Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Core Innovation Capital focuses on financial technologies, typically in the Series A round
There has been a big debate over the last few years over whether the Series A crunch is real or not. What everyone can agree on, though, is that there are definitely more seed and early stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
In this edition of "Meet the VC," we interview Alex Davidov of Core Innovation Capital, to learn more about his firm and his views on the tranforming VC landscape.
VatorNews: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
Alex Davidov: I grew up outside of DC and taught myself how to do web development pretty early on. Actually, I started a web development business in high school and started working for a startup before I even went to college. They tried to convince me not to go to college (in the summer of 2000), but I ended up not taking their advice, which turned out to be for the best. They didn’t exist a year later.
I studied computer science at Columbia in New York and then spent a number of years doing consulting, primarily to the financial services industry, in wealth management and asset management.
I then left to start a couple different companies. I was a founder of an interactive toy company called Intellitoys. We made an interactive teddy bear so that parents could personalize their children’s play experiences by adding new media to the toy. We grew that and got distribution through most of the major retailers. Later I left and co-founded a company called SkillSlate, which was a marketplace for independent service providers like handymen and maids. I helped build the initial product, got that off the ground, and that company ended up getting acquired by TaskRabbit.
And then I spent four years at a big hedge fund called Bridgewater Associates, where I worked on everything from internal strategy to running a big data analytics team. I wanted to go back to earlier-stage companies and felt somewhat disconnected at a big macro hedge fund. I was trying to figure out what to do next, ended up going back to business school, and worked with a seed fund called Founder Collective for a year before joining Core. I realized that I really enjoyed the investor side of things, just focusing on early-stage companies, as opposed to large macroeconomic trends. Core seemed like the best platform to invest in FinTech, which had been my background.
VN: What is your investment philosophy or methodology?
AD: Broadly, we’re about funding empowering financial services. What that means is we’re looking for companies that are creating value for consumers and small businesses. The reason is not just because that’s a good thing to do, which it is. But also, if you create value for people, they’ll come back and use your products over and over again. That shifts the perspective from transaction-focused business models, where you’re trying to extract as much value out of every single transaction, to a much more long-term value creation focus. We think that’s how you create the most successful companies in the world, which creates great financial returns for founders and investors.
VN: What do you like to invest in? What are your categories of interest?
AD: Financial services, broadly defined. That’s everything from infrastructure to credit to anything around the 1099 economy all the way to investments and insurance. I’ve been spending a lot of time in things like “future of work” platforms that facilitate a redefining of the relationship between employer and employee. That could be scheduling, it could be a labor marketplace - we believe these platforms will be conduits for financial services in the future.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
AD: At Core, I’ve been a part of a few different investments—two that particularly stand out.
One is called Mirador, a SaaS platform enabling banks to originate small business loans more efficiently. We’ve seen a shift from denial to acceptance on the part of large financial institutions around this. Increasingly, these large organizations are going to be looking to partner with innovative companies to be more competitive in the market, especially given how weighed down they are by some of their legacy systems. Mirador is only getting stronger. We’re going to see large financial institutions working closer and closer together with startups, and companies that are purpose-built to partner with the banks are going to be at the forefront of that trend.
Another company is called Trim, an AI, tech-based financial assistant. This hits on a number of different themes. One is we’re going to see aggregators that can not only collect information but can also generate recommendations and act on your behalf to implement those recommendations. That’s becoming more and more popular. The first generation of this is Mint, where you saw all your transactions in one place. Trim is the next-next-generation, where you’re actually going to have smart recommendations implemented for you with almost no effort on your part. The text-based interface is right along with how we see consumer interaction models evolving.
One other company I’ve been a part of is Lending Club. I actually had an opportunity to invest in a really early equity round in 2008 along a friend of mine, and it got me into the space to begin with. I realized just what an opportunity there was. Following LendingClub over the year and the whole ecosystem has been tremendously valuable. That was a great personal outcome (I exited in the summer of 2015), and it was a good learning experience from an investment perspective as well.
VN: What do you look for in companies that you put money in? What are the most important qualities?
AD: A great team is still most important.
What I would add is that in FinTech you need to thread the needle rather finely. You’re looking for themes that are incredibly disruptive and innovative but are still respectful of the regulators and clients’ issues. This is not a space where you want to move fast and break things. It’s a particularly important aspect to get right: you want people to make a major change but in a way that’s respectful and thinks about the business long-term. When you’re small, no one’s going to look at you and maybe no one cares, but we’re looking for people that look 5-10 years in the future and are out to build a lasting enterprise. If you’re doing things that aren’t compliant or cutting corners, you’re going to have a much bigger problem 10 years down the line.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
AD: We go all the way to pre-seed investment where there’s truly two people, a dog, and a business plan. There are no hard and fast rules.
Different businesses in financial services require different amounts of capital before launch, so it’s hard to give a broad metric because there’s so many different types of businesses. The capital requirements are fundamentally different depending on what you’re trying to start.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
AD: Again, it depends so much. Certainly, what you can do with $2 million or even $500,000 is much more than 10 or 15 years ago. From a technology or product perspective, we’re expecting to see more.
That said, the cost to start an insurance carrier, broker-dealer, or any one of these entities where technology isn’t the only part of it, hasn’t changed. You still might see a Series A company that’s pre-launch in the insurance space, depending on what they’re trying to tackle. Obviously, we’re all seeing increased amounts of capital over the past few years, which also runs counter to the trend of being able to do more with less. We see valuations and raises going up, but they’re often counterbalanced by progress. When I was at Founder Collective, we saw several seed-stage companies that had a surprising amount of traction. Some of them had close to $1 million in run rate. I don’t think that’s typical but it shows what you can do and how efficiently you can build a technology business today.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble? And is it deflating now?
AD: It’s the multibillion dollar question.
I do think there is too much cash chasing too few late-stage companies, which leads to overvaluation. I think we’re seeing a clear disconnect between the private and public market. In FinTech, there’s been a blurring of “Fin” and “Tech.” What are businesses that are really just traditional financial services businesses that are masquerading as tech businesses and receiving valuation premiums for things that really aren’t there? And what businesses are truly technology-enabled, have some kind of differentiation, are defensible? The market’s going to be increasingly discerning - and we’re increasingly facing this question in our investment process.
VN: If the bubble is deflating, how does that affect your investing?
AD: Great companies are built in all kinds of market environments. We have a long-term perspective.
It’s a difficult way to invest because the company will have liquidity seven years from now. Who knows what part of the business cycle we’ll be in then? You have to remain valuation-focused and disciplined at all times, which is sometimes harder to do. But it hasn’t slowed down our investing.
I will say fundraising risk is an increasing topic of discussion internally. For a company that requires multiple rounds of capital to get to profitability—which is most VC-backed companies—we’re spending increasing amounts of time talking about what that looks like and the likelihood of a company raising follow-on equity financing and debt/statutory capital. It is an existential risk to many companies.
VN: What do you like best about being a VC?
AD: I’m basically getting paid to learn. That’s an amazing spot to be in. Every day I meet with people who know way more than I do about their market. The other side is that, now having been in the space for a couple years, watching some of these companies grow, build, and become more and more successful is incredibly rewarding. It’s not quite the same thing as having your own startup where you’re actually making it happen. The entrepreneurs are obviously doing al the real work. But it’s rewarding to see something you were a part of—even if just by providing capital.
VN: What is the investment range of your current fund? How much do you put into each startup?
AD: If we’re doing early seed or pre-seed, we’ll write checks of $50,000 to $250,000 in rounds typically led by another institutional investor. In Series A, we’ll usually write $1-4 million checks initially, and reserve an equivalent amount for follow-on investment. The initial check size depends on if we’re leading the deal or co-investing with someone else.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
AD: We obviously think about ownership percentage, but we don’t have any hard and fast metrics around it.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
AD: The majority of our time will be spent in Series A, though we will also invest at the seed and post-Series A.
VN: In a typical year how many startups do you invest in?
AD: We do 3-4 main investments (Series A or later). And also probably 3-4 early seed to pre-seed investments.
VN: Is there anything else you think I should know about you or the firm?
AD: The thing that differentiates us is we’re FinTech only. Other VCs are a mile wide and an inch deep, and they bring a lot to the table. But we bring something different, which is that we have a specific network in financial services. So we know all the potential acquirers, other sources of equity capital, regulators, and pools of talent that exist in the space because that’s our bread and butter. If you talk to our portfolio CEOs, they’ll tell you that’s where we’re most helpful.
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Lending Club is a social lending network where members can borrow and lend money among themselves at better rates.
Lending Club provides a much improved infrastructure for social lending: state-of-the-art technology to authenticate all users (ensuring making sure they are who they say they are); credit scoring systems which rate borrower risk; and, the automated clearing house (ACH) system to move the funds between both parties. In addition, we provide our LendingMatch™ system to minimize risk and allow community based lending.