The second wave of the fintech boom is here, says David Sica, a principal at venture capital firm Nyca Partners. First came the startups with their ideas, now banks are leveraging those ideas and delivering to customers.
Nyca was formed in 2014 as a fund for fintech startups that aims to bridge the different experiences on Wall Street versus Silicon Valley and provide entrepreneurs expertise on the inner workings of the financial system. Sica, who began his career at Merrill Lynch and moved on to Visa, was the first employee of the firm founded by Hans Morris, an ex-Citigroup investment banker and former Visa president.
Today Nyca Partners is the third-most-active venture capital firm globally in fintech, by the number of investments, according to a recent study by KPMG/CB Insights.
In an interview, Sica talked about the future of fintech, how disruptive the burgeoning industry will really be to banks and differences between venture capital in Silicon Valley and Wall Street. The following is an edited transcript of that conversation.
How and why did you get to Nyca?
DAVID SICA: I started my career at Merrill Lynch, I worked in CMBS origination. It was a very active area and overnight in 2008 the credit market turned and we were no longer lending. I ended up getting a job internally at Merrill Lynch in the institutional sales group covering Russia, the Middle East and Africa. At the same time I met Hans Morris, who was on the roadshow for Visa's IPO and he invited me to come out to San Francisco to work with him.
It was a really exciting time to be in payments. You had all the regulation around the Durbin amendment, the various class-action lawsuits and all the new innovation that popped up at the same time. There were all these new business models popping up like Uber and Airbnb — these two- and three-sided marketplaces that can be unique payments solutions. The 'wow factor' with a lot of these companies was a seamless payments experience. After spending a good deal of time on the acceptance side of the business I decided I wanted to get more involved in the new businesses. That's where Hans and I teamed up again, and I was the first employee at Nyca.
What the future of payments?
The next big payment company will enable tech commerce that's not happening today. One of the areas I like is small-dollar cross-border payments. If you're Coca-Cola or General Motors, you have a lot of options. You can go to a bank and transfer money around the world. But if you want to do business internationally with small vendors, and send out many small payments to settle in local currencies, there aren't many good options. If there was better infrastructure in place you could see a real growth in crowdsourcing activities and hiring talent from around the world.
We’re still waiting to see how point of sale evolves. Between EMV, Android Pay and Apple Pay, we've had a proliferation of all these new terminals. How this ends up playing out can be pretty interesting because now technology providers will have a clear distribution platform to reach small businesses. Five years ago you heard all these great ideas and all you had to do was sign up a bunch of merchants. It was expensive to do that. You had a decentralized market and had to hire people to go out and sell the ideas. If the mobile POS device has an app store now, developers can build for small businesses.
What's your favorite subset of the fintech industry?
Right now my favorite thing is digital advice. Machines are never out of compliance. Think of debt collection, people calling at midnight and threatening if you don't pay your bills — that sort of thing. A robot solution that applies machine learning will never call outside the allowed time periods, it'll never curse at you, it'll always used approved language. That's important. Whether it's investing money or recommending a whole life insurance policy or collecting on debts you haven't paid — being in compliance is a big thing and that will be a key motivator for banks. It's cheaper, more accurate, better than humans and compliant.
What's something all your portfolio companies have in common?
An A-plus management team. That becomes more important the earlier you go. It's a long path to build a fintech company. The thing we always ask ourselves about a founder is, would you work for this person? Because chances are the rest of the people they meet will feel the same way. We look for entrepreneurs that want to work — that want to work with regulators, that want to work with banks, that are open to collaborating with the existing financial system versus trying to kill it. That's a key thing.
You haven't exited any investments, but how do you determine when to get out of an investment? Is there a one-size-fits all exit strategy?
We're going to have a few big brands that come out of fintech. They're super well capitalized, they're spending a lot of money on building the brand, so people know what they are. They want to build the modern platform to provide financial services. Going into an investment it's important to determine which bucket a company falls into. Is it going to be a business-to-business enterprise software play that can get distribution through banks or is it shooting to become a huge brand? That also connects to the exit strategy. If you're investing in the first bucket you could potentially sell the company to a financial institution, a provider of technology to financial institutions or work with a private equity firm to do a secondary transaction. By investing in companies in the second bucket you're betting this is going to be a very big company with a potential IPO down the line.
To what extent will fintech really "disrupt" banking? Where do you see banks and fintechs in a few years based on the current innovation boom?
If you look at fintech 1.0 companies, they've solved a problem for which there was no other solution — look at Lending Club, they're providing loans banks weren't doing at that time. Different business models, products and ideas came out that got customers excited. People signed up for Robinhood, Acorns and Digit. That was phase one.
The table stakes have increased across the board on retail banking. Consumers are going to be more demanding, they'll want more products. You're going to have a few companies people choose to go and bank with, but you'll start seeing robo-products offered at your existing financial institution. For instance, previously the underwriting process of certain types of loans was so expensive that it made it cost prohibitive for banks to do it. Through tech, they can reduce cost and actually deliver that product. Ultimately the financial system will leverage the idea of new technology — from that first wave of the boom — and offer it to their customers.
You've said before that the fintech survivors are already known. But Nyca is the most active VC fund in North America. What keeps you motivated?
The early movers — the Stripes of the world, the Lending Clubs, the OnDecks — kind of put fintech on the map and made the investment community really excited. I think what keeps us motivated is we're still early in fintech, right? There are many products that haven't been refreshed in decades. That's what's super exciting about this. Entrepreneurs are interested in building companies in these areas.
Why can't we get a mortgage on our phones while we're at the property? Why can't we, as a small business, seamlessly push a button and send money around the world to half a dozen vendors? That's where the opportunity still is.
What do you think about the rise of bank-sponsored VCs?
I think traditional firms are incredibly good at business building. You take your traditional Series-A lead — they're great at getting a lot of momentum around a company, which leads to key hires. They act as a coach for the sea of entrepreneurs. They train them to be great executives, get them thinking about the right key performance indicators and how to manage their business and do so with data and precision and really understand how to make money. For fintech startups, the right balance is a traditional lead VC and a specialty firm like ours to help navigate the details of building a fintech company. The traditional VCs are very good at the business-building ideas. We can bring in the level of fintech expertise to increase their chances of success.
On the corporate side, I think it's mixed. Some corporate VC groups are very good. They operate in one of two buckets: they operate like a VC where they invest capital on a standalone basis or they have to get sponsorship from a business unit that's also going to sign a commercial agreement. It really comes down to where a company is in its evolution and what its trying to accomplish from today to its next milestone. Does having a corporate VC align with its goals? If one goal is to sign a distribution agreement and there are parameters on how it's going to roll out, the corporate VC becomes an incredible reference client that helps the startup build a great outcome. If the startup ends up being unmanaged and the corporation starts sending over all these demands, then it's no good. A strong management team is very thoughtful about who to include in what round, how to launch that strategy and then manage through it to be successful.
All in all I think it's good. They're showing interest in the area and getting a lot smarter in the space, which is a different place from where we were three years ago.