Thursday, July 18, 2013
Core Innovation Capital's Quest To Find Finance Innovation, With Arjan Schutte
Story by Benjamin F. Kuo
Los Angeles has recently become the hotbed for financial startups--from Green Dot, to Blackline Systems, to Wallaby and ZestCash. That increase in startups has not gone un-noticed. Thanks to that activity, a new, venture investor has moved into town, Core Innovation Capital (www.corevc.com) , to specifically take advantage of those opportunities. We spoke with Arjan Shutte about the investment firm and its interest in financial startups, and why it moved from New York.
How did you end up in Los Angeles?
Arjan Schutte: Our fund has a big mission, to invest in financial technology for the emerging middle class. We started in Chicago, ten years ago, when I started a think tank that focuses on the, the Center for Financial Services and Innovation. I then moved to New York, where I set up the fund. However, although New York may be the financial capital of the world it is a little out in the weeds. We wanted to come to California, and Los Angeles in particular, where the consumer is around, and we're close to the end users that we're interested in, and also where there is an exciting, emerging, and under-served tech community. Lots of people think of Los Angeles as a media center, for obvious reasons--but, we knew before we came, there is also a lot of exciting, financial technology going on here. Since coming here, we're actually really excited about how many exciting financial technology startups we have run across, which is a lot more than we originally thought.
Tell us about Core Capital and the types of investments you make?
Arjan Schutte: The consumer segment we care about is the underbanked, nontraditional customers. Basically, there are one in four Americans who are less likely a bank, and more likely to use check cashing. You'd be surprised how big this is. There are 80 million Americans in this emerging class, who are unbanked and underbanked. To give you a feel of the scale of that, those 80 million Americans make up about a trillion dollars in income, and they spent about $80 billion last year on fees and interest with financial services alone, mostly for basic, financial services. We're very excited about investments in this space, because, not only do we want to make money, but we also want to be transformational to people's lives. We want to give them better financial tools, help them save more money of that not much money they do have, and become upwardly mobile. We want to both make an excellent financial return for our investors, as well as make a meaningful, scalable, positive impact on consumer's lives.
How big is the fund?
Arjan Schutte: We're a small fund, $50 million dollars, and our investors are mostly Blue Chip institutional investors. Our investors include Goldman Sachs, another top tier investment bank, one of the top five retail banks in the country, and a publicly traded consumer finance company, plus a AAA-rated pension fund. We're really proud that we have such a high caliber of institutional investors involved in our strategy.
What kind of companies are most interesting to you right now?
Arjan Schutte: Only financial technology companies that address the emerging middle class, the under- and un-banked. Within that, we're looking at things like consumer financial products, payment products, better ways to cash checks, ways to pay a bill. Those might be credit products, better alternatives to payday loans, risk management tools, processing platforms for new kinds of payments, and currency that might decrease friction and interchange fees. We're both interested in companies that are directly consumer facing, as well as companies who are more back office. The Los Angeles examples which you might know about, though not in our portfolio, is Green Dot. They're a well known success story which exactly serves our consumer market. On the credit space, you might look at a company here like Zestcash, which of course is in the business of providing dramatically better and smarter risk management solutions for payday lending. Neither of those companies are in our portfolio, but those are definitely the kinds of businesses we're interested in.
When did you realize there were companies like this here?
Arjan Schutte: I've been investing in this space since 2005, and consistently, fifty percent of our dealflow is from California. There is, of course, a significant percentage from the Bay Area. Being in Los Angeles actually gets us closer to the Bay Area than we were in New York. However, we were really excited by the amount of talent and ideas that are in Los Angeles. As I mentioned, we've been surprise of how many more companies are here than we thought in this space. We've been putting together a list of those companies in our community. Before we came, it was twenty companies. It's now well over seventy. That's been a real pleasant surprise.
What are you looking for in a founder, company?
Arjan Schutte: We invest in successful serial entrepreneurs, more often than not. We definitely are looking for people who have a philosophical alignment with us. We have a very particular point of view. We're not just looking to make money, and we're not just looking to do good. We're looking to do both. There are two types of companies that tend to walk in our door, missionaries, and mercenaries. Missionaries want to do good things to help the poor. I don't fault their intentions, but they typically can't build a business. Mercenaries are looking for opportunities to make money, but don't care about the end users. We're looking for visionaries. They take an ethical approach to creating long-term value in a consumer's life, and they also are great company builders. We're looking for philosophical alignment for our CEOs.
How active do you think you'll be, in terms of number of investments?
Arjan Schutte: We're a small fund, so we average about two to three deals a year. As it turns out, we're actually closing two deals this week. One is in Los Angeles, and it's the first investment we've made that, as a board member, I will be able to drive to. However, we'll continue to be a national fund.