Logan Allin (03:03):
In chess, there is just habitual learning, particularly with the advent of computers and that becoming more and more prominent as I continue to play, which is you need to continue to study opening, so you need to continue study your middle game and basically look for and review master competition games from all around the world. That drove me to understanding that you can really learn and dive into any subject and learn it and study it and grow significantly in your knowledge base around it.

Logan Allin (03:33):
Number two is pattern recognition. So in chess, you see patterns emerging in terms of positions and how things evolve. That definitely applies to venture capital, where you have your gut instinct or your pattern recognition in terms of investing in a company, monitoring a company and its growth trajectory, monitoring a situation where there might be a board question or an issue with a founder or the like, and there’s a lot of pattern around that and things that have happened before that you can take into consideration. So those two absolutely map in my view to games, generally, but particularly chess, which is a growth mindset and this idea of pattern recognition.

Trey Lockerbie (04:08):
That last point to me raises this question around sizing people up. You hear about Warren Buffett’s ability to walk in a room, meet someone for the first time, and within a handshake know if there’s going to be a deal or not just sizing people up. I’m remembering The Queen’s Gambit where you sit down across from your competitor and you’re getting that first initial feel for people. Is there something there that you feel is a skill you’ve learned just from reading people?

Logan Allin (04:32):
I think so, and then it also applies to Poker. I play Poker occasionally as well. I think sizing people up and reading the person is a huge part of chess as well, particularly in Blitz, which is accelerated chess. So typically, you only have five minutes per person or 10 minutes total to make all your moves. In those situations, you can read a lot about the person. You can also read about how they open much like a founder opens up a meeting. So I think there’s a lot to say about founder judgment and evaluating founders.

Logan Allin (05:00):
We as a firm, for example, only invest in repeat entrepreneurs, preferably repeat founders. We do not invest in first time entrepreneurs, and we’ll invest in first time CEOs, but we’ll not invest in first time entrepreneurs. So our profile is very much somebody who’s been in a startup environment, been in an entrepreneurial environment, walks thousands of miles in those shoes, and now is starting their new company or possibly their next company. That’s been an evaluation of the data, but also in sizing people up. If this is your first entrepreneurial gig, there’s been fairly binary outcomes in those regards.

Trey Lockerbie (05:38):
Is the fact that they’ve maybe failed in their prior business of concern to you? I know in Silicon Valley you hear all the time that they almost praise failure and it’s looked upon in a very different light. Is that something that matters to you as far as the previous company was successful or not?

Logan Allin (05:53):
We prefer, obviously, to see success and and the right trajectory. We have a top 50 fintechs that we track on. We use a platform called Lighthouse, Lighthouse.ai, which we leverage through source companies and source founders. We run an algorithm on that vis-a-vis founder DNA, and prior entrepreneurial experience is absolutely part of that. Part of the scoring is whether the prior companies succeeded or not, but they still get credit for having that entrepreneurial experience. So they pass that at least threshold in terms of our minds and in the sense that they have the founder DNA to start something new. They’ve learned those lessons and so forth.

Logan Allin (06:28):
For example, I know we’re going to chat a little bit about the company, PIPE, which you’ll hear a lot about from Jason Calacanis and Chamath and others. PIPE is one of their favorite topics as well. We led the seed in March of 2020, and the prior exit from the founders says they are one to admit was not that exciting. They sold their first business to fair, but it was what they learned as part of selling that business, and afterwards in terms of the gaps they saw in the market that helped them come up with the business idea for PIPE and then execute against that.

Logan Allin (06:57):
So you can absolutely rise from failure as well, and that’s an important outcome, but as it relates to our criteria, we would’ve certainly have preferred you knowing what success looks like to be able to better replicate that in your new venture.

Trey Lockerbie (07:13):
So Logan, what sparked your passion specifically for investing having come out of the banking world initially, and what was the appeal of venture capital?

Logan Allin (07:22):
So I started my career in management consulting and I fell into it as I’ve publicly commented on in the past. I did an internship at Citigroup in my junior year at Duke, and coming out of Duke, I really wasn’t sure what wanted to do. So I decided to go into consulting, which is largely what everybody does when they’re not sure exactly what they want to do because it provides this really interesting breadth and depth of opportunity sets.

Logan Allin (07:49):
They looked at my resume as I was going into Capgemini and they said, “Oh, you did an internship at Citigroup. You must be an expert in financial services. Let’s put him in the financial services group.” So that’s literally how I got into fintech. From there, I fell in love with the space, and that was because it plays such a massive foundational role in the markets as it relates to running of banks, running of asset management, insurers, hedge funds, private equity firms, and so forth. There’s a technology layer and enablement aspect to all of those businesses.

Logan Allin (08:18):
I ultimately went from consulting into the industry side working at Citi National Bank, focusing on digitization and customer experience in that platform. Then I went and did the same job, but more with a global purview at Invesco. Before, I got this very strong entrepreneurial itch and went back to Silicon Valley. I went to high school in the valley, and a lot of my friends. While I was running around in a suit, were running around in hoodies and flip flops and visiting with them in my role at Invesco, where I was actively looking for innovation opportunities and partnerships in the valley, I decided to leave Invesco and join SoFi as an early team member.

Logan Allin (08:59):
That really changed my trajectory. From there, I really saw what was happening in both the entrepreneurial ecosystem and company building, but also in the VCs that were providing them capital. In looking at venture capital, what I saw a portfolio approach to working with entrepreneurs. I had been taking a portfolio approach in my consulting life to working with a number of large institutional enterprises. So it felt familiar to me.

Logan Allin (09:28):
Then secondly, I started to really gravitate in my early days after SoFi back towards enterprise software, which is where I had focused initially in my consulting career and recognized that instead of licensing that technology and implementing it, I could be investing in it, and that felt like a dream job to me. So I got great advice from a number of VCs, guys like Roelof at Sequoia, guys like Brian Singerman at Founders Fund, and they all said, “You need to go keep operating.”

Logan Allin (09:58):
So I did that for a number of years, which is great advice. I always tell people who are at investment banks, in consulting or at business school that they should be getting operating experience before they go into venture capital, and that’s fundamental to that pattern recognition comment I made, having credibility sitting across from an entrepreneur that you’re looking to invest in, frankly being able to add operating value beyond capital as you work with that entrepreneur.

Logan Allin (10:22):
So for me, I think this is the greatest job in the world, being able to leave an impact and a legacy on a massive industry, be able to work with entrepreneurs to help them execute on their visions every day, and I don’t feel like I should be getting paid for what I do. So that is a very good sign.

Trey Lockerbie (10:39):
So you’ve been running Fin now for over three years, and I’m sure those are very interesting years having gone through the environment we’re all in, but you now have 10 unicorns in the portfolio and over a billion dollars now in assets under management. With incredible numbers like that, I’m assuming, and I could be mistaken that there were some tailwinds perhaps, and perhaps related to the pandemic, but was that the case, and if so, what were the tailwinds?

Logan Allin (11:07):
I would say COVID for all of the unfortunate repercussions and everything we all lived through did serve as a tailwind and a digitization catalyst. I think it’s this this pretty well-trodden territory at this point from a data perspective, but we couldn’t go into bank branches. People couldn’t go into call centers and the customers that our companies serve, those being banks, asset managers, insurers, I’ll call them the larger fintechs like PayPal, Intuit, so forth, and then corporates, both retailers and big tech, they recognized that whether they were already financial services businesses and they needed to vertically integrate digital capabilities on an accelerated basis or they were corporates that were trying to vertically integrate financial services and maintain their digital distribution models, they needed to move really quickly.

Logan Allin (12:05):
So people have talked about six years of digital movement taking place in six months. I’m not sure what the order of magnitude is, but it happened quickly, and certainly more quickly than we all expected. So we had massive tailwinds in our portfolio as a result of that. Our investment box entails that we are investing full life cycle from precede through to taking public companies public out of our SPACs, but we solely focus on B2B SaaS. These are capital light businesses, no balance sheet, no credit risk, typically not regulated or lightly regulated, and just very capital efficient, high gross margin businesses, which thankfully were fairly insulated in COVID and are fairly insulated from inflation rate environments and then supply chains.

Logan Allin (12:51):
So we sat back and looked as our portfolios had some of their best years and months on the record, and so felt very humbled and fortunate by that. Now, we’re in a place where omicron, obviously, fully being short and accelerated here, we’re going to see some return to normalization, but I think that digital adoption curve and that rate of adoption is still here to stay.

Trey Lockerbie (13:14):
Now, I imagine when you’re focused on an industry such as fintech you are looking to build an ecosystem, so to speak. So with every company you’re looking at, you’re like, “Okay. That space hasn’t been explored yet, but it works over here nicely with this company.” Do you find a lot of synergies interacting between the portfolio companies? If so, could you give us an example of that?

Logan Allin (13:36):
Absolutely. So we have a very top down thesis orientation to where we think the white space exists in fintech, again, within that Venn diagram of B2B SaaS, and we have identified six sub sectors today. They’re on our website. We’re very public about where we’re constructive that we think represent the largest areas of white space and then very specific theses within those.

Logan Allin (14:02):
So what we do is we go out and proactively market map companies back to those sub sectors and those theses and look to select one category winner within those. What that results in is no overlap in companies. We don’t want conflicts in the portfolio, but a significant amount of potential synergy in portfolio companies working together. So just in short on those six sub sectors, we are the most excited about embedded finance, the CFO tech stack or anything that touches the treasury function, asset management and capital markets, insurtech, blockchain from an enterprise application perspective, and then lastly what we call infrastructure and enabling technologies. That’s things like regulatory technology, big data analytics, this massive cloud migration problem, leveraging quantum computing, et cetera.

Logan Allin (14:56):
So those six sub sectors are where we focus proactively and going out and sourcing, and that’s really where we pointed Lighthouse from a data science perspective on a bottoms up basis. So just as an example on the portfolio, we have a company called Netomi. They are a customer success platform driving omnichannel customer automation through email, which shockingly is still about 80% of customer service traffic, a text message social agent-assisted, and what that allows companies to do and publicly, they have customers like Brex and New Bank and others, where they’re supporting that customer service automation. It improves customer success, improves the customer experience, eliminates call center reliance pretty significantly, which is a massive problem in COVID.

Logan Allin (15:42):
So as you can imagine across our portfolio, anybody who is touching consumers, but increasingly anybody who’s touching SMBs or SMEs, they need triaging support and the ability to have customer self-serve and be supported on a timely basis. So there’s a lot of overlap with Netomi.

Logan Allin (15:59):
Then secondly, our portfolio company is Xingtera, which is a banking as a service company. Xingtera sits in between banks, the fintechs, and corporates, all of whom need banking infrastructure compliance and then fintech applications. They’re helping service that middleman or that glue between all those areas. As you can imagine, they are able to partner across our portfolio as well and enabling those capabilities.

Logan Allin (16:24):
So we love connecting our portfolio companies. We built a community around Lighthouse, around the events and programming we do across what we call the Fin Family, and that’s been really fundamental. The stat that we’re the most proud of that speaks to this is that we have a 95% net promoter score across our portfolio. We’ve been between a 90% to 95% sense inception, and we’re now at 70 portfolio companies. So that’s the biggest litmus test and number I look at to make sure that we’re scaling appropriately and in the right way, that we’re actually adding value beyond the capital we’re investing.

Trey Lockerbie (17:00):
Very cool. You mentioned migration to the cloud, and I’ve heard you mention that only 10% of “financial information” is currently stored on the cloud. So what does that mean? Walk us through the potential opportunity that this is speaking to.

Logan Allin (17:14):
So Gartner puts out a survey every year where they look at budgets in terms of how much the banks are spending. Financial institutions in 2020 will spend, let’s call it roughly $1.25 trillion on technology. Sounds like a big number because it is. They’re the number one spenders on technology in the world beyond any government or other industry. Then they put out the lead table around cloud adoption, and they are consistently in dead last around cloud adoption.

Logan Allin (17:48):
So what is the disconnect? They’re the largest spenders on technology, dead lasting cloud adoption, which means, by the way, they’re licensed enterprise SaaS, which is cloud native or multi-tenant. The industry calls this a massive lift and shift problem. So how do I take data and functionality out of legacy mainframe technology that’s probably on premise and how do I shift that into public clouds, private clouds, multi-tenant clouds, whatever the structure might be, which lowers the cost of ownership dramatically, allows you far more scale, allows you to tap into more functionality and all the other benefits of the cloud?

Logan Allin (18:25):
It is actually not a legal issue. It is not a regulatory issues. It is not a privacy issue. The OCC actually does not care where your data exists if you’re a bank. They just want to make sure that it is appropriately risk-managed, compliant, cybersecure, et cetera. I can tell you that a AWS or a Google cloud or an Azure cloud is far more secure than having a server farm in the middle of the Midwest.

Logan Allin (18:51):
So it’s amazing that this transition has not taken place on a more rapid basis, and it principally because of the legacy mainframe technology and how difficult it is from a technical problem perspective to abstract that data, that functionality, and actually migrates to the cloud. These projects typically entail hundreds and hundreds of Accenture and or IBM consultants. Literally, it’s abstracting this data using effectively flat file formats, and then trying to figure out how to parse it together, putting it in places like data lakes and so forth before they migrated ultimately to the cloud. So it is a massive industry issue, and I think we’ll continue to be.

Logan Allin (19:32):
Then I think the second piece is mainly internal policy, and a lot of CTOs at large banks very much still have the mindset that they should be building everything. I always tell banks CTOs when I have the opportunity to sit down with them, and many of them are OPs of ours, that they should be building anything. There is an API and a solution third-party for everything out there who is spending all of their time, money, and effort on that very specific piece of IP and R&D, and that is not your core competency. Focus on the customer experience, whether that’s retail or commercial customers. Own that, make it incredible, make sure it’s stitched all together in a very seamless way. Don’t focus on building the middleware or the back office or any of that functionality.

Logan Allin (20:16):
So I think you’re slowly starting to see that adoption. JP Morgan announced that they’re taking their entire core banking system and moving it into the cloud with Thought Machine, which is a UK-based company. That’s an incredible milestone. Going back to the Gartner research coming full circle, Gartner also shows you a breakdown percentage of spend by the banks, percentage of spend on internal applications versus third-party. 2022 will be the very first year where a third-party spend will eclipse internal spend. So there’s hope.

Trey Lockerbie (20:47):
Wow. Now, is that just a means of the big banks trying to stay relevant, so to speak? They’re trying to stay innovative, but they don’t maybe have the R&D centers in-house to do so so they’re outsourcing this more and more?

Logan Allin (21:01):
Correct. The banks are absolutely competing with the neobanks and they’re all competing with the robo-advisors, and any of these other players that are focused on the consumer or the SMB, and those players have presented effectively a less friction, better customer experience with ease of use, more transparency, and branding and positioning that says, “Hey, we’re on your side.”

Logan Allin (21:25):
I obviously spent a lot of my career at SoFi going to millennials. We have a portfolio company called Greenlight that has targeted families and very specifically Gen Zers as part of that family finance offering, and they’re winning customers and winning share. So the banks look at that and they say, “Okay. We’ve got these fintechs nipping at our heels,” and I say that very specifically because on a total asset basis, it’s still a fly on an elephant, and they take a long view and they recognize they need to innovate and do so quickly.

Logan Allin (21:56):
Then they also look at net interest income, which is their primary revenue driver, and that has been basically zilch for many, many years, thanks to the fed’s policies, and they look at OPEX. So big part of this is, yes, keeping up with the neobanks, but the bigger part of this is the OPEX concerns and the weight that that has on their bottom line, and recognizing that they need to skinny that down and reduce the amount of IT professionals they have and the amount of warehouse, keeping the lights on cost they have in their IT budgets.

Trey Lockerbie (22:28):
Now, as of VC, are you penciling this out to a certain strategic when you’re looking at an investment? For example, I work in beverage, and so it’s very common that you hear, “Okay. Does Coke or Pepsi want to buy this?” for example, because those are the two major strategics in this industry. With fintech, are you basically looking at JP Morgan, et cetera, when you’re going down to say, “Okay, whose portfolio is this company going to fit into? Will they be interested if we just execute on X, Y, and Z?”

Logan Allin (22:55):
We are from a commercialization and distribution partnership perspective, but we’re not from an exit perspective. So most likely, exit outcomes for our portfolio are IPOs respects or strategic exits, and the number of strategic acquirers for B2B fintech is actually much larger than it is for B2C, B2S, and B-oriented business models. So that includes the legacy or old school fintechs, as I call them, FIS, Pfizer, PayPal, Intuit, Square, right? So they’re all being hugely acquisitive. PayPal has a budget of $5 billion per year per Dan Schulman that he’s looking to spend on making acquisitions. You can put Visa and MasterCard in that category as well, who have also been hugely acquisitive.

Logan Allin (23:42):
Secondly, you increasingly have big tech, Salesforce, Amazon, Google, Facebook, Apple. All have made acquisitions within the fintech and web three spaces in the last several years and will continue to do so.

Logan Allin (23:55):
Third, you do have I’ll call it the exchanges and the fund admins, groups like SS&C, Nasdaq, et cetera, have been hugely acquisitive in this space. Then you have asset managers and insurers, and then lastly, you may have the banks. The challenge for the banks in acquiring a B2B SaaS business is they become the sole customer to that company, and the revenue opportunity becomes less interesting.

Logan Allin (24:20):
So our companies very much try to stay Switzerland when they look for a strategic exit to maximize the tam and the opportunity set that they have to go after, and if they only work with one customer, and then that’s not a hugely interesting outcome over time. So that’s how we think about the exit profiles, but from a commercialization distribution perspective, we have strategic LPs in the asset management world, and the insurance world, and the bank world, and the wealth management world. So we’re absolutely looking at that matchmaking opportunity as we evaluate businesses from a pipeline perspective.

Trey Lockerbie (24:51):
Let’s cover the appeal of B2B SaaS, specifically. I’ve heard you mention that SaaS pricing is broken and that SaaS revenue recognition is broken. So talk to us a little bit about what you mean there and the opportunity.

Logan Allin (25:05):
Sure. So the number one issue that we find in call it seed series A companies as they go to market is their pricing model is almost inevitably broken. We look at average contract values or ACVs. As a SaaS investor, you want to see ACVs over 100K in a top decile type SaaS company, generally 200-250K plus. Early days, our companies are mispricing or pricing their IP and their offerings way too low, and then they’re getting stuck at that ACV.

Logan Allin (25:38):
So they’re pricing it somewhere in the 25 to 50K ACV range, and then when they go to renegotiate, it’s usually problematic. They have MFN clauses in their contracts, creates long-term, long-term issues. So we’ve built pricing models and best practices in our operating playbook, which we share with our portfolio companies. So that’s one big part of the issue.

Logan Allin (26:01):
The other big part of the issue is called vanity metrics in SaaS. So we all remember the WeWork example in terms of adjusted EBITDA and all these games that are being played. Well, the same thing’s happening in the SaaS world. So my favorite is contracted ARR. Well, what does that mean? So it’s in the bank. Well, no, it’s not in the bank. It’s something where the contract is almost done. Okay? It’s almost done. It’s not signed. It’s in your pipeline.

Logan Allin (26:28):
So pipeline revenue versus bookings, meaning the contract is signed and the revenue hasn’t hit your bank account yet versus realized ARR versus gross revenue versus net revenue. There are so many areas of gap earnings that get misconstrued in the SaaS world that it’s comical. So we’ll get these investor pitch checks where they’re talking about 50 million of ARR, and then you dig into the numbers and it’s absolutely nowhere close to 50 million.

Logan Allin (26:57):
So I think more has to be done around guidance in this space. Certainly, FASBI and others have provided some views on how they define all these things. So we actually have a Microsoft document that we send out in PDF or Microsoft Word to all our finance teams and our CFOs that says, “This is how this is calculated. This is what the definition is. This is what you should be reporting, nothing else,” because if you’re reporting anything else, it’s probably non-gap already, but if you go into non-gap territory, the amount of wiggle room that’s provided today is pretty massive. We want our companies to be representing themselves in the right way because sophisticated investors are going to dig in to the P&L and the balance sheet ultimately and figure it out.

Logan Allin (27:42):
So I do think this is an emerging problem. Frankly, now you’re seeing the public market pull back around a number of fintech companies and SaaS companies, and people are starting to ask questions about how sticky is this revenue.

Logan Allin (27:55):
One of my favorite metrics that I like to use in the SaaS world is net dollar retention. So that is how much revenue you’re making from a customer today, and then how much additional revenue you got out of them over a period of time. So the top 10%, this is actually the number one indicator of enterprise value in a SaaS company or their multiple, I should say, and the quality of that multiple and the sustainability of that multiple is net dollar retention. 120% plus is the top 5% decile, top decile returns from a SaaS benchmarking perspective.

Logan Allin (28:31):
So we look at that very carefully and that comes down to, “Okay. The customer loves your product so much. They’ve actually added usage,” if it’s on a usage basis or added seats, if it’s on a seat basis, “and they’re finding so much value they’re rolling it out across the rest of the company.” That means they’re going to be stickier. That 120% the next year turns into 100% revenue and then you start over again, and you got to continue to deepen that relationship, which is where customer success really comes into play.

Logan Allin (29:02):
So we could spend all day on SaaS metrics, but we talk to our companies all the time about this, and we really try to be prescriptive with how they should be thinking about it.

Trey Lockerbie (29:11):
Now, I find it fascinating. For those listening who are like, “Okay. This isn’t relevant for me. I only invest in public companies. I don’t have enough money to put into venture,” et cetera, I just want to highlight something you said earlier, which is a lot of your companies are the exit is IPO, mainly, once you start getting that unicorn status, I mean, you’re over a billion dollars. I mean, acquisitions become tougher and tougher and the universe gets smaller. So IPO is maybe the most common path from that point, but also, some of your companies, especially one you worked at previously, SoFi, is public and there are others maybe even going public soon. So I want to talk a little bit about SoFi given that you have more than intimate knowledge just having worked there. What’s your take on SoFi as a company?

Trey Lockerbie (29:54):
I just want to highlight also that it went public in 2020, and billionaires such as Bill Miller, Chamath, and Dan Loeb have been holding the stock. Although I believe Bill has sold and Chamath has recently reduced, but that could be because or why, I don’t know the correlation causation here, but the stock has been highly volatile with three near 50% corrections in the last year alone. So for investors listening, how does, A, the company make money, and B, what is your take on today’s evaluation based on maybe the metrics you mentioned earlier?

Logan Allin (30:26):
Good question. We have four to six IPOs conservatively this year, which I’m pretty excited about, those coming out of our growth portfolio and then our SPAC, which we listed in October of last year at trades under XFIN, and we’re out in the market having discussions around that SPAC today. We will be serial SPAC sponsors, and SoFi was really the first major fintech company to go the SPAC route. They decided to go to the SPAC route, and this was what they positioned publicly because of the quality of the sponsor and head of SoFi in Social Capital, which Chamath is at the helm of, and we think very highly both parties, and we felt like with SoFi’s consumer orientation, they would be great partners and help take the company into the public markets and support them with both growth capital, as well as, obviously, the advantages of being a public company, particularly with a balance sheet and lowering cost of capital, being able to recruit more and increasing their brand value and so forth.

Logan Allin (31:28):
So we were very supportive of the timing of the IPO and that trajectory, but as you said, the stock has traded in a highly volatile way. I would say that’s the case in the last call it two to three months for the entire fintech space. What you’ve seen is that the fintechs that have had the most volatility are consumer-oriented, rate highly regulated, have interest rate sensitivity, may have some inflationary sensitivity as well if they’re touching the consumer and the consumer basket, and have had, in some cases, some pretty significant issues with regulators, ala Robinhood, Coinbase, and so forth.

Logan Allin (32:09):
In SoFi’s case, they took a very interesting approach to bolstering their business model in advance of going public by acquiring Galileo. Galileo is a B2B software platform that help companies issue debit and credit cards and is a banking as a service platform. So that was SoFi’s ecosystem play, and not only vertically integrating their own tech stack to be able to leverage Galileo, but also leveraging Galileo’s capabilities in servicing the rest of the fintech market with players that include Chime and Robinhood.

Logan Allin (32:42):
So I think that was a brilliant acquisition. It looked expensive at the time, but based on Galileo’s growth rate and their contribution margin to the overall SoFi enterprise, I think it has been a big part of reducing volatility in the name.

Logan Allin (32:59):
Our view also is that SoFi has been hit by the extension in the Cares Act. So Biden came out and said earlier last year, he said, “We’re going to extend the Cares Act through the first part of Q1.” He then updated that in December to say, “We’re going to accelerate. We’re going to continue that through March,” and the Cares Act aspect of this is simply consideration for student loans and allowing people to effectively get their student loans written off.

Logan Allin (33:28):
A big part of SoFi’s business is student loan refinancing, ergo, less loans in play to potentially refi. Public markets view that fairly negatively, but it straightened down to $12-$13 today, which is an all time blow for the stock post SPAC, and I would say that interest rate concerns is absolutely a big part of that, but that’s hit the overall Nasdaq, and I think will continue to be a headwind.

Logan Allin (33:56):
So I don’t think we’re going to see any relief in all these fintech names until earnings here in mid February. I think Q4 earnings should be fairly attractive for names like SoFi and others, but it’s going to take several strong earnings showings from SoFi others in order for them to get out of this the cycle, unfortunately.

Trey Lockerbie (34:17):
I want to double click on that because the SaaS capital index has doubled from a low of 8.1 times ARR in March of 2020 to now a high of almost 17x by the end of last year. So this is obviously an extreme boost in valuation. I’m curious. You mentioned this sensitivity to the interest rates and starting in the public markets. I’m wondering if you see this potentially trickling down into the private markets, where the multiples we’re seeing on these highly valued SaaS companies could take a hit as well. What’s your take on the market and possibly being overheated by these metrics?

Logan Allin (34:55):
So I think on the SaaS side you’ve seen less multiple compression than you have in the consumer and SMB-oriented spaces, and I’m speaking more about this intersection of fintech, obviously. I think that’s because public market investors look at a consumer business or an SMB business, they see a balance sheet, they see credit risk, they see regulatory issues, and they think tangible book value versus in a SaaS company where there’s through IP, ARR, some level of churn assumptions, typically, sub 10% for the top decile, 120% plus net dollar retentions for the highest quality names, and they get more comfortable that that revenue into the future is sustainable and real regardless of growth rate, and there’s a gross margin that’s helping protect that at 70-80% versus consumer and SMB-oriented names where those gross margins tend to be in the 20% to 30% plus range.

Logan Allin (35:53):
So that’s why I think you’ve seen flight quality in SaaS and that will continue. Then frankly, there’s more insulation if you think about the three big, I’ll call it four big macro issues right now, impact of COVID and new strains, impact of interest rate hikes and, obviously, the fed starting to taper sooner than expected. Third is inflationary pressures and cost of inputs and impact on the consumer basket, and then fourth supply chain issues, right?

Logan Allin (36:26):
So those four issues effectively, depending on obviously who the SaaS company is selling into, so like a Coupa, for example, it’s going to be a little bit more sensitive to that supply chain issue because they’re selling into companies that may have complex supply chains, trade shift in our portfolio, has a similar type business model. So you have to look at obviously to the end customers, but writ large, those four areas aren’t as big of a concern for SaaS companies as they are for the broader market.

Logan Allin (36:55):
So that’s why I think you’ve seen less compression. So my favorite example on this multiple story is DocuSign. They were trading at 100x trailing sales at the end of October, 100x. That’s a crazy multiple on any dimension. As we all saw, they got really hit hard through year end. Well, they bottomed out at 15 times trailing sales, which is still a significantly healthy multiple.

Logan Allin (37:21):
So again, I think you’re going to see more insulation in the SaaS names, less of a hit on their multiples, less of a hit on EV as a consequence, and they’re going to be the first to really bounce back as hopefully we get some recovery here in Q1, Q2, but to your point, that has and always will have a knock on effect to pre-IPO rounds. I think pre-IPO rounds, SPACs are certainly giving significant forward revenue credit and a terminal value equation that we all do is happening on next year’s forward revenue or multiple years out, and that will continue, but your discount rates are going to absolutely change, and that’s going to have some multiple compression in these pre-IPO rounds, but the flight to quality, the insulation, et cetera, that I’ve spoken to are all still going to be there for SaaS-oriented businesses.

Trey Lockerbie (38:11):
So I’m curious in this environment, even if it is somewhat insulated as you mentioned, how would you advise fintech startup founders in today’s climate? Meaning, are we in a growth at all cost type of environment and full speed ahead or are we kind of batten down the hatches and getting profitable climate?

Logan Allin (38:29):
I think we saw this in Q1 of 2020. Sequoia came out and said, “Batten down the hatches, index to profitability, trim OPEX, raise as much capital as you possibly can, increase your debt lines,” right? So those five things were the big pieces of advice from Sequoia, and many of us in Q1 of 2020 under a great degree of uncertainty. I think in Q1 of this year, you’re starting to see some of those same recommendations coming back. I don’t think we’re in anywhere near as bad of a climate as we were in Q1 of 2020. I think, hopefully, Omicron, just looking at the data coming out of South Africa, is a bit overblown in terms of the potential longer term impact, and we’ll get through that quickly, but I think the uncertainty around other strains and this being something we’re going to have to live with into perpetuity, good news is the biomedical field is coming out now with pill forms on being able to take in more antibodies, and I think they’ll continue to be innovation around that, which is great.

Logan Allin (39:34):
So I think that first issue I raised in terms of COVID uncertainty will dissipate, but those founders that have in the fintech world and many of them do balance sheet, credit, interest rate concerns and/or impact from an inflation or supply chain perspective need to consider edging and moving more towards profitability, reducing, ratcheting down growth, improving gross margins, doing all the things to make sure that they’re insulated. I think you’re going to see down rounds, flat rounds, increasing venture debt, et cetera, in certain types of business models.

Logan Allin (40:10):
For certain SaaS companies, particularly those that have had headwinds from adoption perspective that we spoke about earlier, they’re going to be able to take advantage and continue to accelerate their growth and invest while others are fearful, classic Buffett recommendation. So there’s going to be a very strong have nots and haves type of divisiveness in the market as a result, and it’s really dependent on where you are in the space as to how you’re allocating dollars and whether you’re out raising capital.

Logan Allin (40:39):
Now, there is a significant amount of capital on the sidelines. If you’re able to take in capital without taking on massive dilution, it’s absolutely something we’re recommending to our companies. So they have optionality and the ability to continue investing in growth, continue hiring the best people, and to probably lengthen the period of time between fundraising rounds so they can hit more meaningful milestones that have to be absolutely solid before they hit their next series. So I think all those things are top of mind for us at board levels in these companies and certainly the case for CEOs out there.

Trey Lockerbie (41:20):
So in an effort to take on more capital with less dilution as you put it, you’re talking about higher and higher valuations, and that has some pitfalls as well I think for a founder and everyone needs to understand that when you’re raising and setting the bar really high valuation-wise, you have to live up to that at some point, at least your investors do. They’re looking to double, triple their money off of that valuation. So talk to us a little bit about the risks of raising at those levels of valuations, especially when you’re getting up into the billions.

Logan Allin (41:49):
Absolutely. There’s been quite a bit of I would say articles and thoughts written I think rightly so that venture capital dollars can be a dangerous drug. So if you’re a CEO and you are continuing to take on more and more capital, particularly in quick succession, without really having the metrics to support those rounds, and there are very specific benchmarks that we lay out for our companies through our operating playbook per seed, all the way through to pre-IPO, I think public market investors and research providers have done an awesome job on SaaS metrics for pre-IPO companies and public companies. They haven’t really provided much data down from there, from a company timeline perspective.

Logan Allin (42:30):
So we’ve tried to fill that gap and providing data out. Happy to share that out with anybody that’s interested in seeing those, and those valuations, indeed, as you said, there’s a lot of round preemption going on now, particularly around the series B, where growth equity investors are coming down market and saying, “Hey, this is a company I would’ve invested in the series C probably two to three years from now. I’m going to invest in them today even though they don’t have the metrics I would traditionally look for. They’re going to get there because they’re on that trajectory, and I want my ownership now, and I want to have ball control.”

Logan Allin (43:00):
So that is a massive trend line that’s obviously been occurring for the last several years. We’re seeing it more and more particularly around our series B companies. I think it’s a trend that’s here to stay as more crossover investors who were in the public markets went to late stage and are now moving down from growth equity into expansion stage and into early stage.

Logan Allin (43:18):
So it’s really important that CEOs understand you’re taking a valuation on that you need to be able to grow into and grow into quickly. Otherwise, you’re going to put yourself in a position where that investor who is really happy with you and excited to give you the capital at that early point, they don’t see your forecast be recognized. You’re going to suffer the consequences in terms of either a down round or a flat round, which is going to accrue to more dilution for those founders.

Logan Allin (43:48):
I think that is one of the biggest dangers right now in venture capital is what I call channel stepping. So these funds, Andreessen just raised $9 billion. You’re seeing fund sizes increase, more products out there. That has resulted in those investors needing to invest the most amount of dollars they possibly can in the most attractive companies from their perspective. In some cases, the founders don’t want those dollars or they don’t want as big of a round, but they’re being forced to take that capital, vis-a-vis the term sheets. As a result, valuations have gone up and that works until it doesn’t to your point. I think for us, we really try to be thoughtful about the step function that our companies are taking, particularly in that series A, B, C as the companies scale through those rounds.

Logan Allin (44:38):
Then I do think pre-IPO rounds will start to contract from a size and multiple perspective as a knock on effect from the public rounds. In many cases, we’re seeing pre-IPO companies not decide to take on a pre-IPO round given those dilution dynamics, given the kicking the can down the road on the IPO timing, but rather decide to go the SPAC route, and that’s our bet having launched our initial SPAC and planning to be serial sponsors is that SPACs are not practically a different route or an alternative to a traditional IPO path, but rather an alternative to a pre-IPO round where you don’t take on that dilutive capital. You get public more quickly, the benefits of that, and you still get certainty around how much growth capital you’re going to be able to raise to work on the growth side without leaving any money on the table. So we think that’s going to be an interesting dynamic for higher quality sponsors going forward.

Trey Lockerbie (45:37):
Let’s talk about Andreessen really quick. They’re now managing something like 20 to 25 billion, I think. I mean, at that size, they’re a behemoth now, and is there possibility for them themselves to go public? Do you think that’ll be a trend these VC firms grow, I mean, yourself included, you’re growing fast over a billion and TPG and some others are doing something similar? Is that going to be a trend we continue to see?

Logan Allin (46:02):
I think you look at Sequoia and their asset base and certainly others like Andreessen that have obviously grown assets under management really dramatically. I think the challenge for asset management businesses is they don’t tend to trade well on public markets. You’re certainly seeing that trend going from an exempt reporting entity under the venture capital roles to an RIA. I don’t know that you’ll see a ton of venture firms deciding to go public mainly because, again, they don’t tend to trade very well on an asset basis, but their enterprise value is right around 10% of their AUM, right?

Logan Allin (46:41):
So if you’re valued at 10% of AUM and you have pretty thin margins, it’s a tough I would say outcome for the founders versus staying private, being able to leverage either exempt reporting laws or the RIA laws to execute on the investment strategy that you want to, support your founders, provide values of fiduciary to your LPs. Public market listing could be a pretty significant distraction, and I don’t think a very interesting outcome ultimately just in terms of how those businesses are getting valued, but we have a lot of respect for the general species and what they’ve built. We work very closely with a number of the general species across our portfolio.

Logan Allin (47:27):
I think, for us, we’ve chosen to be stage-disciplined and size-disciplined, and that’s why we have four separate fund strategies across our four verticals from pre-seed to early stage, to growth, to late, and we plan to continue to do that. At the end of the day, you look at the quantitative data around venture returns. If you go above 400 million in size in a venture strategy, you get massive drag on performance, and that’s Kauffman Foundation data. Cambridge associates has looked at this. Everybody’s pretty much decided that you shouldn’t raise a venture fund that’s more than 400 million because that will be a detriment just purely from fund math and the historical return math. Yet, everybody’s still doing it, right? Andreessen raised a $500 million seed fund as did Greylock.

Logan Allin (48:19):
So I’m not sure how they’re thinking about deploying that and allocating it. There’s some really smart people around the table at those firms, but for us, we look at that historical map. We look at the portfolio construction, and then we look at bandwidth in terms of serving our companies and, obviously, being good fiduciaries to LPs and wanting to make them a 3x net, which is obviously all of our hurdles, and it becomes a much more difficult problem versus separating all these funds out and having fun cycles that are on a measured basis so that you continue to show progress.

Trey Lockerbie (48:52):
Now, you mentioned you’ve created a SPAC and there’s, I think, now over 500 SPACs, but when you point out the amount of unicorns that are at play like CB Insights reported that there’s almost 960 unicorns at the moment, I mean, that’s a decent pool of opportunity to go public. Is that the thesis? Is that the kind of the metric you look at and say, “Okay. There’s a lot of opportunity. That’s why we want to get into the SPAC game,” or is there another reason?

Logan Allin (49:18):
Well, we think are SPACs are structure that are here to stay, that the flight to quality will be in PEBC sponsors, where this is a natural extension of what we do every day. Third, there is going to be a massive amount of runoff in the SPAC market this year. You’ve already started to see a lot of it. Many of the SPACs that have taken fintech companies public, Money YN and others being great examples, are now trading at way below their par value. I think Davis is a good example of something that went public last week. These are companies that were probably not ready to go public. They tend to be consumer-oriented businesses, which as we’ve talked about have not been favored by financial investors just given the makeup of those businesses from a metric perspective, and that’s been really bad signal to the market overall.

Logan Allin (50:10):
Then you’ve had lower quality sponsors, retired executives, politicians, celebrities, and athletes going out and raising SPACs just because they wanted to raise a SPAC and not having a platform or the capabilities to really execute on that.

Logan Allin (50:25):
So our view is that for us, we have a dedicated team. That’s all they do every single day is focus on our SPACs. We only have one in the market today. We plan to only have one in the market on an annualized basis, and that gives us the ability to really focus on our own portfolio companies, first and foremost, supporting our growth equity companies that might view a SPAC as an alternative to a pre-IPO round or we’re thinking about going public, the traditional IPO path, but would rather work with us as a sponsor because we’ll be their quarterback into the public markets versus working with an underwriter where they may not have a very strong relationship with those underwriters, and they’ve also seen in the IPO pop effect and potentially leaving money on the table, and that is obviously a huge concern for them.

Logan Allin (51:14):
So we plan to execute this first SPAC this year and continue to sponsor them as it merits because we think it’s a superior structure to a traditional IPO path. We think it’s certainly a superior structure to a dilutive pre-IPO financing. If you’re solely focused on the enterprise SaaS space and you see those high quality unicorns that are able to sustain those and grow those valuations in the public markets, then that can be a really positive outcome.

Logan Allin (51:43):
We also don’t view it as an exit event. It is simply a stepping stone into the public markets. It almost is like the clock resets from our perspective because we may be already invested in the private markets and then help take the company public, and then we stay on the board and really support that company into its next phase of growth, taking them from an enterprise value, maybe a billion dollars to five to 10 billion. What does that journey look like?

Logan Allin (52:08):
So for the CEO, that’s really strong messaging because we may have been with that CEO since the very beginning in the seed stage, and if we can support them now into the public markets, they have a trusted partner that will support them into that journey. For our LPs, anybody who wants to sell in the private markets through secondary, certainly can. If they want to transfer their position to a public market holder, they can do that as well, but for us, we don’t want to be sellers if the company is going to continue to compound extremely well and start to generate free cashflow and be a long-term success story. Why would we sell that position? So I think the SPAC allows for that full life cycle continuity and is a huge benefit to the investor work base and the company and the ecosystem.

Trey Lockerbie (52:59):
That’s interesting. So speaking of selling, Chamath, who I know is on some of your deals are similar like PIPE and some others, they’re expressing a little bit more bearishness. I think Chamath was saying he had sold out of all but one of his PIPEs and he greatly liquidated going into November, October, similar to when Elon was selling on Tesla and some others. I’m not getting the same sense from you as far as any kind of outlook or bearish outlook. I’m curious if you look at it like a cycle and you think if we’re late in this stage or still fairly early or somewhere in between.

Logan Allin (53:35):
I definitely think we are in a period of caution, but as an enterprise software investor, I would rather be playing my hand today than people who have been heavily investing in consumer and are overexposed to consumer. Chamath’s SPACs were all heavily invested in consumers, certainly one with Virgin Galactic, less or so, but certainly long tail consumer in that case.

Logan Allin (54:03):
So he chose to go down the consumer route and that was obviously where his bread butter was from his Facebook career and writ large, and that’s great, and he felt like he could add value and have ball control there. For us, our differentiation, our ability to have pattern recognition and underwrite businesses is very much in this enterprise SaaS space and the intersection of fintech where we have an edge. So where we feel like we have an edge and can get comfortable on a long-term view of a business, we’re very happy to take that long term position from the early stages all the way through to taking the company public and holding onto that position and into perpetuity. So very much like Warren Buffett and others, having that long view, understanding the compounding effect of those dollars and ultimately dividends and so forth, that’s a much better position for my perspective to be in.

Logan Allin (54:57):
In terms of outlook, bearish versus bullish, I mean, I think we’re short-term bearish and have been really since Q4 of last year given the TED speak and everything else we were seeing from the markets in terms of inflation, in terms of supply chain, in terms of the omicron emergence, and so forth, but I think that second half of this year going into next year for fintech stocks, in particular, you’re going to see meaningful recovery. As you get more certainty around the interest rate picture, hopefully you get some more clarity around how we’re going to handle omicron and future variance and you more certainty around the inflation picture and the supply chain picture.

Logan Allin (55:38):
For us, again, we’re fairly insulated from those four factors and continue to be very constructive on this acceleration of digitization trend that took hold in 2020, and we think we’ll continue to be the story and headline going forward or fintech and adjacent.

Trey Lockerbie (55:57):
Logan, this has been fantastic. Before I let you go, I want to give you an opportunity to hand off to our audience any resources you feel like you want to share. It could be related to Fin. It could just be general investment advice. What would you like to leave for our audience before you go?

Logan Allin (56:10):
Sure. On the venture capital world, only have one book recommendation, Brad Feld’s Venture Deals. He’s on volume four. It’s the only book that when anybody ask me how they should learn about venture capital, that’s number one. Number two is Paul Graham’s blog. That blog is probably 20 years old at this point, in some cases, not the age of Paul, but that is an awesome resource for any founder that’s looking to learn more about building a company, and he obviously built YC, which continues to be a prolific producer of companies. So those two resources I would absolutely point to.

Logan Allin (56:47):
Then we really try as a firm to put out thought leadership, and you can follow us on LinkedIn and Twitter, and then our website, finvc.co/news. We really try to put out content looking to be open about what we’re seeing the markets and be transparent with our own IP because we think it will benefit the broader fintech ecosystem and community.

Trey Lockerbie (57:09):
Fantastic. Well, Logan, really appreciate this and all your time today and really enjoyed the discussion. I hope we could do it again soon.

Logan Allin (57:16):
Thank you, Trey. Appreciate the time. This is awesome.

Trey Lockerbie (57:18):
All right, everybody. That’s all we had for you this week. If you want to see if any billionaires you love are invested in any these fintech companies, you can go to theinvestorspodcast.com and check out the TIP Finance Tool. We really love your feedback. So if you get a chance, hit me up on Twitter, @TreyLockerbie, and be sure to follow us on your favorite podcast app. With that, we’ll see you again next time.

Outro (57:38):
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