Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Dave Unsworth is co-founder and general partner at Information Venture Partners
Unsworth co-founded Information Venture Partners in 2014 and has led investments in eSentire (exited, 2017), Verafin, Sensibill, Igl
Prior to founding Information Venture Partners, Unsworth worked as an investor with RBC Venture Partners from 2001. Prior to his career in venture capital, he had a successful career in operating roles focused on e-commerce strategy development, technology enabled financial services product development, technology project management and retail/commercial financial services.
Unsworth is an active member in the start-up community in Toronto and Waterloo as a mentor to early stage CEOs and founding teams. Dave also serves as a mentor in the Kaufmann Fellows program and more recently with the Holt FinTech Accelerator and as an investment committee member for the Investment Accelerator Fund. He has been a frequent contributor to Private Capital Magazine and is an original member and past Chair of the Financial Services Venture Capital Alliance.
He was granted an MBA from Queen’s University, a Bachelor of Arts Degree in Economics from Wilfrid Laurier University. He is also a graduate of the NVCA’s Venture Capital Institute and the Rotman SME Board Effectiveness Program.
VatorNews: What is your investment philosophy or methodology?
Dave Unsworth: Information Venture Partners is an early stage VC fund focused on Series A. We’ve always been focused on enterprise software as it relates to financial services. FinTech means a lot of things to a lot of people, but we're really a B2B-focused FinTech and financial technology fund.
VN: Why the B2B FinTech space, in particular? What is it that makes you want to invest there? What's the opportunity that you see in that space?
DU: A lot has been influenced by our heritage and where we came; from my partner and I ran corporate a venture capital fund for a very large financial institution in Canada, RBC, that also has a global footprint. And so, we spent the formative part of our venture careers managing CVCs, or corporate venture capital funds, for the bank. In 2014, we did a management buyout of the fund and we’ve since gone on to raise subsequent funds and special purpose vehicles. Our thesis was largely informed and developed over a period of time managing a CVC and, today, Information Venture Partners executes broadly on a very similar strategy with, again, early stage, B2B FinTech.
We remain very excited about that thesis area even after investing in it since before it was called FinTech. We just believe that in the next 20 years you're just going to see a revolution in what's happening in financial services and, more importantly, in the area that we focus on, which is a complete digital rewiring of what's happening in the financial services industry. It's a broad category, it goes beyond retail and commercial banking, and it includes wealth management and capital markets and insurance and the insurtech sector. So, it’s really a broad area to cover in terms of technology.
And then, within that broad beachfront, if you will, we really have narrowed it down into four direct thesis areas. The themes within those theses change from fund to fund as the market changes, but we've always been very focused on: B2B FinTech; technology for financial services, so that would be enterprise SaaS who would sell to multiple verticals, including financial services; cybersecurity, which we've always been eager investors in because banks consume so much cybersecurity and that's just becoming more and more important; then, lastly, we are investors in a category we call financial technology. So, those would be platforms that would help automate the function of finance. If you think about budgeting forecasting and planning, or accounts receivable and payable automation, or investor relations software, it's those kinds of platforms we also are interested in.
VN: You mentioned that you see enterprise FinTech evolving a lot in the next two decades, so what's your vision for what that's going to look like?
DU: If you'd asked me that question pre-pandemic I thought it would have been a bit of a slower burn and a little longer term trajectory, but I think all of the banks right now in COVID, in the heat of it, have really turned their attention towards digitization of processes. That includes the front end, and I think that's where a lot of the attention is being spent right now. How do we engage the customer digitally? How do we deliver better digital experiences? Banking has historically been a relationship business and you can't be face-to-face, or eye-to-eye, with people, so how do you spend money on stuff that will do that?
That’s from the customer engagement perspective, but there's also just this inherent need to rewire what's been going on with all the legacy systems in the back end of the bank, and that's because, as privacy concerns increase, and become heightened, and compliance and regulation are really forcing those changes on the banks, it's not acceptable to not know where personally identifiable information is and who's using the personally identifiable information, or PII, and what's happening with it. So, banks are being held to account to get their back end in order, in addition to this richer digital engagement on the front end with customers.
VN: What's the big macro trend you're betting on?
DU: One of the ways we like to define that macro trend that we're dealing with is, if you dusted off and read annual reports from large financial institutions from 10 years ago, you would hear them very much talking about banking and talking about return on investment and non-interest expense considerations. If you pick up the annual reports of the big banks, or even small and medium sized financial institutions, today they're all talking about themselves as technology companies. What's changed is that 10 years ago, a bank's IT budget was spent 80 or 85 percent on maintaining the legacy infrastructure and 10 or 15 percent on the new and innovative stuff. Fast forward to today and you're seeing maybe 60 percent being used on the legacy infrastructure, and 40 percent, or 50 percent in more aggressive financial institutions, being spent on innovation and digitization. So, if you think about that, there's at least a doubling, if not a tripling, but then IT budgets have also expanded considerably over the last decade, so you have this hextupling of budget associated with FinTech.
With that massive increase in budget and desire to digitize, you can build some very important and interesting companies within that broader macro trend. I mean, Jamie Dimon is in the press all the time talking about technology more often than banking itself.
VN: There's certain industries, like insurance, that didn't really get on the bandwagon with digitization for a long time then they had to catch up. Would you say it's the same thing in the banking and financial services industry? Did they not do it early enough and now they're having to scramble to digitize and catch up with the rest of the world?
DU: I think that's partially true, although I can think of many innovative financial institutions that are really changing things.
Post financial crisis, there was certainly a period where the banks were reluctant to spend and were focused almost entirely on risk and compliance and, just frankly, survival. That's really snapped back in the last five or six years. One, banks have stabilized, they’re growing again, and there's budget available for these things but then, two, there was a material rise in funding, and a material rise in size and performance of disruptor FinTechs that were targeting consumer and wealth management. That made banks wake up and say, ‘okay, this market isn’t an oligopoly, this market isn't all of ours to enjoy forever and ever, and there are attackers.’ Those attackers aren't the bank across the street anymore, those attackers are either an emerging set of FinTech companies or, increasingly, if you look at some of the interesting things that Amazon and Facebook and others are doing, you could also have big tech really being a disruptor in financial services.
All of that has definitely fueled the desire for banks to catch up, if you will. Keep in mind a lot of those institutions are 150 years old and have never really had existential threats before, so it takes a while to turn. What's the expression? You can’t turn elephants on a dime? But it's all coming home now.
VN: What is the size of your current fund and how many investments do you typically make in a year?
DU: We're typically looking at somewhere between four and six investments per year.
I can refer to the size of previous funds that are closed but, for regulatory reasons, I can't talk about fundraising activities right now. Needless to say we've had multiple funds and they've all been in the $80 to $100 million range. Fund II is $106 million.
VN: How much do you invest in initial checks and over the life of a company?
DU: That's an important piece of how we invest. We're a Toronto, Canada-based fund and although we invest across North America each fund we do about 60 percent in Canada and 40 percent in the US. So, Series A for us is a company that's doing about $1 million in annual recurring revenue; there's a lot more to add than just a revenue number but that's how we start to think about Series A ready companies. In B2B software there will sometimes be an eight, nine, 10 year run with the company before its IPO, or before that billion dollar exit, so we'll often go in with an initial check of $4 or $5 million as part of a lead strategy for a Series A, and then we reserve very heavily. It's not uncommon for us to end up having $10 or $11 or even $12 million in a company at exit because we'll put a significant amount of our money behind the companies that hit significant milestones and keep scaling. That allows us to maintain significant ownership positions and really have companies that can provide an outstanding return to our LPs should they scale.
That was certainly the case with some companies like Adaptive Insights, which is a Palo Alto-based company. We were very early investors there, about $1 million in revenue, and still had a board seat in a very substantial ownership in the company when it filed to go public and was acquired by WorkDay. We play that active role from beginning all the way through to an eventual exit. The same was true for a company that was recently bought by Nasdaq called Verafin, where we were really the first institutional investor in, we doubled down even when a growth equity round was done halfway through the company's life. It was just acquired for $2.75 billion by Nasdaq and that just officially closed last week.
VN: You mentioned $1 million in ARR being important, but are there other numbers that you need to see from a company in terms of users or growth or anything else that makes you want to invest?
DU: It's less about the numbers at $1 million; it's more about the use cases and the consistency of the use case. There's a lot of technology out there looking for various solutions to apply themselves to, so we're really looking for a business problem that the entrepreneur has built a solution for and also if they're able to show that multiple financial institutions have that problem and want to spend money to rectify it or make it more efficient. A company that we invest in might have two or three of the largest banks with multi $100,000 subscriptions, or we might invest in one that has 20 or 30 small or medium sized financial institutions, using the same solution. So, that repeatability of the problem set, and the desire to solve it, is more important to us then pure metrics in Series A because they can be a little misleading that early in a company's life. We are very metric and data driven post-investment as the company scales, without a doubt, but, early on, we're looking at that.
VN: What do you look for in terms of the team?
DU: At Series A, we want that compelling entrepreneur, we want that person that can not only articulate a vision to potential target customers about why their software is the solution they need, and can sell it, but at Series A you're building the senior leadership team for the first time, and we're looking for that person that can also have that compelling vision that can attract the best talent. You need somebody that people will gravitate around and rally behind and believe in the mission of building that company, because that company might pivot or change or evolve as it grows over eight or 10 years and finding those early best in class people is extremely important.
VN: What about product and market? What do you look for there?
DU: With respect to product, again, we really have to believe that it's a big problem that's systemic across financial services. We have to believe that they can really sell the product into those institutions over and over again and make it a repeatable sales process. It has to be something that's a priority item; the old adage that it’s a ‘need to have’ or a ‘must have’ versus a ‘nice to have.’ It's not always easy to figure out in Series A and so part of the work that we do going in is really spending a lot of time with our strategic investors in our fund, which are financial services organizations and insurance companies themselves, to really understand the problem set and make sure we really understand before we make an investment to make sure that it's that ‘must have’ technology or that it is that big problem that will allow the company to meet scale.
VN: What do you think about valuations these days, especially with what’s happened with COVID? When this situation started there was some trepidation or some belief that it would be harder for companies to raise funding that the market would consolidate or shrink and that didn't seem to really happen. Did you see any change in valuations thanks to COVID?
DU: I agree, when the pandemic first hit everybody was very concerned that it was going to be difficult to raise money and that we might have some kind of retrenchment again. I would say that we have not seen that at all. In fact, valuations, particularly in financial technology, have continued to be, I hate using the word robust, but certainly it's been full valuations for companies. Also, the size of the rounds, frankly, just continue to creep up as well. Part of that's driven by this increase in valuation; to get the same ownership in companies that you're required to make your model work, you're writing bigger and bigger checks. So, I would say we haven't seen any real significant pullback, certainly not over the last three quarters. There might have been a small dip right off right away when the pandemic struck but since then it just keeps going up and to the right.
The other thing that has rotated very much is the terms for the entrepreneur. The terms are probably as friendly as I've ever seen them in 20 years for founders and entrepreneurs starting companies. I mean, there really are very, very company friendly terms in order to win deals today. It's excellent for the entrepreneurs, but, as an investor, it's always a little bit worrisome when valuations and terms are both are in the company's favor. Sometimes there's less alignment than like one might like to have.
VN: Why are the terms more friendly now for the entrepreneur than they would have been previously?
DU: A couple of things. One, there's no shortage of money to get into alternative investments and certainly venture’s have been a beneficiary of a lot of capital. So, whenever you’ve got into a situation where there's a significant overhang of capital chasing a few good deals, that will fuel valuations rising but it also puts a lot more power into an entrepreneur's hand in terms of what they're able to negotiate. When you have multiple term sheets at the table, it allows you to negotiate a good deal and, frankly, they should. I mean, if you're in demand and your product’s in demand and you're in demand as an entrepreneur and you've got multiple term sheets, you should take advantage of that. It's just the way it is in the market right now.
Another thing is there's been a lot of new funds that have been raised and maybe they are still in their first fund, or just starting their second fund. Frankly, in the last decade, valuations have done nothing but go up into the right whether it's financing valuations, M&A valuations, or if you look at what's happening in the IPO and stock market right now, everything's on fire. Some investors haven't lived through a retrenchment so they don't know what it looks like when it gets bad. I was an investor with my partner in 2001 and during the financial crisis in 2008, and so we've seen what retrenchment looks like and it can be ugly. That's why some of those provisions are there and there's probably a new cohort of investors that don't have a full appreciation for what that looks like.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners and to entrepreneurs?
DU: We have leading institutional investors that most VCs go after, whether it's groups like HarbourVest out of Boston or Northleaf here in Canada; very large fund to fund investors who are traditional institutional investors and they've been great partners for us over multiple funds. But what helps differentiate us for entrepreneurs, anyway, is two things. One, my partner Rob and I, and also the team that we've assembled, for the most part had operating careers within financial services ourselves before becoming VCs, so we may have lived the problem, or walked in the same shoes, as the entrepreneur that's working on a given problem set. In my case, I had pretty deep retail and commercial banking experience and built out first iterations of online banking and mobile banking at RBC, and my partner Rob has a leveraged buyout, M&A, and investment banking background. We have others on the team who have done a fair amount of consulting within financial services and other investment banking roles. We also have some people on our team that have been part of various fast growth technology companies. So, as a team, we bring a very deep and unique understanding of financial services and a network that gives the entrepreneur some comfort that we really know what we're talking about and can identify the problem, because that's all we do. We don't invest in anything other than B2B FinTech.
The second thing that's a real differentiator is that we have four of Canada's six largest financial institutions as direct LPs in the fund; we have a global insurer and a large, wholesale bank as LPs in the fund. We're able to immediately open doors for the entrepreneurs, and we even do this as part of our due diligence process, having some pretty interesting conversations at senior levels and decision making levels within large financial institutions to help validate what they're doing and get them that access. They may become customers, they may not, but it's an excellent diligence point for us. We're also able to map the strategic priorities of some of our LPs and use that to help shape our thesis.
Then the last bucket we have is, of course, people that we backed before that having successfully exited and made money that are practitioners in financial services or FinTech. We can introduce people like that both that are direct LPs in our fund but also people from within our network to help us differentiate in the entrepreneurs mind.
In terms of how we differentiate for LPs, there I would argue that we now have 20 years of experience in B2B FinTech under our belts, we have a very long track record in making FinTech investments under the categories I identified for you earlier. What the financial institutions really like about investing in our fund is that lens on innovation, that lens on what's happening in the market, and early warning signals for things that could disrupt them downstream or where they could use technologies that we identify as strategic elements of what they're doing to change the direction of their financial institutions. You’ve got to think about the banks that are LPs in our fund are so massive it doesn't really matter what amount of money they give me and even if I'm a magician and can have consistent funds that return 10 times, fund after fund after fund, it's going to be a rounding error on their quarterly earnings frankly. So, it's really that strategic angle that they all find really important and intriguing. Also, to a certain extent, it's about showing that they support the emerging technology market is also important given you know everybody's out as a financial institution also trying to differentiate themselves and show support for small businesses.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
DU: I'll pick two that we've had very successful exits with, and then one that we’re in the process of scaling right now.
Adaptive Insight, which, as I mentioned earlier, was acquired by WorkDay, is a very interesting company that was bringing automation to financial planning and analysis. It has a really interesting founder, Rob Hull, at the helm, a domain expert who really identified an opportunity to help really change the way organizations think about budgeting, forecasting and planning. So, they created a SaaS platform which automated how you break down and share budget components with different operating entities within the business and then reconsolidate all those, refine and create a much more efficient and collaborative budgeting and forecasting and planning tool. If you think about that, I mean, literally everybody has to do some form of budgeting, forecasting and planning from the food truck on the corner all the way through Fortune 10 Enterprise and, within that, financial services does an awful lot of FP&A. We had experience with that with a prior investment that was on-premise and it was difficult to implement and integrate, so we recognized that, with the delivery of a SaaS model, it really was going to revolutionize the way people did financial planning and analysis. Like I said, we were an early investor there when the company was still doing just about $1 million in ARR and we participated pro-rata, or super pro-rata, in almost all their rounds. They had some really some tier one VCs, like Bessemer and JMI, along the way, and we maintained a very active governance board seat there until it was acquired.
Another company that we met early was called Verafin. They had a very intriguing story and a unique culture; they had built and bootstrapped the company and had really pointed their attention towards identifying money laundering activity within financial institutions. They had done a nice job with this on-premise software solution with small and medium sized credit unions in Canada. They reached out to us because of our expertise in financial services and we spent some time with the company. What we quickly identified was an opportunity, again, to transition his company to a cloud offering, a SaaS offering, a subscription model, which really spoke to a lot of small and medium sized financial institutions that don't have in-house IT resources to handle this. Plus, this was post financial crisis, when the regulatory burden on financial institutions to really understand money laundering activity and fraud really ramped up, so you had this really strong customer need, but then you also had this really strong compliance push. And so, Verafin really was at that intersection of those two drivers.
That company scared very well, the founders built a very unique culture and they also built a company where, frankly, it was in St. John's, Newfoundland, so not an area that every investor would look at investing in a company. That’s also one of the ways that we differentiate: we're quite happy to focus on markets that maybe some mainstream VCs might consider B or C markets but we firmly believe that there could be some real advantages to building companies where there's less competition for talent and less turnover and lower cost base. Verafin became the dominant player in anti-money laundering and fraud detection, not just from small medium sized banks but also right up into the largest financial institutions in the US.
There's a more recent investment for us called Coconut Software. Again, off the track, it's headquartered in Saskatchewan, but a very compelling female entrepreneur named Katherine Regnier who is a fantastic entrepreneur. She bootstrapped a company that was really helping telcos and financial services with enterprise grade appointment scheduling. How do you do customer engagement management with your client? How do you engage them for meetings? One of the biggest costs within financial services is people just not showing up for meetings, or showing up for meetings ill prepared, or being mismatched with the wrong talent within a financial institution on their first meeting. That makes the first meeting a poor impression but also a waste of time for both parties. So, this company really helps optimize the matching of talent, the appointment scheduling itself, reminders around the appointment and materials that are required. It really does a terrific job of solving for efficiency and we've got financial institutions as large as Capital One all the way down to corner credit unions or small town community credit unions on the platform. With COVID shifting everything to virtual, that just provided a tremendous amount of tailwind for this company and Katherine is going to do something really important with that company.
VN: What are some lessons you learned?
DU: The hardest one to learn, and we sort of touched on it a little bit earlier, is just the discipline around investment pacing, valuation and not getting too far off strategy. Whenever we've stayed very focused and disciplined around our entry points from a valuation perspective, when we stay disciplined around our need to have that really outstanding entrepreneur and culture, and where we stayed in our lane in terms of subject matter expertise, we've done well. When you stray from that or, in some cases, if you increase the size of your fund too rapidly, there's all sorts of academic studies that point to funds that get off strategy quickly and end up having deteriorating returns. So, the most important lesson we've learned, and where we've done well, is just staying very disciplined, staying very focused and in our lane in terms of what we focus on and just getting good at.
I'll give you an example: we're a FinTech investor but we've always struggled with making investments in payments. It might seem counterintuitive but payments, in and of itself, is such a big market with so many embedded, large players from very innovative and forceful disruptors in that market, with very low margins and very high volumes. The revenue models, frankly, are different than traditional SaaS businesses, so that one's been a harder one for us to crack and we also recognize that we don't know what we don't know in payments. So, we've tended to stay somewhat away from that and focus more on the things that we know a lot about which is governance compliance and risk technologies, data collaboration and analytics platforms, financial technology, and some B2B2C consumer offerings, where you're selling to a large bank and then they're turning around and selling to the consumer or retail or commercial. Those are the things we know, and we do tend to stay away from the things that we don't, cybersecurity being one of the things we know as well.
VN: What excites you the most about your position as VC?
DU: The thing that really motivates me and attracts me and, frankly, is a privilege of being in this business is you get to talk to people every day that are just so much smarter than you. And so, you've got all these people that are out there that are brilliant that are thinking through big problems and starting companies and have that passion and that drive and you get that opportunity to engage with them daily and just meet new people with new ideas and new ways of thinking about things and inventing things that you can marvel at. Probably the singular most motivating or exciting thing is that every day you just don't know what company you're going to stumble on next from your network or from your deal flow or because they seek you out. So, that part is really exciting.
The other privilege of this business is you get an opportunity to also hire and attract and develop really, really smart people as a next generation of VC, too. We're incredibly proud of the team that we're developing at Information Venture Partners. We strive to hire those people that have that drive and that passion and that excitement for invention, that curiosity, I guess is the best word. We look for people that just have an endless amount of curiosity, because that's, ultimately, what makes you good at this business and lets you help entrepreneurs grow their business.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
DU: The one thing I just encourage any B2B FinTech venture inventor, operator, entrepreneur that wants a really hands on partnership and help in building their company, to get in touch. FinTech entrepreneurs that want an experienced VC along for their early stage financing round, they should reach out to Information Venture Partners. We don’t have an Andreesen brand in the US, though we are the first call in Canada, no doubt, but we’ve invested in some very important US-based companies and we’re earning a reputation and we’d love an opportunity to talk to early stage B2B FinTech entrepreneurs.
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