Oak HC/FT’s Matt Streisfeld (General Partner) — on M&A in FinTech, AI/ML & Digital Assets
In today’s episode, Kailee Costello sits down with Matt Streisfeld, General Partner at Oak HC/FT. Oak is a venture and growth equity firm investing in companies driving transformation in healthcare and fintech. Oak was one of the earliest venture investors in fintech, and now has over $5B in assets under management. Matt joined Oak in 2015 and was recently named one of Insider’s Rising Stars in Venture Capital.
“Consolidation happens pre massive waves of growth and then happens post massive growth … I think we’re at this period of the wave where M&A will take the forefront of organic growth strategies”
In the episode, Kailee and Matt discuss:
- The outlook for FinTech in 2023 and beyond — what sectors will continue to grow, and what sectors will find it more challenging in the current climate?
Matt: Firstly, FinTech has traditionally been defined as the verticals. You’ve got payments, banking, lending, capital markets, asset management, insurance, and so on. But simplistically speaking, FinTech has evolved to horizontally delivering financial services, or driving a financial outcome via software. If you think about vertical SaaS, for example, you’ve got your system or records, workflow and automation tools, customer onboarding, fraud identity, verification, and embedded payments all wrapped under one umbrella. Ten years ago, that would not have been factored into FinTech. Today, I would say nearly every FinTech investor would call that FinTech.
I say that because what we’re really bullish on is how the evolution of financial services is being delivered and who the customers are that are absorbing those financial services. And so when you think about, broadly speaking, vertical software, you think about the embedded financial services infrastructure, you think about commerce infrastructure, fraud, identity verification, authentication. These are horizontal models that are applicable to businesses that don’t just look like traditional fintechs but are actually emerging companies or SMBs that need to be absorbing financial services. That’s what’s really interesting to us. The areas that I think are the most concerning or I think have the most work to be done is around consumer fintech, particularly those that are single-threaded applications, that may be focused on banking accounts or investment products. I think that those will struggle to acquire customers, differentiate in proposition, and scale efficiently long-term unless they come up with their act twos and act threes and that’s really absorbed and consumed by their end customer.
- Expected consolidation across the FinTech landscape
Matt: I think there will be some consolidation. Historically, if you look at the aftermath of ’99 to ’01, and even post the great financial crisis, there’s always a period of aggregation of capital, de-aggregation, or deceleration of capital, and then consolidation. And consolidation happens pre-massive waves of growth and then happens post-massive growth. So, I think we’re at this period of the wave where M&A will take the forefront of organic growth strategies and I think those single-threaded applications will be absorbed by those that are looking to diversify their product portfolios.
- The M&A environment for fintechs
Matt: On one hand, I think there’s going to be a massive opportunity on the acquisition side for the growth-funded companies that have grown and have achieved pretty good scale and maybe have profitable underlying economics and aggregate businesses, maybe they’re kind of breaking and losing a bit of money. I think there will be a combination of public, private, and even private and private that think one plus one could equal three. I’m thinking about this purely from the B2B and the infrastructure side of it that will create a catalyst for acquisitions.
The second side of it is you have some really great companies that have gone public in 2020 and 2021 that are, I hate to use the word “orphaned”, in the public environment, but they’re certainly depressed. I’ll give you an example: it’s mid-pandemic. The public fintech companies (as in, payments, B2B, SaaS, and lending) — the forward revenue multiple for those companies were trading at 12.7x. Post-pandemic, those companies came down and the median valuations of that same subset are now 2.9x. So you have this degradation of multiples of around 77%. And you’d say, “What’s the catalyst for this?”. So, growth has decreased by over 50% for those businesses. And look, instead of growing at 50–100%, maybe they’re growing at somewhere between 15–30%. And historically, those stable businesses that are growing 20–30% and are profitable and succeed the rule of 40, are really good public-stage companies. But, regardless of that, they just don’t have enough maturity in the public markets. Their stock prices are down. You have employer retention issues. I think there will be an opportunity for those companies to decide to go private. There’ll be consolidation, maybe a public-to-public type of acquisition. But there are some really great companies that are out there with valuations that don’t necessarily match historical fundamentals, which means that either something has to change to get the fundamentals right or to create the most shareholder value, there will probably have to be a change of control.
- What stands out in contrast between this most recent boom-bust cycle in 2021–2022 versus the cycles that FinTech has gone through in the past
Matt: If you think about the FinTech cycles, like 1.0, 2.0, 3.0, there’s been an evolution of how the product has evolved and who the end customer is. FinTech 1.0, everyone would say, was around changing consumer behavior, adopting a better UI, creating a better customer journey, and just being a better customer-facing solution than historical financial institutions. Now, that has worked to a degree, but I think the rate at which, for example, AI and technology is going to evolve, will enable those FIs to catch up.
Fintech 2.0. is really around the improvement in the infrastructure and shifting from legacy solutions and legacy infrastructure to more modernized solutions, more scalability, and greater modality. You’ve got more relationships, and dynamics where you can create a better relationship between the end customer and the company delivering the service. That being said, sitting here thinking about the 3.0, I go back to that existing example, which is I think financial services are becoming increasingly more horizontalized.
One thing to add, you had a new true product offering, BNPL, which has been around for some years, back to Bill Me Later and the acquisition by PayPal. You had these companies that were priced at 20, 30, 40X revenue multiples, because they were viewed as greater, more like payments businesses. However, that boom ended up creating a massive downfall in public valuations because they ended up reverting back to being perceived as consumer fintech companies. And if you go back to like the original, like 1.0 and Lending Club and P2P, those are companies that were trading at 10, 15X, forward revenue multiples; I think they came back down to 1–2X. I think that’s a really interesting component. What we’ve been seeing in this cycle is, you have these new really great FinTech companies, but they’ve been perceived and reverted back to something that an investor could relate to; taking a firm that really has created tremendous consumer awareness, merchant awareness, it’s also a true pain point, is an alternative payment schema, but is now being looked at as a consumer lending business, which I just think is misunderstood. And I think that is fundamentally an example of what’s been happening in these cycles. The other thing that we’re seeing too is the PSPs and the merchant acquirers that were trading at 10+X multiples are now reverting back to historical means of anywhere from 2–5X revenue. I think that also shifts not just the public markets but also impacts the private markets and how we perceive payments and payment infrastructure businesses.
- Whether fintechs are misunderstood by the market with these current valuations, or whether some of the companies are true fintechs whereas others are more like a standard financial institution
Matt: I think the public investor is pretty smart, but the public investor is also pretty fickle. They see the differentiator in the offering, they see the market share accretion, and they see the way that the offering is being delivered differently. Those are all great. These are companies that could grow. But at the end of the day, a public investor is still trying to figure out how you’re going to make me money. So, what we’ve seen in the cycle is there has to be a clear profitability proposition or an ability to gain market share at a rapid rate without deteriorating financial profile. I think we’re still really early in the ’21 and ’22 cohorts, to show the long-term ability to generate profitability, and I think that will be the point where public investors come back to the space.
In terms of what happens from a cycle standpoint, I think you see the boom cycles, you see the degradation cycles, you know, we’re kind of at this plateau relationship. You can see that actually in the FinTech index if you look at what’s gone up and what’s come down and then sort of the plateauing of that relationship. I think we’re at that first inning of where FinTech 3.0 is heading and it’s really exciting. That’s why we as Oak exist and why we continue to invest in the space.
- The most promising opportunities in FinTech at the moment
Matt: If you think the shift in the ability to build software, new capabilities for probabilistic computing, if you think about quantitative outputs — there’s so much more data and shifts in the underlying techniques. Thinking about the broader AI space, the models that we’re training data on, as well as the ability to build better software faster, are growing at an exponential rate. Going back to like fintech 1.0 and fintech 2.0, there are still a lot of kludgy processes that exist within the financial services ecosystem, there’s still a lot of sort of inertia in terms of changes in processes. And I think there will be this technological shift that reduces more of that inertia and is going to reduce a lot of that lack of automation and lack of innovation that’s happening from a processes standpoint. I know that may sound a little generic, but what I think you’re actually seeing is every single business model in financial services is going to go through some type of evolution. And it’s not saying, “Hey, a company that was built 10 years ago is going to be disrupted by the next company in the next 10 years”. I actually think the companies that have been built in the last 10 years that have great customer relationships and traction are going to continue to evolve and grow at a pretty attractive clip because the moat that they’ve created has been on the customer side. The contrast is they’re building off of legacy systems, but I think technology will enable them to remove their legacy systems and build on more modernized solutions. And again, it’s like we want to be playing in a space where we’re providing the picks and shovels to the FIs or to the emerging enterprises or to the SMBs that need those technology solutions to offer better products to their customers. And it really does stretch across those horizontals that I was referring to earlier.
- AI and ML, and what makes a fintech stand out in this space
Matt: Those are companies that are not just advanced in their learnings and their capabilities and their datasets and the number of data parameters that are input into their models, but, more importantly, it’s the way they’ve approached their markets. For example, raising their hands and saying, “Hey, we want to help you and your customer or end partner, and we want to do it in the right way”. So, when you think about AI in financial services, there’s going to be a lot of pushback if you’ve got the “black box”. What we get excited about is the total opposite. We can help solve really important issues for you using AI technology to predict outcomes, using majority voting prompts, using models that are enabling billions of data parameters and you know, not just that, it’s also decision trees and stack ranking, probabilistic outcomes. All those things are helpful to the underlying customers to say, “Hey, listen, we have ways to help you drive a better result”. And I think that’s where it gets super exciting around where we’re at because this technology requires billions of data points and individuals that know how to make the machines work. So companies like Pagaya and Justt are in a position to say like, “Hey, we want to help you and we want to enable you to benefit here.” That is where there’s just so much opportunity.
- Use cases for generative AI in fintech
Matt: We’re still early innings here. So you think about the vertical application of the generative AI capabilities. And then you think about quantitative analysis, like where we’re at like with Minerva or PaLM and sort of new techniques that complement GPT-4. You’ve got the ability to train data sets with NLP plus quantitative reasoning or deduction.
I’ll give you a good example. There’s a degree to which generative AI is helpful in advancing or improving the outcome. But there are also financial services where you need to have a deterministic outcome, it has to be a hundred percent right. It’s like in the healthcare space, I can’t give you a diagnosis that feels right or seems right. It has to be the right diagnosis. In financial services, it’s the same thing. I can’t tell you that I think you have a thousand dollars in your bank account; you have to have a thousand dollars in your bank account. Especially when it comes to money and what it means to individuals. So, one model doesn’t do it all. I say that because what’s really, really exciting is we’re still at those early use cases, getting closer and closer to deterministic outcomes and the new models that are being built, not just on text and NLP-based models that are based on text and images, but really getting into quantitative analysis, like what’s being built off of Minerva that will help us take the content plus the quantitative assessment to drive the next generation of outputs.
- Emerging companies that Matt is excited about
Matt: I think I’m biased because we’ve invested with them for about four rounds, but Pagaya is one example. It’s still super early innings of where they are from the data sets and the ability to use AI to generate better credit decisioning and outcomes and their ability to build this network of buyers and partners to originate more loans. It’s better for the underlying customer. It’s great for the partners. And it’s great for those that like to buy those loans, which is a world that has existed for decades and will continue to exist. And so the ability to do greater matching and to build that network connectivity is fascinating. And if you look at any other public information, they’re explaining more and more about what they’re doing to the underlying market because of their desire to be incredibly transparent with how they use AI and how it benefits the end customer, their partners, and the buyers of these loans. And again, I think it’s early days.
- Risks of generative AI, such as the increased risk of fraud
Matt: It’s a great question and I think frankly nobody knows, but it’s a really great opportunity as well. I’ll give you an example. So we’re seeing in some of our companies that you can build better rules to file chargebacks at the merchant level for e-commerce purchases, where the question is, “Is it friendly fraud or is it legitimate fraud?” The ability to distinguish and differentiate and process that inflow is actually a quite daunting challenge.
The burden lies on the merchant who doesn’t have the time or effort or capabilities to handle it. Even large merchants have significant chargeback issues, but they are handled probably in-house. That being said, having a solution that is able to accelerate that process because fraud is more rampant and fraud looks newer is important. We haven’t seen so much of this same fraud because it’s actually being pushed from a generator capability, which means that you’re getting more volume or it looks different from historical models. Every challenge creates a new opportunity. And I think that’s kind of a unique aspect.
The other area around this is synthetic fraud. We know that where AI can shift voice and shift image and act more similarly to, or look similarly to something that is real because it is real, but in a different construct. And that’s going to create a lot more identity fraud that’s going to affect commerce, can affect banking, or affect payments. It could affect the legitimacy of all financial services.
- Financial services incumbents have gotten a major boost with GPT-4 and other open-source software — does this hurt startups with tech moats?
Matt: I think it does, to a degree. I think it definitely shrinks the innovation gap. I don’t think it means, “Hey, the incumbents are going to remain the incumbents and win”, but I do think it means, “Hey, that nimbleness and that ability to focus on execution needs to be prioritized” and needs to be done efficiently, because that tandem can outperform the corporate implementation and corporate delivery and regulatory bureaucracy, for lack of better words, that exists in these organizations. So there will be a unique push-pull threshold here in the next handful of years as incumbents are ramping and scaling up faster, but, the emerging companies offering these solutions are competing, but also accelerating because of their nimbleness.
- Digital assets have gained traction in recent years. What areas of crypto and blockchain do you think are most investable?
Matt: So what’s fascinating about this space is if you separate between DeFi and CeFi and everything that’s happening in and around the broader digital infrastructure space, a lot of the pain points that we’re seeing in financial services and the broader fintech universe are applicable and truly mirror what’s happening in the crypto and blockchain space. Fraud is a huge issue. The ability to issue, settle, transfer, and make payments, particularly around using stablecoins where you’ve got a digital currency that needs to be exchanged with fiat and vice versa. Those are real, tangible pain points that as those businesses, as those industries, as those markets expand, stablecoin usage for payments is only going to accelerate. Fraud as a result is only going to accelerate. And those are maybe a little bit like the less sexy of ideas in the space, but they’re going to be critical to the success of that ecosystem.
DeFi has worked, you know, vis-a-vis CeFi, especially in the wake of some of these bankruptcies that we’ve seen in the collapses in the market. What I think is very promising is, it’s not an if, but more of a when — when chain oracles and scaling improve DeFi as a viable alternative payment or finance network. That, I think, is the part that becomes incredibly exciting. I think there just needs to be increasingly more trust in the decentralized offering of financial services. And that takes time, but it’s proven that it’s worked at least at the current scale.
It’s unclear if this happens in the next sub two years. I think between the next two and five years is when it happens. I don’t think it takes 10 years for the full market to catch up, but I think there is still going to be enough regulatory overhang, particularly until we get through an election cycle in ’24, where there’ll be real insight into the oversight. But the promise and the applicability of this technology and what it does and how it’s supposed to better serve and transform the financial services ecosystem still applies. Everyone that was excited about it two years ago should still be excited about it. But adoption is important and increasing capabilities needs to improve. But those are things that will happen and are going to, and one will form the others, and then you’ll have a snowball effect where I think over the next two to five years, you’ll have much broader adoption.
Check out the Episode on the platform of your choice here: Spotify | Apple Podcasts | Soundcloud
About Oak HC/FT
Oak HC/FT is a venture and growth equity firm investing in companies driving transformation in healthcare and fintech. Oak HC/FT partners with leading entrepreneurs at every stage, from seed to growth, to build businesses that make a measurable, lasting impact on these industries.
Founded in 2014, the firm has $5.3 billion in assets under management. The partners at the firm have had 46 realizations and 35 companies achieving valuations in excess of $1 billion.
About Matt Streisfeld
Matt Streisfeld is a General Partner at Oak HC/FT. Matt joined the firm in 2015 and focuses on growth equity and early-stage venture opportunities in FinTech.
Matt currently serves on the Boards of AU10TIX, CLARA Analytics, Highnote, Justt, Namogoo and ZenBusiness. He is also a Board Observer at Ocrolus and is actively involved with Blend (NYSE: BLND), Pagaya Technologies (NASDAQ: PGY) and Paxos. His prior investments include FastPay (acquired by AvidXchange), Groundspeed (acquired by Insurance Quantified), Kryon (acquired by Nintex) and Urjanet (acquired by Arcadia).
Prior to joining Oak HC/FT, Matt was a Vice President with LLR Partners, a middle-market growth equity firm, where he focused on investments in financial services technology companies. Matt was previously a Senior Associate at Lightyear Capital, a private equity firm focused on middle-market financial services companies. Matt was also an Associate in the insurance investment banking group of Keefe, Bruyette & Woods.
About the Author
Kailee Costello is an MBA Candidate at The Wharton School, where she is part of the Wharton FinTech Podcast team. She’s most passionate about how FinTech is breaking down barriers to make financial products and services more accessible — particularly in the personal finance space. Don’t hesitate to reach out with questions, comments, feedback, and opportunities at kaileec@wharton.upenn.edu.
As always, for more FinTech insights and opportunities to collaborate, please find us below:
Wharton FinTech: Medium Blog | Twitter | Our Website | LinkedIn
