Business problems may not be new, but the solutions are
Francisco Partners is a San Francisco-based private equity fund that specializes in technology companies. Peter Christodoulo, a partner with the firm, leads its financial technology investing.
Financial technology, or fintech, is very hot right now. What kind of companies are you excited about?
Peter Christodoulo: First off, we focus on companies that are somewhat more mature. These aren’t tech companies with a couple of guys working in a garage. We invest at least $50 million, with an average investment of over $100 million.
Fintech is something that reaches into a wide range of businesses, including insurance, payments, banking, investments and financial planning. Financial services as a whole, being heavily regulated, haven’t adapted to technology as fast as other industries. And so there are still enormous inefficiencies that create opportunities for fintech companies?
The problems these companies are solving are very big. And by the time they reach the size that we’re working with them, it’s still just the beginning.
Are there any particular areas within financial services that stand out as opportunities for new technology?
PC: There are a few areas, such as payments and lending, that are brimming with new companies. But other areas have developed less quickly, though they present equally compelling opportunities.
Insurance is one example of a massive industry that’s poised to be revolutionized by new technology and the expanding availability of data. People see the innovation and the new options available in other aspects of their lives, and ask questions like, “Why can’t I pay for car insurance based on how many miles I drive?”
Banking is already changing. The bank of the future isn’t a branch — it’s your phone. And now we’re starting to see more wholly digital banks come to the fore. Customers are asking, “Why am I writing a check for anything?”
As a private equity fund, what do you see as your role in helping these more mature fintech companies take the next step?
PC: The biggest thing we can do for the companies we fund is to assess what it is they need, and work with them to address those needs.
It’s different for every company. A CEO with a tech background may need a different kind of support than one with a finance background. For some companies, it could be finding a CFO, or investing in sales and marketing infrastructure; for others it could be guidance and capital for possible acquisitions.
It seems that in fintech, data security is either a massive threat or a massive opportunity. How do you view it?
PC: We see it as both. It’s obviously a potential Achilles’ heel. A breach can take a company down pretty fast.
But at the same time, we invest in many of the data security firms that protect financial services firms, and the companies that they call after there has been a breach. And those investments have done well. Data security issues aren’t getting any smaller.
Our relationship with those security firms gives us access to perspectives on emerging threats, as well as the security of the other companies we consider investing in.
You mentioned regulation earlier. How do you think regulatory changes will affect fintech going forward?
PC: The big issue now is that large financial companies spend so much money lobbying and have so much influence in Washington that they can support regulations that make it harder for younger, nimbler companies to compete.
That obstructionism can take many forms, and is almost never aligned with the interests of the end customer. Often, large firms will argue for keeping these practices in place by claiming that new efficiencies will lead to large-scale job loss.
Recently, we saw it in the Department of Labor’s fiduciary rule. The large brokerages lobbied hard to get it watered down to protect many of their ingrained inefficiencies and conflicts of interest, most of which could be eliminated by an online advisor using an algorithm.
From a tech standpoint, what new developments do you believe have the potential to change fintech next?
PC: Well, we won’t all be making payments with our thumbprints next week. The questions in fintech investing aren’t so much about new or revolutionary technology as they are about applying established technology to problems within financial services.
And there are still so many places where you can automate and create efficiencies within these businesses.