William Leonard
Hey everyone. Welcome back to the Atlanta Startup Podcast. My name is William Leonard, your host for today. And I’m excited to welcome Sarah Morgenstern, who is a Venture Partner at Flourish Ventures, to the podcast. Sarah, welcome to the show.
Sarah Morgenstern
Thank you, William. It’s so great to be here.
William Leonard
Yeah, it’s great to have you. And I want to jump right in, Sarah, and talk about your background and your segue and overall journey into the space and world of Venture Capital. And then we’ll dive more into Flourish on the back of that.
Sarah Morgenstern
I grew up in a suburb of Cleveland, Ohio. My dad was a startup lawyer, my mom was a nonprofit consultant, and I went to a big public high school that was very socioeconomically diverse. And so I’ve always been interested in the intersection of market innovation and economic opportunity. But it took me a while to figure out sort of how to mesh those two things together. That was definitely not a straight line. So I was a history major as an undergrad, and then I worked and lived in China for a couple of years. I came home, I did an MBA ma, and I joined McKinsey after grad school graduation. And in consulting, I was serving corporate finance clients on the one hand, and I really loved that analytical exercise of modeling the future and nonprofit clients on the other, so big hospitals and universities. And at the time, that was a pretty unusual mix of work in a consulting context. And it dawned on me that there were organizations that were experimenting with how to fuse those two worlds. So, I joined what was then called the Omidyar Network. It was an early pioneer in impact investing that was funded by the founder of eBay, Pierre Omidyar, on their financial inclusion team. And my first role was to help refresh the team’s US. Investment strategy. And this was back in 2016, four things really stood out to us. The first was that by almost every measure, 40% to 70% of Americans were struggling with financial health. How they spend, save, borrow, and plan many living paycheck to paycheck. And that was true up and down the income spectrum. So most Americans were leading precarious financial lives. That was sort of takeaway number one. Number two, understaffed Americans were spending $200 to $300 billion a year on financial services. So this was a big market. The old adage, it is expensive to be poor. And it struck us as a market that was ripe for disruption. The third was there was a lot going on in tech innovation. So, between smartphone proliferation and enabling infrastructure and predictive analytics, it seemed like a good time to challenge the status quo. And then fourth, and this honestly was the most important and the reason that I got hooked on Venture. The founders in the space that were both mission-driven and determined to build extraordinarily successful businesses but also improve consumers’ lives at scale just blew me away. And so that was really the man. This set of people working on this set of problems is a really privileged place to spend some time professionally. I’ve been in the early stage of US fintech.
William Leonard
I love that. And the founders, the problems that they’re solving, and the scale that they were solving for are what really attracted us and so tell us more about Flourish Ventures today. Give us an overview of where the firm’s headquartered. What does the organization look like as a whole?
Sarah Morgenstern
Flourish is an early-stage global venture capital firm and we’re focused on innovations that directly or indirectly advance financial health for both consumers and small businesses. It’s a 500 million dollar fund. It’s solely funded by Pierre Omidyar. A really unique evergreen structure. And we have a global portfolio of more than 70 fintech companies. It spans the full gamut of financial service products from mobile banks and personal finance to debt management, insurance, and backend infrastructure. I focus specifically on our work in the US. I am the boring one at Flourish. The stories around the globe are way more interesting. But in the US, our portfolio includes market leaders like Chime, Propel, kin, Unit, Alloy, Jetty, Clerkie, and Mantl. So, really broad-based fintech portfolio. Unusually, we also partner with industry thought leaders such as the Financial Health Network and FinReg Lab to support research and policy initiatives that foster a fair and inclusive financial system. At the end of the day, that’s what we want to see. And we think startups have a really important role to play in creating that future. But we’re also engaged with the broader set of stakeholders that are part of the dialogue as well.
William Leonard
That’s awesome. So, a $500 million fund really have this evergreen structure with a focus on financial services fintech and you’re hyper-focused on US opportunities for the team. What stage is most appropriate for you and the broader team at Flourish as well?
Sarah Morgenstern
Yeah, thanks for the question. So we’re early-stage investors. Our sweet spot is seed through Series B and we can play flexible roles in syndicates. We can lead, we can co-lead and we can co-invest. We price and lead about 50% of the time but really want to show up in the way that works best and supports the founder instead of folks around the table.
William Leonard
That’s awesome. So you have really great flexibility in deal-making here. And so let’s take a deep dive on the approach that Flourish takes. And one, how you think about making investments, and two, how you think about approaching impact and systematic change. And I think that may best illustrated across portfolio examples as well. You talk about debt management and financial health, you talk about the statistics of how many people live to check to check in America. And it sounds like you all are wanting to invest in technologies that bring this broader education to improve the overall financial health of Americans and just people in general.
Sarah Morgenstern
That’s right. I think that’s beautifully captured. So we’re looking at a range of companies, both consumer-facing and infrastructure, that sits at that sweet spot of having both the potential for massive commercial success as well as driving transformative impact at scale. And really how we think about it is we want all of our startups to be wildly successful in their own right, but we also want them to provide a demonstration effect for sort of how to nudge the whole system in a direction. So I’ll give you a few examples from our portfolio. One is a company called Chime. Chime is a fee-free mobile bank account for mass market consumers and it was built expressly to take on incumbents that were poorly serving those customers with high minimum balances and punitive overdraft fees. We invested in Series B in 2017. It’s now become one of the first new banks to reach EBITDA profitability and has more than 10 million account holders. So by any definition has sort of reached critical mass in terms of touching individuals’ lives. But what we’re also really excited to see is that they’ve contributed to positive momentum around incumbents changing their practices with respect to overdraft fees. So overdraft fees when we did this six or seven years ago can be $10 to $30 billion a year in fees, very disproportionately hit low and moderate-income consumers and often not representative of the financial risk involved in the exchange. And it’s been really heartening for us to see a number of major banks announce reforms to their overdraft fee policies. And we’d like to hope that Chime made some contribution to increasing that competitive nature and changing the status quo for the industry writ large, obviously in tandem with regulators and other competitors. But that’s the sort of indirect impact that we aspire to see from our portfolio companies. I can give you one other example that comes at it from a different angle, and that’s a company called Propel. It’s a cash flow management app focused on we invested in their seed in 2017 and they have grown to serve 5 million monthly active users. So really impressive user penetration and adoption in a relatively short period of time. And what they illustrated for us is the power in spending time with overlooked consumer segments. So when you talk with the founder, Jimmy Chen, when he did ride-along in grocery stores with food stamp recipients, the observation was, hey, unlike a checking account, where if we want to know our balance, we can check it at any time, for food stamp recipients, they either had to call an 1800 number or run the math themselves. And that was really hard because here you are in the grocery store trying to figure out enough to buy this carton of milk and you don’t have the information you need. And so that observation and the seemingly simple ability to build a wedge product, which was to check that balance, rhyme, actually had a profound impact and really deeply resonated. And so you were able to scale on that initial wedge product with really low customer acquisition costs because it’s a company that others are not focused on. And on top of that layer on additional financial services, So that’s a model of understanding underserved customer segments’ needs and building for them and how that can lay the foundation for success that we hope will inspire other innovators as well.
William Leonard
And I love how sort of the common underlying theme here between Chime and Propel is to serve the overlooked consumer segments here, right? And I’m sure as you all think about thesis building and identifying opportunity investment areas, you all do rigorous research to figure out what are core problems to solve for now and how financial technology can really be at the forefront of that. What are some areas that you and the Flourish team have identified that one piques your interest? You maybe think they’re underrated or overlooked and are optimal areas and opportunities for innovation and really why?
Sarah Morgenstern
It’s a great question. One level up, we think fintech as a category right now is underrated. So before we even get into the specifics of it, our thesis is there is a lot more to be done in terms of disruptive fintech. And we think we’ve only scratched the surface. We’re in the early innings of a pretty powerful digital transformation in this industry that has the potential to drive down costs and in doing so, increase access and improve value propositions to lots of folks that historically were not well served by the system. So we see genuinely significant opportunities across payments, banking, lending, insurance, core infrastructure, and the whole value chain. That said, a couple of specific examples of spaces we’re especially excited about right now. One is there’s a lot of interesting stuff going on with you got 30 million small businesses in the US rapidly digitized during COVID. So. real acceleration in digital adoption, which means you’ve got all sorts of digital information and exhaust that you didn’t use to have on small businesses and introduces new potential. So there’s stuff happening on the consumer-facing and on the infrastructure side that we think could be really exciting. On the consumer-facing front, you think about vertical SaaS companies take a toast that is building software ERPs that are expressly built for that industry rather than sort of being a horizontal layer. And because the software is 10x better than the existing options can propel adoption. And on top of that, you can then layer payments and underwriting because you’ve got unique visibility into that small business’s performance. We see the potential for those kinds of solutions across a huge range of sectors, from healthcare and logistics to service businesses like barber shops. And it’s a really fun space of the mashup between fintech and the real-world economy across the board. I think equally interesting is what’s going on the back end for SMBs, in part spurred by that digital wave of everything from KYB companies. So identity verification for businesses. How do I know that you are the business that you say you are and you really exist? Which is the first step to anyone being able to access an account or get a loan. And because there are all these new data sources, you can leverage those and try and assess risk in new, more cost-effective, and efficient ways. We’ve made an investment in a company called Truebiz that’s focused on that problem. There are also new companies like A Kodad or Rails that are building the pipes for new data sources like accounting information. And so imagine now you’re able to mash up banking transaction data with accounting, get a much more holistic snapshot of your business in real-time, and help with reconciliation that has some potentially powerful unlocks. And then the last one is cross border. We were a global firm. As we talk with our colleagues in Latin America, Africa, and India, that pain point of small businesses on the ground, in emerging markets who are trying to pay their suppliers in a cross-border fashion through the correspondent banking network system, that remains a really slow, really paper based, very expensive money movement experience. And so that’s a space that we view as prime for disruption as well.
William Leonard
Awesome. Yeah, I love the thesis around one, just your overall bullish outlook on fintech, but then how granular you get when it comes to the various verticals here that exist. So I love themes around small business and digital adoption, a lot of the information that’s coming in, the know your business aspect of it is very important. And I personally am seeing a lot of opportunities around treasury management, yield management, especially in the face of the banking crisis that we saw earlier this year, tremendous opportunity there, especially for newly funded precede seed Series A, Series B companies that have this influx of cash and that need to actively and efficiently manage those bank accounts and that cash that they yeah, tremendous opportunities exist here. And I want to give a shout-out to one of our portfolio companies, Goodfynd as well, out of DC and the DMV area. They’re building fintech and payments platforms for mobile-first businesses, and small businesses certainly fall in that category as so really unique insight there, Sarah. And as you talk about how you. Areas of opportunity that you’re excited about from a vertical perspective, I want to get your insight on areas of opportunity you’re excited about from a geographical perspective. What cities, regions, and countries in the world, and domestically here in the US? Does the Flourish team and specifically you get excited about?
Sarah Morgenstern
This one is a bit of a softball because the Southeast in general and Atlanta specifically are at the top of our list. We view Atlanta as a fast-growing venture ecosystem with all the ingredients to become a fintech startup powerhouse. From the strength of the financial service incumbents, particularly around payment processing and the global reach there, to exciting first-generation startup exits from Cabbage to GreenSky, the breadth of impressive tech talent in the city, the density of the talent, the diversity and inclusivity of the talent, and then the vibrancy of the ecosystem of startup actors. Everybody from the Russell Center to Atlanta Tech Village to what you guys are leading at Startup Runway and Valor Ventures, as well as civic leadership from the office of the Mayor of Technology and Innovation. It’s just a great city and we love to visit. We’re really excited about what’s happening and the whole ecosystem has just been immensely friendly, collaborative, and welcoming as we’ve started to spend time there. So Atlanta. But Atlanta is really illustrative of where we see broader opportunities in the US. Which is to say, we believe that a large portion of high-potential founders from underrepresented backgrounds continue to go overlooked within the fintech sector. And so we’re really excited about focusing on underestimated founders by geo. So folks who are building outside of New York and San Francisco, as well as gender and race in the real belief that there’s just incredible talent there that too often is not getting recognized.
William Leonard
Yeah, that’s a great response, Sarah. And Atlanta is definitely one of the premier cities that will be on the rise here. I think you look at the commerce that happens here in the city, you’ve got a robust rail network that is still very active. Atlanta is one of the first port destinations where goods come from the port of Savannah and up 75 and into the heart of the country. You’ve got the world’s busiest airport here, right here in our backyard. Like you said, tech-forward leadership and more venture funds are coming here now to establish gaps that have existed at the early stage. And I think that one of the things that has propelled the city as of late is that there’s more early-stage capital here now to fund and get this flywheel going of innovation consistently churning out of the city. So, I appreciate that insight. I want to transition here, Sarah. We have a pretty diverse audience of listeners here, I would say mainly founders, investors, and ecosystem stakeholders as well. And so for the founders listening to this episode who are building early-stage fintech, that is impacting change and they want to reach out to flourish. Two things what does having flourish on your cap table look like from a founder’s perspective? And what is the best way to get in touch with you all regarding potential investment?
Sarah Morgenstern
So Flourish, we invest in early-stage seed through Series B and can lead co-lead, or co-invest. We lead about 50% of the time. Ticket sizes can range from five hundred k at the low end to six to 8 million at the high end. And we have multistage investment capacity. We often assume governance roles and we’re in frequent dialogue with our founders. So, on that sort of passive-to-active spectrum, hope to be really active and lean in, we want to be that first call out and then we aspire to support our founders on a number of dimensions. The first is with deep sector knowledge in fintech and financial services both in the US. And globally. And increasingly there’s fascinating cross-pollination across those geographies. The second is surfacing some of the insights from what we’re seeing in India, Africa, and Latin America and sharing them back with our founders here. The third is a clear point of view on what a fairer financial system could look like and a peer community of founders who are all motivated by mission at a core level. We bring together our founders for retreats every year and other events and find that there is a kinship and sort of special magic to the founders in our portfolio who all are building amazing businesses but have that motivation rooted in improving the lives of their end users. And then the fourth is we have a really strong suite of in-house operational support services. So we have full-time human capital that can help with HR strategy, talent identification and recruitment, comp design, DEIJ culture building, and all of the complex decisions that you’re making in rapid succession in an early-stage company. Full-time marcoms from message development to media outreach strategy. We have gr advisors, so government relations advisors, recognize we’re operating in a closely regulated environment for good reason. Money matters and we got to be careful with it and supporting folks in helping to get that foundation right. And then we have an explicit focus internally on supporting the founder well being. It goes without saying, but sometimes it needs to be reiterated that being a founder is really hard, and providing empathy and support for the personal experience of Navigating. The ups and downs of that journey from peer support groups to resiliency resources is a place that we really hope to show up for our founders.
William Leonard
Yeah, you got this platform really around company building capital, but what I really love about what you said is how you all focus and emphasize founder well-being. I mean, where is a company going to be at, if the founder is unhealthy, not taking care of their mental, those types of things that’s important to the overall function, growth, and future success of the company? So, it’s great to see that you all really place a strong emphasis on that as well.
Sarah Morgenstern
Yeah, that’s well summarized. Thanks.
William Leonard
As we wrap up this conversation. Sarah, it’s been great to understand, flourish thesis, your expertise as a team across fintech, and some of the great companies like Chime and Propel that you all have invested in understanding the areas of opportunity that you all are most excited about. Geographies, that you’re excited about, ways that you support your founders aside from capital. My last question for you is really about the broader macroeconomic situation here and your views on how the state of fintech has, let’s say, evolved since the end of the bull market run in 2021. And in any bold predictions that you may have over the short to medium term for the broader fintech category over the next couple of years or so.
Sarah Morgenstern
Yeah, so first, Fintech is not going anywhere. We really genuinely believe we’re inning two or three of a long game of a massive industry that’s just beginning to be fundamentally disrupted. Second, I think the last couple of years have placed a heightened focus on the fundamentals unit economics and sort of staged financing to reduce very specific risks and at the high level, I think that’s healthy for the whole industry and stronger companies will emerge from it and you’ll see a real sort of bifurcation there. We’ve talked a lot in this discussion about some of our consumer-facing portfolio companies. We also see tremendous opportunities in back-end infrastructure. We view plumbing as being a really important factor in unlocking consumer-facing innovation, so often in the US. When you say, “Why does this stick? Why is this so hard to use my app?” It’s because there’s stuff going on behind the scenes that hasn’t yet been modernized. And so we’re spending a lot of time there across a bunch of different dimensions from reg tech. So think folks like Alloy, which does KYC AML Hummingbird, Suspicious Activity, reporting to infrastructure for embedded finance. So folks like Unit that are focused on baking as a service to players like Mantl that are helping to modernize and digitize the long tail of community banks and credit unions by making it easier for them to open and offer digital accounts. So there’s a lot still there going on the back end that is cobalt based, that is people and paper that can be massively improved from an efficiency standpoint. And that’s one area we’ll continue to be bullish on.
William Leonard
I love it. Well, Sarah, this has been such a fascinating and insightful conversation to your background and journey into venture capital and the origin story of Flourish, and really the unique evergreen structure and wide check writing capability that you all have. So, what is the best way for a founder to get in touch with you or someone on your team about potential investment?
Sarah Morgenstern
Always welcome. There’s no bad way to reach out, so you can email us. My email is Sarah. Sarah@flourishventures.com, ping us on LinkedIn and meet us up at conferences. I’ll be at Fintech South and Venture Atlanta in September and would love and welcome meeting in person. Anyone who’s building something new and interesting in the Fintech space there.
William Leonard
Awesome. Sarah, thanks for joining me today.
Sarah Morgenstern
Thank you so much for the invitation. It was an absolute pleasure and a great conversation. Thanks, William.
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