… Then also sort of the next generation of banks, like the Chimes of the world. Because we have the real estate investment businesses, that one area that we pushed into very heavily has been this intersection of finance and real estate.
Scott:	Yeah.
Don:	Whether it’s digital home mortgage, digital HELOC or digital assistance for buying a home, I think all three of those I think we now have something like a four-investment in space.
Scott:	That’s amazing.
Don:	Yeah.
Scott:	Before we turned on the mics, we were talking about a specific company and specific use case, but maybe there’s been Opendoor and some other institutional new entrance in residential home buying. But I know you guys and Peter Thompson has a group doing that too, it sounds like.
Don:	Yeah, yeah.
Scott:	Maybe paint the picture for folks of what’s changed there and then how some of your companies…
Don:	One of the biggest surprises, and so it was funny, we just invested maybe three or four months ago in a company called Ribbon based in New York. Interestingly, somebody, the entrepreneur who founded the company, came out of LendingClub.
Scott:	Oh, of course. Your alumni, everyone’s going to call you. “I have no idea. I’ve got to talk to Don.”
Don:	It was so funny, because it’s interesting to see that the first generation of FinTech started to lead to like the next generation.
Scott:	Yeah, exactly.
Don:	The entrepreneur is a gentleman named Shaival Shah. Basically, I think if you look at Ribbon, what they’re doing is quite interesting. It’s helping people buy homes in the territories where they’re working with an all cash offer basically through Ribbon. What we found as we got to know the company and we were looking at it, they were operating in certain markets like Charlotte or Raleigh-Durham and expanding sort of from the East out to the West. One of the things we heard was that in some markets, in some parts of Charlotte, 40% of the homes were being bought with all cash offers. That’d be either the iBuyers, like the Opendoors of the world, or the institutional buyers, like Peter’s group.
Scott:	Yeah. That probably was 10% 10 years ago, right? Or 5%?
Don:	Yeah.
Scott:	Only very wealthy people could buy all the cash houses.
Don:	Houses with all cash offers. It’s interesting, because if you look at the history, it really has become institutional buyers instead of-
Scott:	Yeah.
Don:	One of the things that we did was we went to the guys running our real estate investment business and said, in the markets they’re operating in, which were Dallas, Fort Worth and Atlanta and some of the other Southern states, you know, “Is this common?” Much to my surprise, they said, “Well, some neighborhoods of Dallas-Fort Worth are 40% all cash offers, and then certain neighborhoods in Atlanta would be 90% all cash offers.”
Scott:	Oh, my God.
Don:	Yeah. It was surprising.
Scott:	Is that a neighborhood that Opendoor institution targeted as like, “Hey, we want to own as much inventory in that neighborhood as possible” kind of situation?
Don:	I think it’s a combination of factors. For one thing, I think there’s a lot of data science that goes into the home purchase these days. That’s one thing we’ll do with our real estate investment group, is look at the tech stack they’re using to buy a home. Typically, you’ll have a model that says, “Okay, here’s all the inputs to the acquisition in the home purchase cost. Here’s what it’s going to cost for me to renovate it and then rent it out.”
Scott:	Yeah.
Don:	I think what happens is, in certain markets you can look at the… It’s almost like a fluctuation between the home acquisition pricing and the rental pricing. It’s like I can acquire it on a relatively cheaper basis and rent it out. Therefore, buyers go in and start buying up a lot of homes there until the prices have appreciated.
Scott:	Yeah. It’s classic math, and just working out… It’s almost like the same math that goes into customer acquisition on Facebook or something like that. I can buy this property. I know it’s going to pay off and dah, dah, dah.
Don:	It’s like this arbitrage.
Scott:	Yeah.
Don:	I think that certain markets lend themselves to that where there’s more renters in the market than there are buyers in the market. Anyways, what we found was that this is actually much more prevalent than we had expected. What Ribbon is doing is they come in on the other side of that equation and say, if you’re a home buyer and you want to buy a home but you want to buy a home in a neighborhood that is dominated by all cash offers, you can work with Ribbon, and Ribbon in effect buys a home for you. When you close on the home, you enter into a daily rental agreement with Ribbon and you move your things out of your old place into your new home, Ribbon-owned home, and then you transfer your mortgage or you basically move the mortgage from one property to the other. Then Ribbon basically, you pay Ribbon off for that. So, it’s a transitional product.
Scott:	It’s super powerful for actually people like me who have bootstrapped the company. I have a hard time coming up with enough cash to do an all cash offer, right?
Don:	Yeah.
Scott:	Competing in San Francisco. Also, like that transitional loan allows you not to pay rent and a home mortgage at the same time, which is hard for some people.
Don:	That’s right.
Scott:	You can also, I presume, get a traditional loan either from Ribbon or a bank that maybe has a different interest rate or something like that.
Don:	Right now, it’s through the bank partners they’d be working with.
Scott:	Yeah.
Don:	What’s interesting is that there’s one other thing that I think Ribbon has realized is, there’s also an arbitrage between the discount to market that the institutional buyers usually are looking to get versus if you’re a homeowner, you’re looking not at cap rates and rates of return and things like that, but you’re looking at, hey, this is the neighborhood I want to live in. If you have children, this is the school I want my kids to go to.
Scott:	Totally.
Don:	You look at the market price and say, well, that is the market price.
Scott:	Yeah.
Don:	Not, gee, I’ll only buy it if I get a 15% discount.
Scott:	Yeah.
Don:	Basically, they’re coming in and leveraging the fact that the retail buyers are willing to pay market where the institutional buyers are happy.
Scott:	It makes so much sense, though, because you buy a place with a… You don’t want the walkup if you’ve got a two-year-old like I do. It’s just too hard. But the data science person might see a different value, or you like the paint job or you like, whatever it is.
Don:	Yeah. There are emotional factors attached to a home that an institutional buyer who’s, maybe he has a portfolio of several thousand homes. They’re much more interested in the rates return and appreciation-
Scott:	Do you think it’s also the timeline too? Because when we buy a house, I know we’re going to plan to be in the house for… I’ll probably die in that house, you know, 30, 50 years, whatever.
Don:	Yeah.
Scott:	Does that set it off too?
Don:	I think so. The one thing I’ve noticed as we’ve spent a lot of time at this part of the FinTech world, in this intersection property [inaudible], there’s much more active buying and selling of portfolios amongst the large institutional homeowners. What happens is sometimes our group will acquire a portfolio of 30 homes or acquire a portfolio of X number of homes, and then out of that portfolio say, you know what, these two are in neighborhoods where they’re just far enough away from my property management that it’s going to be harder to service them, so I’m going to sell them off.
Scott:	Yeah.
Don:	What I realized-
Scott:	It’s like a secondary market.
Don:	Yeah, that’s right. What happens is, I do think there’s a difference in timeline, and if home price appreciation spiked in certain markets, then I think a lot of the folks, like our guys that are doing this, the home buying business, they might look in and say, you know what? We’re going to take those gains, where a homeowner might say, “That’s great. Maybe I’ll take out a home equity line of credit against that” as opposed to moving.
Scott:	Yeah, and I’m not going to uproot my family. That’s amazing. I remember that the whole market is so fascinating because in the downturn in ‘08, ‘09, a bunch of institutional investors stepped in with all, when people were losing their houses, and I saw these huge portfolios. It’s interesting that your company, Ribbon, can now take advantage of all these factors and actually provide a service to someone like me-
Don:	To the homeowners, yeah.
Scott:	Yeah, really help me.
Don:	What’s interesting, so Ribbon is actually, the way that they distribute this, they work with real estate agents, and so it becomes something that the real estate agents refer to their clients. The one thing that, it’s nice to have something that we think will do well, but then also makes you feel good about what you’re doing. The one thing we heard was, I remember talking to one of the agents in Charlotte who said there were certain neighborhoods that I used to tell my customers like, let’s just not bother touring this neighborhood, because it’s going to be an all cash-
Scott:	And we’ll lose.
Don:	Yeah, we’re going to lose, so let’s not waste each other’s time. Then I was like, no, actually, we can go look at that.
Scott:	That’s really amazing.
Don:	We can actually compete in those neighborhoods, because… It was one of those things where, the one other comment I heard that was really interesting too, and it speaks more to the changing nature of demographics and home buying, was that one of the agents we spoke to, also in Charlotte said, “I look at these large apartment blocks of all these young families that basically haven’t had the capital formation yet to buy a home, and even when there’s a downturn, those, she used to say, “Those are my batteries.” That’s what’s going to provide energy to the real estate market when the market tanks.
Scott:	Again, my wife is younger than me, but we talk about it all the time. Actually, I’m going to check out Ribbon. That’s really cool. You also talked about some of the online banking companies. I’m still with Wells Fargo and First Republic and God bless [inaudible], I love them, but we had Mercury, Ahmad from Mercury on the podcast. I see the appeal of these banking apps. How do you see the market unfolding?
Don:	I’ve been super impressed with the amount of acquisition they’ve been able to do and tested out several of them. It’s interesting, because in a way I look at it sort of like the commoditization of a lot of financial services. By that, I mean, basically I think you’re collapsing some of the cost structure into a much simpler cost structure.
Scott:	Totally.
Don:	And where the lending part of the organization is actually separated out to specialists, like some of the online distributors of credit. So, your loan officers become like the virtual loan officers in the bank. To me, that, frankly, makes total sense. I remember once upon a time knowing the founder of Simple Finance. Simple got bought by BVDA.
Scott:	Yeah. It was kind of like Stripe, right? A little bit like Stripe?
Don:	Yeah. Yeah. So, it’s become the bank that BVDA offers in this space. I think he sort of had the correct vision, which was, gee, these markets over time are basically going to convert into something that’s basically a better product for the consumer and also a lot easier to use. To me, it feels like absolutely sort of the arc of history. If anything, I’d say it does feel like some of the tech trends, basically it’s leading to the commoditization of some of these markets.
Scott:	Well, I think a lot of people are like me, where my banking needs are actually pretty simple outside of that one moment I need a mortgage.
Don:	Yeah.
Scott:	I got my bank accounts. I’m using, you know, someone like Schwab or Sofi to invest, but for my bank I just kind of need them to hold the money and process checks. The apps do that really, really well. As a business, we’re a big business user, our first public SVB, because we have so many clients that are working on it, they have made huge strides in making their interfaces and their data feeds cleaner. It’s actually made accounting so much easier. I love this whole trend.
Don:	It’s been good.
Scott:	Yeah, and it’s good for the consumer.
Don:	It’s interesting too, because one of the things that I think is coming, and Kabbage has already announced some of this, but they’re going to a kind of a vision that Rob Frohwein, the CEO there, had articulated, and that was basically he would call it a cash flow as a service, but basically, it’s understanding the ebbs and flows of your monthly cash. Then if there’s going to be a point in time where we’re going to have insufficient funds… And I think Dave.com sort of nailed this with their monthly bill that you can, monthly subscription so you can pay to cover those. For me, the next sort of feature that I think you’ll start to see in some of these new consumer banks or even from folks like Kabbage, will be something that says, gee, I recognize in the Kabbage case, you’re running your business. I recognize that typically you pay payroll and these days and you’re collecting from these locations and, gee, it doesn’t look like you’re going to be collecting enough to cover payroll, so I’m going to fund a short-term loan to cover that gap. When the next set of revenues come in, I’ll pay that off.
Scott:	Yeah.
Don:	It’s funny. I remember one time one of the board meetings we had, Scott Thompson, the former CEO of PayPal, said something I thought was very appropriate. He said, “The one thing a small business owner doesn’t have is time, and so anything we can do to save them time,” basically thinking, helping on their behalf. He said that’s net positive for all of us. I kind of feel like that’s where a lot of these apps are going.
Scott:	I feel like the other thing the small business person doesn’t have is they internalize all the stress themselves. There’s no one, you know… So, helping them in that two-day window, where it’s close… I remember how we were like four years ago. We had five people, and it was like, oh, my gosh, we got to collect and the… That’s an amazing service. I was just reflecting on that on the consumer side, a big profit center for traditional banks is those overdraft fees. It also hits people in lower income brackets a disproportionate amount, so that’s really cool that they can offer that kind of stuff.
Don:	It’s interesting because for the consumer, I think if you can avoid that, the overdraft fee, it’s one of these things where I think it’s a win for the consumer and win for the lower cost basis tech provider who can do that. The one thing that’s interesting is I’m expecting with a lot of these, the next generation of sort of FinTech companies, what you’ll see is much higher NPS scores in the bank-
Scott:	Oh, yeah, yeah, yeah. Because they won’t have those nasty overdraft fees.
Don:	Yeah, or surprises. I think there’s organizations we have a ton of respect for, like [inaudible] bankers, Silicon Valley Bank. I think if you look at the NPS scores for a well worth-
Scott:	Wealth, yeah, yeah, yeah.
Don:	A little bit tougher sledding.
Scott:	Yeah, for sure. So, your crystal ball moment here, do you see traditional banks like Wells buying those types of companies, or do you see the classic innovator coming into the market and taking a lot of share and doing an IPO kind of company?
Don:	It’s probably a bold statement, but I tend to see more of the latter. I think if I look at the BBVA acquisition of Simple, I think it’s going okay, but I don’t think it’s revolutionized either the buyer or the industry. I think it’s a little bit harder to look at that and say, yeah, that’s going to be the way it goes. We’ve seen some acquisitions, but it feels like it’s going to be harder for the banks to come around and say, yeah, we should buy something. In conversations I’ve had with people working inside the big banks, I think it’s gone from skepticism to, one thing I’ve seen is people say, you know what? Actually, sometimes when we look at these, we see things that we know we should be doing but we just haven’t been able to move the organization.
Scott:	Because of bureaucracy, yeah.
Don:	Yeah.
Scott:	I found that too, talking to people at big banks. This is a gross stereotype, but there’s a feeling of, almost like helplessness, like, “I just can’t push it through.” I remember having those conversations around when LendingClub was doing their IPO and things like that, and talking to like someone at Wells or BFA, and he’s like, “We should be doing this. Why are we not the ones,” right? They couldn’t do it.
Don:	It’s almost like a classic innovator’s dilemma. I remember one of the, we do a lot of research, and research for us typically will be in our verticals around a certain topic or a theme or in conjunction with one of our portfolio companies. As part of these, I actually had spent a bunch of time talking with heads of innovation or heads of chief architects at a couple different banks. I remember one of the most remarkable conversations I had with somebody who’s in one of the, called a top 50 incumbent bank, and he was a chief architect and also ran some of their innovation labs. I walked into this office, and he had a white board with all these features, and the feature set was the same feature set that we knew a lot of startups were working on.
Scott:	Yeah.
Don:	I sort of looked at it and was, “Wow, you guys are thinking of the exact same things for your customers, helping predict if they’re going to run out of cash on a certain day or…” all these things. He sort of looked at me, and I said, “So, do you think you’re going to put these in place?” He said, “My fear is that interest rates will rise. This place…” meaning his bank, “They’re going to start printing cash because of the interest rates.”
Scott:	Oh.
Don:	He looked at me and he goes, “Don, I think we’re going to backslide on all of them.”
Scott:	Oh, my gosh.
Don:	I was like, “Oh.”
Scott:	You feel bad for him, you know?
Don:	You feel bad for him.
Scott:	I’m sure his stock options will be worth a ton, but he’s not going to get that emotional career fulfillment.
Don:	No. It was almost kind of like this concept of, we’re going to be printing too much money to change that much, and therefore, the irony of potentially increasing interest rates could be slower innovation.
Scott:	Yeah. Well, I just saw yesterday in Bill.com’s IPO that a lot of the profit they make is actually on the cash, the interest on the cash. We put every client on Bill.com, so we’re one of the largest partners in the startup world. I never… Because it’s only in their account for one day. It’s not like a lot of… But it just adds up. It’s pretty amazing.
Don:	It’s kind of interesting too, because we see with a lot of the next generation of FinTech companies that they’re making money on managing the payment rails, the front interchange or things like this.
Scott:	Interchanges. I see it everywhere.
Don:	Yeah. It’s interesting, because it’s kind of like, gosh, you can build a nice company and be profitable off of just that, where just that alone is not going to solve the… When you look at the IT spend, other things for some of the big banks, that doesn’t get you there.
Scott:	That’s amazing. Okay, this has been so amazing. Thank you so much. I do have one question.
Don:	Yeah.
Scott:	One piece of advice for the founders that you work with besides being nice and hitting your numbers.
Don:	The thing that I’ve found has worked for entrepreneurs is look for, in your industry, look for something that is the conventional wisdom to challenge. I think we talked about the LendingClub and the conventional wisdom of, you only lend to people you’ve met. We have another company called Ladder Life. It’s in the online direct life insurance space. I remember as we were doing research on sort of insurtech and insurance innovation, going to different insurance industry conferences, and the conventional wisdom has been that life insurance is something that’s sold, not bought. It’s something where you’re going to pay for it today but it’s going to benefit your family members, your-
Scott:	It’s like a kind of an aggressive sale historically. I bought life insurance because I had a baby. Yeah, you feel like you’re, I’m almost buying a car right now kind of situation.
Don:	Yeah, that’s right. That’s the established wisdom of the life insurance business. What we found is that, so the idea of doing an online direct, and, by the way, you know, distributing by API to websites that happen to deal with things like when you get a home mortgage, thinking about instances where you start to think about life insurance or through websites that deal with things like parents having children.
Scott:	Yeah, that was me, yeah.
Don:	That’s the moment when you start to think about it. That’s worked out really well. It’s like one of those things where I think if I were to start a business today and go find some established wisdom, I’d say even if you look at the success that some of the challenger banks have had, there the conventional wisdom that they challenged was this concept that people would never switch their direct deposit accounts. That was kind of a known conventional wisdom. I think challenging something like that, and they’ve done it successfully, right?
Scott:	I see it all the time, because we get the notification when someone changes. People are super comfortable doing that now. It’s actually pretty easy.
Don:	It’s almost like, pick a conventional wisdom.
Scott:	And attack it. I love it. Don, do you want to tell everyone where they can find you and how to reach-
Don:	Probably the easiest way to get in touch with me, you can learn more about your group at Thomvest.com, our website, or for myself, I’d say LinkedIn is probably the easiest way. I’m just Don Butler on LinkedIn.
Scott:	Just my personal testimony, of every interaction I’ve ever had with you, you are the nicest, very caring person, and you’ve been incredibly successful, so it’s working. Keep it up, and thanks for coming by.
Don:	Thank you. Yeah.
Singer:	So, when your troubles are mounting in tax or accounting, you go to Kruze from Founders & Friends. It’s Kruze Consulting Founders & Friends with your host, Scotty Orn.

Leading fintech VC, Don Butler of Thomvest, on 20 Years of investing in fintech startups

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