Hi Guys, welcome to the Fintech Coffee Break. I’m your host, Isabelle Castro. This week, I sat down with Daniel Ballen, Co-Head and Partner at Portage Capital Solutions, to talk about the startup funding environment.
Startups have been facing a frigid climate for funding, exacerbated by March’s banking crisis and ongoing rate hikes. Demand is high, but supply is low, and VCs have had to adjust their strategies. I spoke to Daniel about his outlook for fintech funding and how Portage has adapted its approach.
Isabelle Castro
Hey Daniel, how are you today?
Daniel Ballen
Hey, great. Great being here. Thanks for having me on.
Isabelle Castro
Yeah, good to have you here. I’m really happy to welcome you to the Fintech Nexus offices. So to begin with what gets you up in the morning?
Daniel Ballen
Great question. I think there’s a literal and figurative answer to that question, figuratively. I love what I do. I love solving challenging problems, complex problems. I love the day to day of investing in, in the fintech world. Literally, it is my three and a half year old toddler who is still jumping up on me in the bed each morning and waking me up at ungodly hours in the morning. So
Isabelle Castro
well, that’s a lovely way to wake up.
Daniel Ballen
It had its charm for the first few months, and now it’s more tiring.
Isabelle Castro
Yeah, I can imagine a lot of lack of sleep, right?
Daniel Ballen
Yes. Not as bad as it was when he was an infant, but
Isabelle Castro
Okay, nice. Okay. And so tell me a bit about your career journey and how you came to Portage?
Daniel Ballen
Yeah, you know, I’ve spent probably about 20 years just investing in and around financial services and fintech worked at a variety of firms started off on the advisory side at Bear Stearns, way back when, and then, you know, moved to a few firms in between Bain Capital Partners, and then I was at PIMCO for a number of years. And I’ve always been investing in, you know, kind of growth oriented businesses, exciting stories in North America and Europe and around financial services. And I was looking to do something a bit more entrepreneurial. With my career, really building a new platform, I thought it was a really interesting time to build this kind of later stage strategy had gotten to know the the leadership at Portage, Portage part of the Sagard ecosystem is really been one of the most successful fintech investors over the past decade. And it was a great place to launch a later stage effort. So you spent a lot of time with the team. Devin, my co lead in the strategy joined around the same time, and it’s been a really great story ever since.
Isabelle Castro
Nice. Yeah. I’ve talked to some people from Portage before. And I love your strategy and the way you approach fintech investing. Okay, so let’s get down to it. What is the outlook at the moment for fintech investing? And fundraising in general?
Daniel Ballen
So you know, we’ve, we’ve kind of drank the Kool Aid in terms of you know, fintech and the long-term secular trends around the industry. You know, clearly there’s been a dislocation over the past couple of years. But over the long term, there are still so many really antiquated areas of financial services, you know, the areas of insurance, Wealth Management, banking, lending payments, that still are ripe for disruption. And there are just fascinating new technologies and services and products that you know, are born every day that will continue to take share from kind of the old school online financial services companies that dominate. So long-term very bullish. Clearly we’re in a period of a bit of a dislocation. In the near term, it’s tougher for for businesses that are trying to innovate and invest in r&d and growth because the that liquidity is much more scarce. But you know, I think they’re still really interesting companies that are doing well proving their business model have reached kind of profitability and will be self sustaining. And those will succeed where that liquidity pressure isn’t as acute have
Isabelle Castro
the recent kind of macroeconomic conditions for the fintech environment, have they changed the way that you are approaching? How you fund companies and fund growth?
Daniel Ballen
Yeah, absolutely. There are a lot of considerations, I will say, you know, the macro picture is overall negative for a lot of these fintech businesses, but there are also kind of, I wouldn’t call them unintended consequences. But there are industries that are actually benefiting quite a bit from higher interest rates that are benefiting from inflation that are benefiting from increased mortgage rates. And just to give you an example, you know, housing in the US drives a lot of financial decisions that you know, some people’s homes is the biggest asset that that they have as relates to their net worth. Because a lot of people are now anchored to extremely low mortgages, two and a half percent. Housing mobility has dropped dramatically, right? i The ability even to upgrade my home, if I’m paying a 7% mortgage, you know that that financial math just doesn’t really work for most people. So what do you do if you’re stuck in your home? Well, you have additional liquidity, you can improve your home. So there’s actually tremendous demand for Home Improvement lending, Home Improvement, your products and services in and around that ecosystem. And there’s also a lot of demand for products that allow you to tap into your home equity if you want to make a big purchase if you want to consolidate credit card debt or, or other liabilities. So there are a lot of companies, whether it’s, you know, offering HELOC or second lien mortgages that don’t touch, you know, the really precious two and a half percent first lien that are benefiting so I think we, you know, the macro picture is not black and white, there are kind of nuances to, to how certain industries are affected. But I think overall, I think as other investors have done, there’s definitely an increased emphasis on lowering burn having, you know, runway and liquidity needed to continue operating and growing for a longer period than would have been, you know, price efficient in the 2021. Code bubble, but you have 2021 macro picture, in the sense that you can really guarantee that you’re going to be able to raise money and in, you know, a year from now as that was kind of a very predictable outcome for companies of that size. So you focus on liquidity. But you know, there are nuances in between.
Isabelle Castro
I’m glad you brought up the kind of change in how people are like they’re not taking it as a given that they’re going to have fundraising next year. Have you noticed in the founders and the entrepreneurs that you work with? How have they changed their approach to take account that they might not get funding next year?
Daniel Ballen
Yeah, it’s this is probably the most fascinating aspect of the current market and Portage that our leader stage fund is not a traditional Growth Fund, in the sense that we have purposefully built in a lot of flexibility to build in bells and whistles to our investment that could counterbalance a maybe a higher valuation than then we would be accustomed to investing behind if we had a traditional growth equity fund. So building in things like downside protection, you know, return protection, other kinds of governance features, where we could say, hey, we think this company is worth in reality 600 million, but we’re fine investing at 700 800 million. So what that does, is actually given us a really great purview into the mind of these entrepreneurs, management teams and shareholders because we’re giving them the flexibility and they can kind of pick and choose which way they want to go. So I think there are a few things that they’re doing. One is they’re focusing on less dilutive capital, I think our fund would qualify, but they’re looking at venture debt, they’re looking at other types of kind of credit products that maybe don’t in include selling or diluting the equity, which are around but tricky to find in your company has to fit a certain profile, we’re seeing inside arounds, where a company will go to market, they don’t really get the valuation that they want, existing shareholders will put money in probably much less so than they had anticipated raising in the external market, just to kind of kick the can down the road and say, we’ll put in enough to manage through a period of time when until the markets recover. We’re seeing more of that as the public markets start to recover a bit, it’s giving people a bit more optimism around, you’re having a better fundraising environment a year from now and kind of stalling in a certain way. And then we’re seeing people cut, you know, riffs are very common cutting expenses, you know, it’s, it’s, it’s hard to say whether, you know, they’re doing it in an appropriate way, or in a way that’s not sacrificing too much growth rate, you could cut, you know, 80% of the staff of a company and it’ll like kind of chug along for a short period of time before things collapse. So there is kind of a happy medium of how to do that appropriately. But I think people are trying to slow burn as much as feasible. And sometimes it’s a combination of all the above,
Isabelle Castro
what do you think are going to be the key differentiators are their key differentiators? Or does it really depend on the business? Where they are? And how first of all? Okay, that’s my question. First of all, are there key differentiators between the ones that will do well, and the ones that won’t? And what are they? If there are.
Daniel Ballen
I think the characteristics of successful companies to actually doesn’t change much in different environments. You know, I think you’re looking for sustainable business models, great unit economics, really great teams, I think, you know, the quality of management is as important now as ever. And then, you know, areas where there’s a real kind of barrier to entry. Yeah, I think those are those are still fundamental characteristics of businesses that will succeed and things that we look for as other investors do. I think in 2021, and 2020, and answering that kind of bubble period. It’s it’s not that people weren’t looking for those. I think it’s just that the bar was much lower for what would kind of qualify as as an investable company and then you know, at More people than not were able to raise capital. So I think there’ll be kind of a flushing of the system. People are more selective. There’ll be a flight to quality, but I think they will still do well.
Isabelle Castro
Okay. Yeah, I’ve talked to a few people. And they’re saying there’s a shift from growth at all costs. I mean, you could see that in some of the people that have released earnings recently, they did a huge amount of cuts. And now they’re actually doing really, really well. I’m not gonna mention them. But yeah,
Daniel Ballen
well, I think we’ve all seen the press around people who worked at Facebook and made like, hundreds of $1,000 a year and just said, Oh, actually, it really didn’t do anything all day. I mean, it’s just, it’s kind of astounding, the fat and the system. And I think people are still trying to figure that out. And, yeah, and, you know, the AI component is, you know, adds an interesting overlay to that, like, what is the appropriate staffing level to, to keep, you know, growth and to maintain my operations? But, yeah, I mean, fundamentally, growth is not the end all be all at the moment.
Isabelle Castro
Do you see AI? Now that you’ve mentioned it? Do you see AI affecting a lot of these businesses that you’re investing in? How they approach where they’re growing? I know, a lot of them are putting it into their systems. And everyone’s got some kind of AI strategy. But is this like, with the workforce? And all of that? Do you think that’s going to really affect how they grow going forward?
Daniel Ballen
Yeah. So you know, I don’t have a crystal ball as to how AI develops over the next 10 years, I think it’s obviously a fascinating technology, it seems to have kind of hit everyone kind of blindsided and came into nowhere in some respects, but it’s been kind of a technology has been talked about and worked on for decades. You know, I would just say, I have certainly seen AI be incorporated into managing presentations and fundraising presentations, I think, people, you know, when there’s a really hot area of the venture world, or a hot area of the technology world, people try to kind of leverage that kind of glow into their own business. And, and you can kind of cheaply and incorporate AI into your current operations, no matter what you do, you can do it here and have aI come up with questions and say, Oh, I’m an AI driven podcast, right. But, but I think it’s in the near term, we were just definitely seeing companies experiments. In on kind of the engineering technology side, you know, with like software development, you have talked to engineers who will have kind of certain AI driven tools come up with solutions, and then you’d have you know, engineers review it. And so it’s somewhat of a time saving measure, they say, 5% of the time, the AI tool will come up with something clever that they hadn’t thought of. So it’s been helpful. I don’t see it, I haven’t seen it yet. Like really, fundamentally changed the the staffing of firms have like, I don’t need a certain department or I can cut things dramatically, because I have now you know, an AI tool that can replace that capability. But you know, the future may change things change things dramatically. So it’s definitely talked about more sizzle than steak at the moment, but that could change.
Isabelle Castro
Okay, I like that saying more sizzle, that steak. It’s nice. So you mentioned earlier that you saw kind of company is focused towards kind of home improvements, that sector is doing pretty well in this environment? What are the other sectors that you’re seeing that, uh, perhaps doing better at this than others?
Daniel Ballen
Yeah, so there are in the near term, there are, there are definitely a lot of businesses that may be counter cyclical in and around like consumer credit. So like debt resolution, debt repair, I mean, consumer credit levels are, are quite high from a historical basis, like they will and are positioned to do well, when when things potentially turn or if people are over levered. You’re servicing collections businesses because there’s just a larger kind of principal balance of those receivables out in the world. There are also other companies that hold consumer deposits or cash that aren’t really in the business of paying out interest and get away without paying interest that benefit greatly when when rates are higher. So there are a couple of public companies in the US one is called the Bancorp once called used to be called meta now it’s called Password financial. And if you buy like a gift card, or if you have a we have like these health savings accounts in the US where you just have money sitting somewhere, it’s not a lot. And it’s your helps you pay health expenses. consumers aren’t really accustomed to getting interest off of that as they would a traditional bank account. So you have a company that maybe aggregates a lot of these health savings accounts. So they have a bunch of cash that sits there they can predict when it’s going to be needed. To be dispersed, they can take that cash and, and invest it at risk free instead of 0%. Now it’s kind of 5%. Right? So all of that is margin that goes to the bottom line of that company, that that kind of manages that. That account and, and the HSA is one example, there are a lot of different accounts like that in the prepaid world and, and their banking as a service providers that hold cash in a certain way where they can get that margin. So there are other companies that will do well, because of that.
Isabelle Castro
And fundraising as a whole. It’s not that this this what you’re saying?
Daniel Ballen
It’s debt is a strong word. I think things go in waves, right. I think everyone is anchored to what fundraising was like in 2021. That was a huge historical aberration. Actually, if you look at the levels today, it’s not like the lowest in 20 years, we’re kind of back to the mid aughts, like 1415 levels of fundraising. So I think it’s, it’s probably overshot the other way a little bit, especially in kind of a later stage side. You know, I think the seed a world is generally okay. You’re the BC D pre IPO has been tougher, which is part of the thesis of why we came in in that area. But, you know, it’s, it’ll probably come back, you know, I don’t think it’ll ever get back to the levels of 21. But, you know, who knows? No crystal ball?
Isabelle Castro
That’s exactly no crystal ball. That’s a shame that I won’t go back to that, again, no crystal ball. So let’s go past this year. I know you don’t have a crystal ball. But you can see kind of what’s going on. What’s your outlook? What’s your outlook for the fintech sector and the fundraising environment? For fundraising?
Daniel Ballen
I think, I think it will improve in the areas that it’s been difficult, again, in this kind of mid to late stage, maturity of company, I think it will improve. And I think it’s, when you go through these, your largest locations, I think there’s just the uncertainty will create a lot of just apprehension from anyone, any investor and LPs, which has a second order effect on investors have just like, we don’t really know how this is going to get settled. We don’t want to catch a falling knife or pause. So, you know, fundraising was was extremely low, you know, earlier this year, as people try to figure out what’s happening, you know, inflation rates kept going up. Now we’re seeing that kind of level off, I think people will look for stability. And I think we’re starting to see the elements of that. So I would expect in two, three years that, you know, I think there’s much less apprehension, there is still, you know, I think, selection, you know, hiding of kind of selection criteria. But I think it’ll it’ll kind of be on the upswing at that point.
Isabelle Castro
Okay, that’s positive. That’s good. Are there any factors that will affect that? Do you think
Daniel Ballen
it will, of course, I mean, the macro picture could change dramatically? You know, I think there’s geopolitical events that could also have have an effect. If China invades Taiwan next year, like, I think all bets are off, you know, there are things that are tail risks that, you know, I think people tend to, you know, maybe have a lower sense of the probability than the reality of of that the probability of that event in Russia and Ukraine, and no one would have predicted it. And it’s, I think these things are always going to be out there. But you’re the macro picture. I think there’s still uncertainty. Inflation seems tame, but that could change. We have an election coming up next year that some people have heard of, but that may impact how people view the kind of next four years at least of kind of the economic regulatory environment. So we’ll see.
Isabelle Castro
I guess, like, since the pandemic anything.
Daniel Ballen
Yeah, like who would have predicted that?
Isabelle Castro
yeah. Okay. And what’s a piece of advice that you would give to founders to anyone really within this environment.
Daniel Ballen
So this is, is a totally biassed and self serving. But you know, I’m interacting with management teams all the time. And I of course, once someone, if I present them a deal, like they should take my deal, we should be partners and make a bunch of money together. And I’ve seen some management teams and shareholders not really accept the reality of where the terms and valuations are. And they say no, well forget, it will go back out in six to 12 months. There are examples. And I get will give a couple of seconds of companies that, you know, they didn’t get exactly the valuation they wanted a year ago, and they did a little bit of an inside round or maybe they raised a little bit of venture debt. And then you know, they went back out again to raise money. They didn’t get exactly what they want is they said no. And there have been a couple examples of those companies going bankrupt, right, you just it without the liquidity is the biggest existential risk for these kinds. because if you run out of money, there’s nothing you can do. And as you get closer to running out, actually your options become more limited because you become a distressed situation and things become much more fraud. And, you know, I think, you know, these capital raises raising 50 or 100 million. It’s, it’s, it is dilutive, but in some cases, you’re selling, you know, 510 15% of your of your business, you know, if you thought your business should be valued much more highly, maybe the differences you sell 15% instead of 10. But you’re getting the liquidity to really survive and potentially thrive and go on offence in a market where that that actually has a really good ROI on it, because others are pulling back, I think. Yeah, my advice is to think carefully about saying no to liquidity in this in this environment. Okay,
Isabelle Castro
cool. That’s a really good piece of advice, I would say. Your curveball question. Okay. What would your life’s music
Daniel Ballen
be? Oh, boy. So I’m actually going to see Billy Joel tonight, which I’m very excited about. I don’t know either. Maybe a big fan of yours on the piano man. Yeah, I don’t know. I think just helping kind of orchestrate all aspects of my life and maybe via via music. It just feels that’s what I like doing just being involved in a lot of different things and whether it’s family work, otherwise, but I think that’s just so driven by my concert tickets tonight, but
Isabelle Castro
it’s a good answer. I’m gonna listen to it afterwards, because I don’t know. But
Daniel Ballen
oh, yeah. It’s a classic song. You’ll really enjoy it. Okay,
Isabelle Castro
cool. Well, thank you. Thank you for coming in. Yeah, I really enjoyed talking to you, and have a great rest of your day.
Daniel Ballen
Thanks, Isabelle. Really appreciate it. Really excited to be on. Appreciate the time.
Isabelle Castro
As always, you can reach out and chat with me on my personal LinkedIn or Twitter @IZYCastrowrites. But for access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook or Instagram. You can also sign up for our daily newsletter bringing news straight to your inbox. For more fintech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton and Todd Anderson. That’s it from me. Until next time, enjoy your downtime.
