One of the questions we often hear from startups we meet and the LPs who back our fund is how we select sectors in which we invest and startups we back. In this post, we hope to shed some light on a process that has evolved over the months and years.
In this article, I've taken five of the key factors we look at and how they impacted our investment in money transfer company TransferWise. Any investment we make is a mixture of factors, including those below.
As individuals we bring in our own beliefs and experiences to the investor table. Having worked in financial services, I have seen the many weaknesses in the space and have a positive bias towards solutions that can serve consumers better. And, we view technology as a fundamental facilitator of this experience. We believe a great user experience ensures customers will be hooked and will show a greater willingness to pay.
Because of this belief we were on the lookout for fintech companies as early as 2007, before it was even a thing. One of the first investments we made was a company called Kublax, which helped users understand their finances. The company failed for a myriad of reasons that I won’t cover now. But we liked what we saw in terms of possibility in the sector and were keen to find the right team and product to back the next time.
Because of this belief we were on the lookout for fintech companies as early as 2007 before it was even a thing.
So in 2011, when I noticed one of our mentors, Taavet Hinrikus, in this Techcrunch piece, I chased him down and said we absolutely had to invest in the business. As has now become famous lore for startups… the page was just a placeholder to see if there would be a market for what Hinrikus and co-founder Kristo Käärmann were trying to do. As we now know, there certainly was!
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It’s a fundraising ideal if investors come to you rather than the other way around; when an investor chases you, you know you are onto something. On the flipside, a learning experience for us was to always be on top of news and happenings of where mentors and our own alumni were moving and building things. If you snooze you lose. If I hadn’t acted when I did we might have lost our chance to invest so early.
Once I chased Hinrikus down, we started to dig into the business a bit more. What we saw was that there were a lot of remittance businesses offline and online, and that at the very high end (either high-net-worth individual or corporate) if you complained enough your bank would give you a decent deal on Forex.
Yet nothing in the market really served the prosumer and small business markets. Talking to team TransferWise, we understood this could potentially be a very big market and that currently there was no solution to serve this cheaper, faster and simpler.
Evolution of market
In 2011, we saw a few things begin to evolve. Trends become trends when you see a repeated pattern of ideas, concepts and products emerge. One of the big trends we saw for the impending rise of fintech was regulation. Especially in the UK, but Europe-wide, regulators were also making it easier for new entrants in financial services to emerge and thrive.
A key enabler for TransferWise to operate was the Small Payment Institution license; their timing was perfect.
I would argue that what separates great founders and investors from others is the ability to tie disparate pieces of knowledge together.
Across the industry, the demand for better services married with the supply of products that could finally make customers happier meant that between 2011 and 2016 we saw the growth of a myriad of new banking services.
While we think we are good at seeing the future, it’s important to get the timing right. I would argue that what separates great founders and investors from others is the ability to tie disparate pieces of knowledge together.
Reading a ton of everything is important. Meeting the right people at conferences and events. Having exposure to different technologies and solutions that may have nothing to do with the sector, but may have a lot to do with how the population is evolving. Being an early adopter of concepts and products. Ultimately it’s about the magic of tying curiosity with judgment, so you are always learning about the right things.
Competitive advantage of London
London has long been a financial services hub, with the City in our backyard and the rise of Canary Wharf from what was essentially swampland. This means that there is an array of excellent talent that understands all the complexity of what it takes to build and deliver a financial product.
Encroaching on top of the City has been the rise of Shoreditch, where the talent for building technology products that delight users has been growing apace.
Both the banking and tech talent saw opportunities to serve users better in the aftermath of the 2007 banking crisis. The financial crash left behind a sense of distrust and unfairness. That proved fertile ground for a company like TransferWise who came in with such strong messaging around transparency, fairness and an all round technology-based experience.
Team: product and operations
Having had Hinrikus as a mentor at Seedcamp over the year prior to the investment meant we really believed in him from the beginning. We knew well his ability to lead product from his time at Skype. Added to that, we knew he was ambitious to work on a very big idea and was really effective at cutting through the noise. Often as an entrepreneur, you are bombarded with so much noise a key skill is to distill signal from said noise.
We knew that a product competing in this market would need to excel on multiple fronts to really become a success. Therefore, backing one of our mentors was a more straightforward decision. And, with Kristo’s experience in consulting and working in very complex industries, we felt confident they could combine the product experience the internet consumer was demanding with the operations discipline handling finance requires.