Even people who have not heard of Ribbit Capital will know about some of its success stories.
The startups that this venture capital firm has backed since its launch in 2012 include many of the biggest fintech and neobank headliners:
- Affirm, a leader in buy now, pay later financing.
- Brex, which provides tech firms with business credit cards and cash management.
- Coinbase, a major player in cryptocurrency.
- Credit Karma, a personal finance hub that’s now owned by Intuit.
- Figure, which uses blockchain technology to tackle challenges in areas ranging from home equity lines of credit to capital raising.
- Nubank, the Brazilian neobank.
- Revolut, the international neobank.
- Robinhood, the stock trading and investment app.
- Upgrade, a personal finance fintech that’s been expanding its loan and deposit lineup.
It’s been a wild ride.
But the once high-flying fintech sector had a crash-landing in the spring of 2022. As interest rates rose, their ubiquitous infusions of fresh capital dried up, and many of the survivors have been struggling since.
So what’s the outlook of one of the most well-known venture capital firms in this space now?
In this exclusive interview, Nick Huber, a partner at Ribbit Capital, discusses how fintech funding has changed; where promising fintechs will come from in the future; and why artificial intelligence, especially generative AI, is so exciting. He thinks this is one innovation that might just deserve the hype it generates.
(This is the first of two articles based on the Huber interview. A second article— “Fintechs, Walmart and Crypto: A Venture Capital Firm’s Take” — covers Ribbit’s investment philosophy, its perspective on crypto, its partnership with Walmart and more.)
Funding for Fintechs: How Deep Is the Valley?
Spirits in the fintech sector are starting to improve, after a long period of bleak funding prospects.
“It definitely felt like the funding environment was dire for fintech entrepreneurs at various points in the last 18 months or so,” Huber says.
The atmosphere was similar to “the very beginning of Covid, where everybody was so shell-shocked,” he says. “It seemed like no capital was flowing.”
And yet, “there was never a point where zero capital was flowing,” he says.
Huber expects things to start settling into a new normal, though, he says, “we’re definitely still not there.” Exactly what normal will look like remains unclear, but Huber is confident there will be no return to the days of free-flowing capital for fintechs.
“I don’t think we will ever go back to where things were,” he says. “There were a lot of drivers causing the hysteria that we will be very unlikely to see for decades.”
Nonetheless, Huber sees some new signs of life. High-quality fintechs have started hitting the market again for capital raises, and some early-stage startups have been seeking seed money.
Though capital has been available for a few months, any raises earlier on would have resulted in terms most would have been unwilling or reluctant to accept, Huber says. Now the terms have eased to a more palatable level.
Founders also have realized that they can’t avoid fundraising forever, so some are coming back even though the price of capital is much higher, Huber says. “We’re even seeing some competitive deals again, which is a stark contrast to nothing getting done.”
Not just anybody can get funding. Among existing players, a key set of expectations must be met.
“They must be quality companies that have been disciplined with unit economics, that have a clear use of proceeds, that have a clear market fit for their product, that are operating in big addressable markets, and that have done well by their teams, their existing investors and their customers during this hard period,” says Huber. “There’s money out there for those folks.”
However, he adds, “it’s harder to be an early-stage company now.” The previous wave of fintech companies consumed a lot of “oxygen.”
Exceptional Fintech Founders Stand Out
When things were still percolating along, fintechs and neobanks targeting niches of all sorts could get capital.
Is there any room left to go where no fintech has gone before?
“It’s very accurate that the opportunities that existed a decade ago or even a half decade ago for consumer fintech in developed markets have largely been addressed by some fairly successful fintech companies,” Huber says.
“One view that a person could have is that it’s game over, that consumer fintech has played out, that there’s not going to be another Robinhood in the U.S., for example,” he says.
Launching something new is much harder. And for investors, the fintech sector in general is less exciting.
But exceptional founders going into a category that’s supposedly filled up can still generate interest if their plan offers a new spin. Maybe a twist on distribution or a fresh way of segmenting the customer base.
“The creative destruction of capitalism and the history of financial services tells us that there will always be new brands that will emerge even in dark times,” Huber says. “But it’s a much harder game to play.”
At the same time, he says, there’s still plenty of white space for fintech innovation in markets around the world and Ribbit Capital, which does business in 10 countries, has been active overseas.
Ribbit Capital Sees Fintech Opportunities Around the World
At the time of the interview, Huber had just returned from a trip to Singapore. Aside from being a market unto itself, it is a hub for doing business in Vietnam, Thailand, the Philippines, Indonesia and other countries.
Huber calls these “wave two” developing markets. All have growth potential for fintechs able to improve financial services for consumers, small and medium-size businesses, and even larger businesses.
He sees opportunities in payment services, remittance, insurance, wealth management and investment management.
“You feel like the way that they do things in some of those countries feels like the Stone Age in certain product categories,” says Huber.
These markets will be home to “at least a handful of very good fintech outcomes in the coming decade,” he predicts.
India is especially important to Ribbit Capital, he adds, describing it as “a hotbed of fintech activity.”
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Consumer vs. Commercial Fintechs: The Balance Is Shifting
One area in the United States where Huber holds out hope for growth and opportunity is in fintechs serving commercial customers.
In a sense, this is reminiscent of oil drilling. As initial supplies ran lower, techniques for obtaining more from existing wells became more common.
“There are many opportunities in categories that just didn’t get as much attention because they were harder for a whole bunch of reasons,” Huber says.
Huber believes founders and investors will start digging into more of those opportunities now. Ribbit Capital has already done a lot of spadework.
“We have spent a lot more time in the last few years on B2B opportunities in the U.S.,” Huber says. “It’s just shocking how even B2B payments are so far behind consumer payments. What we expect to be a reasonable payments experience as consumers just doesn’t exist for most businesses, even in the U.S.”
These opportunities in the business space are harder to capitalize on than with the consumer side — the products are much more complicated. But Huber says “the size of the prize” is bigger too.
Generative AI Could Be Fintech’s Rocket Fuel
Huber knows the hype cycle well. When talking about generative artificial intelligence, he notes that “everybody’s hyperventilating” about it now.
“Honestly, as much as we hate to do that when everybody else is, we’re also very excited about and focus on the opportunities in generative AI,” he says.
Other types of AI — machine learning, for example — are routinely used in many financial institutions, he points out. “If you haven’t been using some sort of machine learning in your underwriting, you are definitely behind.”
But generative AI is new and evolving quickly. What’s exciting is how large language models like OpenAI’s ChatGPT could impact the financial services industry, Huber says. The potential changes are hard to predict.
“We probably aren’t going to be able to figure this out as investors in this space. The people who will figure that out are the entrepreneurs,” he says. “So a lot of our energy has gone into helping connect our founders with each other and to other folks who are doing interesting things on the forefront of generative AI. They know what their pain points are and what their opportunities are far better than we do.”
Marketing is an easy win for generative AI, according to Huber. Though he hasn’t seen any financial institutions generating ads or content with generative AI at scale, he believes it is coming. He foresees extensive customization and personalization achieved in app-based experiences and targeted digital advertising.
That’s just one use case, Huber says. “But it’s an important one, because distribution is still the hardest thing to do in financial services and it’s the Holy Grail.”
Huber says the surface hasn’t even been scratched as far as the possibilities for generative AI. He expects this innovation will become a big part of Ribbit’s fintech investment portfolio, and he believes the potential will be vast.
“Even with what we know today, what we’re seeing in our portfolio today, there’s a real opportunity to improve the user experience and to drive down the cost to serve, which to me makes it more than worthwhile technology,” Huber says.
But what about the flip side? Will generative AI change the way that Ribbit Capital itself does business?
Huber says Ribbit builds much of its own technology. “We’ve always thought of ourselves as a startup that invests in startups, and we are doing a lot of experimentation with AI to see if it can help us at various points in the investment process,” he says.
Even so, Ribbit’s process “will always be very, very human-driven, because it’s very relationship-driven,” Huber says.
“So much of our underwriting consists of underwriting founding teams. It’s impossible to imagine a world where things like interpersonal dynamics and the personality traits of a founder can be totally picked up by a machine in a way that we’re able to pick up as investors.”
— Nick Huber, Ribbit Capital
But Huber quickly adds that perhaps he is being too much of a Luddite in feeling as if jobs at Ribbit are secure.
“Everybody would like to feel that way about their jobs,” he says.
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