Here’s what PayPal’s first VC investor likes now in fintech

BlueRun Ventures
Feb 26, 2019 · 9 min read

Feb 25, 2019, 11:17am PST Updated: Feb 25, 2019, 11:39am PST

Jonathan Ebinger, who was the first institutional investor in what became PayPal, talked to the Business Journal about current fintech startups and growing concerns over privacy.

Jonathan Ebinger of BlueRun Ventures has a long view on investing in fintech, having been the first venture capitalist to back what became PayPal Holdings Inc.

He talked to the Business Journal recently about that and about growing concerns around how consumer data is being used. The following Q&A has been edited for length and clarity.

Your firm has been around a long time, hasn’t it?
Yes, we’ve been around since 1999. We invest generally in the Series A stage, although that is becoming more and more ill-defined as a category. We like to invest in companies which are working on real-time systems to displace outdated decisioning and processes.

That opens up quite a wide range of business opportunities, so we try to focus on three in particular. We focus on financial technologies. We focus on healthcare. Then more broadly we focus on mobility. Those three areas have served us well for the past 18 to 20 years.

You were the first institutional investor in what became PayPal, right?
We were the first investors in a company called Confinity, which had a product called PayPal. We led the Series A round for Confinity and that led to a merger into X.com, and ended up becoming PayPal. We wrote a check for about a little over $1 million in that first round and that sent us on our way.

We have continued to invest in other companies from those founders, including a few of Max Levchin’s companies over the years, and we’ve had some limited partner relationships with them as well. It’s been a long and really productive relationship over the last 20 years.

What has been the biggest change you’ve seen in fintech and what is the biggest opportunity that you see in that space?
The biggest change I’m seeing is that banks — which at one time were fully integrated as savings and loans — have been really separated. You no longer need to only use a bank for your deposits.

Consumers and businesses have been chasing yields since the 1970s when the money market accounts came out. It has become much more institutionalized and more front of mind amongst depositors. Obviously, we’re in a low-interest environment right now, but that may be changing. So I think you’re just going to see an even further move away from what were considered safe areas to put your money.

Deposits used to drive lending but banks no longer need deposits in a bank to generate dollars to be lent out to small businesses and businesses. There are other sources of capital for lenders now. You no longer need to go to a bank. I think that, overall, is the single largest change in financial services. Banking is the largest of the financial services and when you separate the almost psychological link between savings and lending, that opens up a wide range of business opportunities.

We’ve been investing in that, I think, relatively successfully for the last 20 years or so. More recently, it’s really accelerated.

Give me an example.
We’ve invested in a modern version of PayPal. It’s a company called PayStand, which is effectively doing real-time payments for businesses. It is just mind-blowing how much commerce is still being done via purchase orders and paper checks between businesses. We see a huge opportunity there and we’re going after that right now. PayStand is effectively creating private rails to immediately transfer money between businesses and free up working capital.

We remember well that 10 years ago, a lack of access to working capital was really the cause of the global financial crisis. To the extent that we can move cash and receivables more quickly to the suppliers, we think we can really stay ahead of any existential risks to companies and the economy overall by making sure that capital can move more quickly than it traditionally does between businesses.

There was a lot of talk of blockchain disrupting a lot of the types of things you’re talking about. Have you invested in that? How do you view all of that?
Some of our companies use blockchain. It’s not front and center with their sales pitch to customers, though. Customers don’t really care or particularly want their money to be moving through what they consider cryptocurrencies and blockchain.

It’s just something that you really don’t need to use when you’re simply dealing in fiat currencies. If you’re using U.S. currencies, for example, you don’t really need to trouble yourself with that. With PayStand, specifically, it’s not in the sales pitch to the customer because it just creates additional confusion. Blockchain is really more of just a back-office functionality for them.

Give me another example of what you are investing in.
One of the other things that we’re doing with the decoupling of the lending from the banks is we also invested in a company called Kabbage, which you may be familiar with. It’s one of the leaders in small business lending.
They do just exactly that. They found alternative sources of capital for lending, which can therefore be used for a more efficacious and speedy route to capital for small businesses. Again, we don’t need to be a bank to do that, which is really liberating.

When you start thinking about capital as something that a business can manage on their own and drop the veil of secrecy behind a bank, you can look at companies like Kabbage and these other companies. They say, “Let me manage your cash position overall for the company. If you have excess cash, let me invest that for you. Let me deposit that for you. If you need cash, let’s put a short-term loan in. Let’s smooth out these ups and downs, and through predictive analytics, we can solve in advance.”

It’s not a mystery that you have payroll on the 15th and the 30th. We know that there’s a cash need coming, and if we can predict that and say, “Hey, it looks like you’re going to be $1,800 short. How would you like to take a short-term loan out?That would be a great idea.” Because you know that receivables are coming in a few days later. Versus having to go through a payday lender or something like that, that is much more using technology to make banking less of an opaque process, but more of an integrated partner in your business.

The number of early-stage deals, the area you focus on, has been going down in recent quarters even though the amount being invested is up. What do you attribute that to? Has that affected what you do at all?
I’ve seen that data as well. We’re a small fund and we don’t have a whole lot of trouble investing. We’re doing eight to 10 deals a year. We’re a small fish in a big sea. We don’t really bend to the macro trends so much.

We do see that some series A pricing is going up. But I think a lot of that is just nomenclature inflation. We’ve done some seed rounds, which before would have been the size of a Series A. We put $1.5 million into Coupa when we led its Series A about 10 years ago and they have since gone public. Today, $1.5 million would be a small seed round. It’s kind of the equivalent of grade inflation. Seed rounds are being done at the size of what used to be an A round. A’s are now becoming the size of B’s. It happens in school. It happens in venture, I guess.

It looked like your last fund raised less money than previous ones. Why?
Our funds are usually in the $150 million range, give or take $10 million or $20 million dollars. We have a small group of LPs and we have a pretty regular cadence with them. We go out every three years or so to raise a new fund. Whether it’s$130 million or $150 million, it doesn’t really matter too much.

All that really means is we’re going to end up going out a quarter earlier or a quarter later to raise the next funds. We have about a dozen LPs and we have long-term relationships with foundations and state pensions and so forth. I didn’t really give it a whole lot of thought, honestly.

Because of the length of time that you’ve been involved in the fund, you have seen a couple of dips in the economy and people have been predicting for a long time now that we’re going to see another one.
Eventually, they’re going to be right

How does that affect what you do? Did it have an impact on what you did right after the dot-com bubble burst and then the financial crisis 10 years or so ago?
Well, I think that, indirectly, some of the companies that we invested in were in reaction to the financial crisis. For example, we invested in Kabbage in 2010. The company was founded in ’09, when companies were having working capital problems. I wouldn’t say the financial crisis itself impacted our firm or our interest in getting out or putting money into early-stage companies. But it presented a different kind of company to invest in.

We’re in these companies a long time, as you know. The average hold period is seven or eight years. I don’t know what the economy is going to look like when it comes time to exit these businesses. A lot of Monday morning quarterbacking is written about how the best companies are created in recession and so forth. I think you can find what you’re looking for in those kind of stats. I think there are plenty of good companies created during bull markets as well.

What would be a good example of what you have invested in, beyond fintech?
One is Human API in San Mateo. It is banking on the same thesis that I mentioned earlier with regard to using real-time systems to replace outdated processes. The name is actually quite descriptive of what Human API does. It is an API to collect all of your personal data on the health side. This isn’t the scary sort of system you’re reading about so often in the papers today. It aggregates the data on an opt-in basis to provide it to insurance companies that you’re looking to get a policy from.

What we do with Human API is we provide underwriters with an ability to look at your life longitudinally. Like, this is how many days of exercise and this is what I’m eating.

Whatever data that is connected to you that you’re willing to share can all be used for better underwriting. You see the same sort of things in car insurance. If you let the drivers track their miles and their average speed, you can use that for better underwriting for auto insurance.

That gets into an area that a lot of folks are getting more concerned about, isn’t it — businesses using private consumer data?
I think what you’re really seeing in reality, versus what may be covered in terms of privacy, are two different things. We see this on the business side and also on the consumer side. If the data is being used in ways that clearly are transparently explained and provide a clear benefit to the consumer, they’re happy to share it for their own benefit.

There is an implicit value exchange, which is happening with these businesses, whether it’s Gmail reading your mail to give you targeted advertising or Facebook going through your activity to give you more targeted messaging or targeted campaigns. I think most people understand that you can’t get something for nothing.

Whether or not we’re going to be getting a data dividend, like Gov. Newsom asked for, or not, I think is yet to be seen. We definitely are making sure that our companies are transparently disclosing what data is being captured and for what it’s being used for.

But in terms of whether all of this is actually impacting our investing decisions, the answer to that is no.

You can now establish a trust relationship in real time today and share data and we really think that that is a trend that is not going backwards. We’re excited about it and I think the current focus on this is important. But I think it will ultimately lead to, hopefully, a better understanding from the consumer of how their data is used. Thinking that it’s going to stop, I think, is a mistake.

Cromwell Schubarth TechFlash Editor
Silicon Valley Business Journal

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