British novelist C.S Lewis once wrote “Hardships often prepare ordinary people for an extraordinary destiny.” Today, I’m excited and grateful to begin the next phase of my own journey, with the opening of Reciprocal Ventures.
Reciprocal Ventures is a New York City-based early-stage venture capital firm focused on investing in the enterprise FinTech sector. We invest in visionary entrepreneurs and uniquely qualified teams that are obsessed with driving innovation in financial services.
The name Reciprocal is a reference to the old adage that venture capital is a people business, with relationships at its core. Our founding principle is that relationships work best when they are mutually beneficial. In reciprocal relationships, both sides win.
Reciprocity is part of the promise of venture capital, where founders and venture capitalists rely on one another. Founders ride a daily rollercoaster and need to be able to lean on their investors for more than just capital. Our investments are commitments to dedicate our time and energy to help build the company and support the team.
We believe our backgrounds and experiences are valuable to startups in the FinTech ecosystem. My colleague, Josh Kuzon, is a seasoned FinTech industry professional, with a decade of experience at large US banks. Josh specialized in enterprise strategy, corporate development, and innovation at Chase before becoming the US payments strategist at Silicon Valley Bank. My own experience is in equity analysis and portfolio management. I managed a portfolio of public technology companies for 15+ years at SAC Capital, simultaneously making private, venture investments in a personal capacity. Early stage investing started as a hobby for me in 1999, but my passion turned it into a highly productive pursuit. I switched my professional focus to FinTech venture investing in 2012.
The financial services industry is an intricate maze. Each major segment has its own specific competitive dynamics, customers, intermediaries, and drivers. Our domain expertise enables us to see the pain points in the system and identify the scope of opportunities. We like to think of ourselves as sector specialists, who see the low hanging fruit, but also enjoy researching and doing diligence on more complex and arcane ideas.
Providing connectivity to financial services executives is an important part of the value we deliver to entrepreneurs. We firmly believe that the best path for many FinTech startups is to partner with established financial firms, and we’ve made collaboration core to our strategy. We have cultivated relationships with some of the most forward thinking firms in finance — firms openly embracing FinTech innovation. We help these large institutions access and engage interesting and relevant startups, share our diligence and help to foster a group dialogue.
We’re initially focused around the segments of finance that we know best: capital markets, asset management, payments, and banking. Our concentration on enterprise-focused FinTech investment opportunities is derived from our thesis that the enterprise is a relatively under-penetrated segment of FinTech and is ripe for transformation.
Banks, insurance companies, and asset managers of all sizes face immense challenges in their efforts to maintain their leadership in a new world that is increasingly driven by technology and tighter alignment with customer needs. These financial firms experienced a long period of underinvestment in infrastructure and product innovation. Banks often operate through a patchwork of closed, antiquated systems and solutions. With competitive threats on the horizon from new companies, combined with shifting customer demands, this underinvestment has become a business risk.
Recently, we’ve observed an attitudinal shift at large financial firms: innovation has become a popular topic. Incubators and accelerators have proliferated. A few of the industry’s leaders have even moved beyond experimentation and begun the long cycle of investment. We believe a broad and meaningful step up in spending and FinTech adoption is next. We expect the catalyst to be a combination of Trump’s new regulatory regime, coupled with rising rates. This more business-friendly environment should help drive higher returns for financial institutions and in turn, lead to greater FinTech spending. The changing market dynamics, innovation mindset and additional free cash flow sets a powerful backdrop for FinTech opportunities.
Each of the FinTech verticals we cover contains meaningful opportunities for innovation and strong investment catalysts. In capital markets, illiquidity is a meaningful problem that has been masked by the strong performance of indices. MiFID II and PSD2 regulations in Europe will alter the global market for research, data, and privacy, starting next year.
Asset management is even more dynamic as large swaths of discretionary managers face an existential threat. In 2016, over one thousand hedge funds were liquidated, the highest number since the 2008 financial crisis. According to Morningstar, in the U.S., the gap between active and passive flows has never been wider. Competition for alpha and the resulting scarcity of it has compressed fees and challenged business models altogether. We’ve begun to see serious adoption of technology and data intensive quantamental approaches, involving unusual talent acquisition and idea generation models. Large asset managers are still highly profitable, yet under pressure and desperate for new tactics and techniques. If they don’t innovate, they risk profit pools shifting.
The payment industry in the US is massive, antiquated, and ripe for change. Charlie Munger of Berkshire Hathaway recently pointed out that people are in a “state of delusion” if they think they can project what the payments industry will look like in the next decade. He was referring to the current woes at American Express, but his comment touches upon a well-known opportunity: our payments system is rapidly outpacing an infrastructure in the US that is almost 50 years old and acts as an unnecessary tax on our economy.
The financial services industry is clearly undergoing a transformation. Massive profit pools are under competitive threat from new entrants and technology enabled solutions. Innovation and infrastructure investment is no longer optional, it is necessary.
We’re excited to have the opportunity to participate in this change, support great founders, and help build the next great financial services franchises. One of the most influential writers of our time, the author of The Alchemist, Pablo Coelho, once wrote “The secret of life…is to fall seven times and to get up eight times.” That message of resilience resonates strongly with me, and is one which I’m sure all entrepreneurs can relate to, as well. I’ve been fortunate in my life to have been surrounded by incredible people who have taught me just how important it is to have strong relationships and supportive friends. With that in mind, I can’t close my first blog post without a thank you to my friends, family, and business colleagues — it is with you in mind that I named the firm.