Inflation is rising, interest rates are up across the globe and cash is king again. How will this impact the flow of venture investments in start-ups and emerging technologies?
While traditional investments may suffer during a recession, the venture capital industry has historically been able to weather the storm and even thrive. One reason for this is that venture capital firms typically invest in early-stage companies that are not yet generating significant revenue.
In fact, some of the most successful companies in recent history, such as Uber, Airbnb and Snapchat, were founded during economic downturns. The downturns created opportunities for entrepreneurs to innovate and create new solutions to problems caused by the economic conditions.
Mendoza Ventures is one such investor, but with a unique approach. Mendoza’s investment strategy is focused on the verticals of AI, fintech and cybersecurity and 80% of their investments go to founders from diverse and minority groups.
I recently caught up with Scott Heyes, CFO at Mendoza Ventures to understand how a venture capital firm works in practice and how he and his colleagues think about investing in the current economic climate and beyond.
In this episode of Leaders of Analytics, we discuss:
- How Scott became the CFO at Mendoza Ventures and what a week in venture investing looks like
- How the firm decides which companies to invest in
- Why Mendoza Ventures specifically back founders from diverse and minority backgrounds.
- Which segments within AI, fintech and cybersecurity will win or lose during a period of uncertainty, inflation, reduced access to funding and higher borrowing costs.
- The trends in AI, cybersecurity and fintech worth watching in the next 2-5 years, and much more.
Scott on LinkedIn: https://www.linkedin.com/in/scottheyes/
Mendoza Ventures: https://mendoza-ventures.com
Jonas Christensen 3:00
Scott Heyes, welcome to Leaders of Analytics. So good to have you on the show today.
Scott Heyes 3:04
Thanks, Jonas. A pleasure to be here and thank you for inviting me to come on to your show.
Jonas Christensen 3:08
Yeah, and we have a really interesting episode ahead of us because we're going to be talking about venture capital investments today and specifically in the industries or verticals of AI, cybersecurity, and Fintech. And this is where you are an active participant in those industries, in those markets, Scott. But before we get to that, we should learn a little bit more about you. So could you start by telling us about yourself, your career background and what you do?
Scott Heyes 3:39
Yeah, no problem. Yeah. Thanks, Jonas. So, my name is Scott Heyes. I'm the CFO at a venture capital firm in Boston, called Mendoza Ventures. My background is actually what they call over here, ''a recovering banker''. So for 25 years, I was a global banker and I lived and worked in Melbourne, Sydney, Dublin, London. I worked across all industries and I was always on the relationship and credit structuring side. So I was a bit unique. I wasn't one or the other. I actually had that dual focus of bringing deals, being the relationship guy and being the BDM. After 25 years, I moved to Boston in 2019, with my family. That was on the back of a great job opportunity for my wife. So, we packed up the family moved. We came over here got settled in and then COVID hit hard pretty early here. I then became the home schooling expert while my wife worked away. My youngest son at the time was in kindergarten or prep. So, I enjoyed spending six hours a day with him, five days a week, going through school, and I'm pleased to tell everyone that I graduated from kindergarten, which is a big achievement because it's pretty tough from there. But during that time, like every week, my kids were home for 14 months. So that's a big stint of homeschooling and we just virtually arrived in the country. But I kept in touch with first Australian Chamber of Commerce, which I was a member of. We had a tech founders group and I chaired that. So, that kept my toe in the water and and kept me up to date, what was happening there. I was also a member of the Boston Irish Business Association. So right in the middle of COVID too, I connected those organisations that normally rely on in-person experience. Normally around a pub, having a bit of fun and a bit of chat. That's where the Irish community does their best business and work. But I connected them for a tech bridge to Boston event. And through mutual connection there out of the Boston side, was introduced to Adrian Mendoza. That's how I met Adrian. And yeah, from there that's how I got into venture capital. Wasn't aimed to get into there. But I made that introduction and just started chatting and I liked the way they went about it. I like their investment thesis. I just liked the fact that they always up the underdog, which is the great Australian way of always backing the underdog and not against the authority. Yeah, the model is actual investors, LPs, chip in and help out. So I rolled up my sleeves and said, ''But I become an investor and I can help you out''. And within a month, they'd liked what I was doing and said, ''Hey, we want you to be the CFO''. That's how I segwayed into venture capital over two years ago now.
Jonas Christensen 6:03
What a great story. And there's so many serendipitous moments in that, but you really sought those out in a way by putting yourself in those different positions and being a great networker. I can imagine that your experience as a business development person and corporate matchmaker in the past has also helped you a lot in that and knowing how to navigate that environment.
Scott Heyes 6:24
You know, that's true. That's always been a strength of mine. It's that people side of things. And my sweet spot as a banker was always helping the privates grow into corporates. And I really enjoyed that sort of middle market, sort of corporate finance banking stage where you're jack of all trades. What they'd like to say is like you're the GP. You bringing the specialist as required to help out the requirements of the company, whether it's debt or investments, or cash management or leasing stuff. So I've brought those skills to venture capital. And what's interesting there is if you're at the pointy end, you're at the entrepreneur stage where it's all exciting. It's all a buzz and there's a lot of energy and instead of providing debt solutions, you're providing equity. The more sort of pointy end, more exciting end, but it's really good experience.
Jonas Christensen 7:09
Yeah, I can really see how your experience and resume is a real good fit for venture capital. And Scott, let's dig into those adventures and your role there a little bit more. Because as you said, you're the CFO there at the firm. And the firm invests in AI, cybersecurity and Fintech businesses, predominantly. So could you give us sort of a synopsis of the company, your investment approach and the portfolio of companies that you have?
Scott Heyes 7:37
Yeah, so Mendoza Ventures, we're six years old now. And it really came on the back of Adrian Mendoza, our founder here in the Boston ecosystem. Adrian has a great story. He grew up in East LA. His parents were Mexican immigrants. He went to USC. He came to Harvard to study design. And when he moved to Boston for design, that was the middle of the Dot-Com boom. So Adrian got involved in building websites and stuff like that. And then when he graduated from Harvard with his master's in design, he quickly worked out that the best opportunity for him was actually to be in tech and to build that, as opposed to being an architect. He quickly moved into that area, his entrepreneur residence at IBM. John Hancock: he building mobile apps, gaming, payment systems, stuff like that. And then also had two VC backed startups. So, Mendoza Ventures was born on the second startup. Both Andrian and Senofer had a bit of capital from that. And then they looked around the ecosystem in Boston, and said, ''Hang on. There's no one who really looks like us. We're that sort of immigrant and also a female. We're the investors here whereas VC's traditionally a white male dominated industry, especially in an old school town like Boston. So then Adrian started thinking, ''But a lot of the innovation and the good stuff comes from people who have diverse backgrounds, and stuff like that, people who look like me''. So it wasn't really intentional. But Adrian sort of sought out those gold nuggets early and with Senofer who has had operations experience. They have felt the thesis. The first one was like a test fund of their own capital, but within four months, their first investment was acquired and that was a AI cybersecurity company. And that was founded by two Latinos. Thas was a great story. 10X your money after four months. We thought, ''Hang on. We might be onto something here''. And then two other investments followed. One which is still going now is a blockchain solution for capital markets and also capital credits. And that was virtually the first money in there too and they're reaching that Series A stage now. And another one too, where they were first money in for an AI-focused company for corporate gift wares and solutions. Then two years ago they raised a Series B. Close to 150 million valuations. With that, they thought, ''That's great. We might be onto something here. This sort of works''. Another interesting fact was when Adrian also had these two startups, the VC model was a black box, you just didn't know who your investors were, LPs. You just never knew and post the second exit, he was advised by a couple of people who came in and said, ''Hey, I invested in you and really followed you and realise what you did''. He actually say, ''Hang on. If I actually had access to you earlier, you could have helped me go further, longer, quicker''.
Jonas Christensen 10:26
Tell us how that works in practice. So, the typical VC market, is that where there's a bunch of high net worth people that are pooling money behind the scenes, and you don't really know who they are and there's this firm that represents them and that's how it normally works?
Scott Heyes 10:42
Yeah, so the traditional venture capital model is pretty much that. It's a raise of funds. You go to seek investors. Investors invest in that fund based in your thesis. And typical VC firms, especially at pre-seed/see, like to write the checks. It's that power law, or they expect 90% of the companies to fail. But the 10% that do well will make up for the losses there, and also the gains. And there's no real value added. It's just pretty much that spray and pray approach that people probably think that VC is. Adrian as a founder saw that. Didn't really like the model. Didn't really help him in his business. And then started this concentrated portfolio approach, which is how we do it. We're more like that PE model. Fund II, for example, which we've just closed, that has 11 opportunities in it. So 11 portfolio companies. We lead the rounds, or didn't lead the round, but followed on. We've created this great network where they all can work together. They can all access solutions and networks that help each other. And the active part here is with fund II we have 90 LPS, 80 of them individuals. Executives in tech and finance, who can roll up their sleeves and help these companies progress. And what we found is because everyone's got skin in the game, everyone wants to see them succeed. Plus, they've got knowledge. But also it's a way of investors imparting their knowledge and also trying to generate a career post their corporate life to be an investor or an advisor. And that's the genesis of our thought process of how we construct our funds and how we're a little bit different from the normal venture capital firm.
Jonas Christensen 12:13
Yeah, it's interesting. So I'm sitting here listening to what you're saying. And what I'm imagining is the traditional approach being - It's a pool of funds, a pool of money and an ecosystem of money. You're also that, but you're also in a pool of knowledge or an ecosystem of knowledge where everyone can create these sort of win-win scenarios. The people who invest can directly impact the success of what they've invested in. And they can also then build a resume as a result in doing that. And of course, those startup founders that are getting that knowledge will benefit in obvious ways from that.
Scott Heyes 12:49
Yeah, and that's pretty much it. Our model is different. We do three months due diligence. And that's important, right? You can see, it's not when things are going right. You want to see how the founders go when things don't go so well. How's their response and activity and stuff like that. But it's a good way. We normally track the companies before investing for a long period of time. And we are that high touch model, as you say. And that's for that concentrated portfolio, out of fund, too. There's a lot of follow-ons for most of our companies. Most of them now progressed to Series A stage, which is great. And we're just raising 100 million fund now. First Series A and B. We just announced last week that Bank of America is the anchor. We've got a number of family offices and high net worth individuals. We've initiated our first close and deployed our first bit of capital. But a lot of our companies said, ''Hey, we really liked this model. You guys actually lean in and help us''. And you've got this network that helps. Whereas most don't, and don't leave us now. And so we really want you to help us provide this growth capital. And then we looked around, and we saw that there are a lot of diverse emerging managers, especially at that seed and precede stage. But there's virtually nothing in that growth capital stage from that. And with a lot of encouragement from just our investor base, the founders, we've launched fund through, which provides that growth capital for these companies.
Jonas Christensen 14:06
So a lot of questions in this here, Scott. So firstly, could you give just for some listeners who may not be aware of the typical VC funding model or sort of post trajectory of these tranches of A, B and C? Could you explain in a few words how that works?
Scott Heyes 14:22
Yeah, absolutely. So, you know, we see someone go to pitch event at a startup or they're at a Y Combinator, or accelerator. Generally, that's precede. So it's virtually first check in. Someone's got an idea and they get up on stage and they pitch. That's fine. And then you move to seed when you have a customer or two. You're generating revenue. You're still working at your go-to-market, but you've got something there and you're getting a bit of a momentum. And then once you hit metrics and for us, especially in FinTech and AI and cybersecurity and we'd like to see AI as a minimum $1 million a year now. ARR is annual recurring revenue. So it's revenue that's constantly. So an easy example there is, say your Netflix subscription? That's a part of ARR, so annual recurring revenue for Netflix. So you put all that together and that's your revenue for that client. Once you hit certain metrics, - so generally around Series A, they call it growth capital. So you've got paying clients, the business is gaining traction, but you really need to - You pretty lean right? You don't have the C-suite. You don't have a finance function like a CFO. A lot of times, you don't have operations. You might and you just really need to build out a team, including sales and marketing. So the product's pretty much there, even though it keeps eroding. You've got sales, but you really need to invest in capital, and hence, it's called growth capital, to put that sales and marketing for that infrastructure, the operations, the finance, so you can actually go for clients, generate more revenue and that's when you grow really fast, which is the basic model.
Jonas Christensen 15:55
Yeah, very interesting. And listeners, if you're interested in understanding a bit more around this recurring revenue model and how it works, I will link to a previous episode with Sami Kaipa in the shownotes, so you can check that out. And it is a really important concept in this tech startup world, especially when you have SAAS business model setup. Now, Scott, I think we should just talk about very quickly the investment that you got from Bank of America, because I think it speaks a bit to your purpose as an organisation and also how that resonates with other organisations. Because as I understand, there's this quite an interesting sort of background to why they have decided to put, I believe, 100 million USD into your fund there. So could you give us that story?
Scott Heyes 19:08
Yeah, they've actually committed 5 million to our $100 million fund.
Jonas Christensen 19:13
Other way around, that's good.
Scott Heyes 16:50
Yeah, I'd take 100. That'd be good. Then we'd have a bit of concentration to receive it. So, Bank of America, as a corporate citizen, they made the recommendation early, that America in itself is very diverse. And traditionally, VC funding only goes to, as we say, the old white guys. And what happens here is a whole circle. The only people who get invested in are white guys. And it's very pronounced here in America. And it's something for me, but there's the biggest growing area in America is Latinx. That's a massive amount of population. The African American community is huge, too. But they're overlooked most of the time. And it's a stupid step, but one in four people here don't even exist in the banking system. Can't get a bank account. Not part of a credit score. There's all these barriers to entry here to what we take for granted, especially in Australia, what's normal. And so, Bank of America recognised this and fairness to them, they're investing off their balance sheet as part of their diversity inclusion play to actually invest in emerging managers that invest in diverse startups to also create wealth. Because what happens is, if people from diverse backgrounds, obviously they spend it in their communities, and then wealth generates from there, but it also gets that high sort of ability to bring everyone and lift everyone up and grow. It's done a really good job in identifying emerging managers such as us, who have that diverse background. Look, 80% of our CEOs are diverse. That's unheard of in venture. The stats this year, are actually appalling. The 2% of funding went to women. I think African Americans receive point 5% of all VC funding. Latin X is about 1%, too. But in the country, when you've already knocked out 70% of the population, who don't get funding and country of 30 million, that's just massive. And that's the opportunity too,right? We actually didn't go down the path to be diverse. It's just the best opportunities came from diverse managers. And you look there, it actually reflects society. That's how it is. And then creating solutions. One of our portfolio companies called Listo. They're doing an awesome job providing banking services and insurance services to the Latino community, predominately in California. Traditionally, these people are unbanked. It's a cash economy, payday lenders and they don't have a credit score. So, you can't get a loan. You can't do this, you can't buy a house, you can't even rent over here. So it's this whole cash economy type of system. But through use of AI and data, they start off for that community a small credit card or an insurance product. And as they make repayments over time, they've got their own credit scoring system. And that just improves and tells everyone that this person has actually good credit risk, and they move up toward more mainstream products. And this is actually quite exciting because it creates - There's a lot of banks over here, there's community banks, but a lot of them don't represent the community that they're in anymore. The banking system is tied to the old ways. And so, they're in a predominantly Latino area and yet everyone who lives there doesn't qualify for a credit card. Who's their client? They're gonna wither and die. So this here provides an opportunity for people to be relevant, to move with the times and also innovate. And that's pretty much the ethos of how we look at a lot of this FinTech, AI and cybersecurity we invest in as well.
Jonas Christensen 20:18
Yeah, there's so much in what you said there, right. Those stats that you presented are first of all, kind of mind boggling to some extent. A country that is so modern and so advanced as United States still have that sort of 25% sitting outside, the mainstream banking system. It's such a rock in the shoe for those people. And I can also imagine that when you're investing in these companies, there is, of course, the idea on paper and does it stack up and there's business casing and all this stuff. But there's also just this ability to have empathy with the target market, the target audience. Understand all the little subtleties. What is it like to be that target market and be sitting in their kitchen and having the problems that you're trying to solve for them? All those sorts of things. So, having those founders be part of those communities, but also having the VCs be part of those communities, or have an appreciation for those communities is really powerful. And I imagine that's also basically why old white guys invest in other old white guys, because they do understand that target market and not others.
Scott Heyes 21:27
Yeah, look, it's definitely a club there. Even for example, I moved to America three years ago. Perfect credit score and Australia. Mortgage, 100k of credit cards in Australia limits. All come here: Don't exist. No FICO score. Couldn't get a credit card and it was hard enough getting a bank account. If it's hard for me, then you go, ''Hang on. How do these other people live?''. And that's why you see in these communities. It's payday lenders. It's the people living by cashing checks and stuff like this. And that's prevalent here. It's just not but someone who's experienced the frustrations, like myself just to get a credit card or to get a credit score, it is mind boggling how it works here. But then that's also an opportunity, right? That's where you know you're solving a big problem.
Jonas Christensen 22:12
Yep. So you've gone from old white guy to immigrant in a few days and felt in your own body, what that feels like?
Scott Heyes 22:19
Yeah, so you're right. You do have empathy, because you know, the frustrations. If I'm struggling, the average punter out there and especially once your English is a second language, you just don't know how they survive. Obviously, it's through their own networks and that cash economy. It's a whole subculture. Some level of existence over here.
Jonas Christensen 22:37
Yeah. Look, it's wonderful that you are able to, as a firm, combine business with positive social impact. And let's dig a little bit deeper into what that looks like day-to-day, Scott. Because you did mention that you are hands on investors, and you're sort of part of these businesses. So tell us about what that looks like in practice and also, what does your week look like, as a CFO in this sort of environment?
Scott Heyes 23:06
Yeah, so look at appropriate preface that I'm the CFO in title. But we're a startup ourselves, right?vWe're a growing business. That's the exciting part. But that also means that you got to do everything. So, not only is the finances and the relationships and provide a lot of advice and help our companies. I'm running two of the boards of the companies informal and formal fundraising. We hear founders all the time say fundraising is hard. We're fundraising every day ourselves. The model is we need to fundraise to be able to then find investments. We've got empathy there. We know what it's like. So there's no days typical. So I'll give you an example. Like last week, we made our first investment out of Fund-three, so that was finalising the documentation there, making sure everything's fine, teeing up all the investors, making the payments. So that's the Banking Finance side. But in between that we're also having fundraising discussions, helping out founders, board meetings, and just whatever happens to be jthere and needs to be done. We're growing fast too. And yeah, it's actually funny. There's a lot of people have come from corporate jobs, the startup life isn't for them. Because it's not really structure. You need to be able get up and go, a bit of nounce and you've just got to roll up the sleeves and get it done. And some people can't cope with that because they've had the big symbol behind them and all the infrastructure and the titles and people to do everything else. Whereas others just thrive in that ambiguity and just the opportunity to just, - You just gotta go for it. Stuff needs to happen and you just do it. You don't need permission. That's that part of that entrepreneurial spirit and growth and that's the real exciting part. Right? That's the balance of doing that with your companies, helping them grow and helping them hit goals and that's the ultimate joy in the job.
Jonas Christensen 24:48
Yeah, great. And I'm really glad you're calling out the examples of people thinking - They attracted to the allure of entrepreneurship, which has been made a little bit sexy and a little bit hot in last probably 20 years with all the tech founders and whatnots that we see in media, that are hailed as heroes all most the times. But when you're in a startup, it actually sucks a lot of the time. I've tried it myself. And I also found it really hard with not having that corporate structure behind me. So, I struggled with having the entrepreneurial tendencies and wanting to create something, but maybe not being the fully fledged entrepreneur that I was allured by media stories and all that stuff. So, if anyone out there is wanting to found something, 9/10 times or 99/100, you're gonna buy yourself a new job. So, you better make sure you love what you do and that you're happy to eat crap for a while for no money.
Scott Heyes 25:41
Yeah, no, that's the entrepreneur. It gets hard, right? And hence, that's why it's good we've got this network where we can call on people to help when required, or even just someone who's walked in those shoes. And that's important why as Senofer and Adrian are great at that, because they're ex founders. Partners too. They're ex founders as well. All being Finntech. So we all understand the trials and tribulations. I worked in financial services for 25 years. So I was the ultimate user of a lot of bad tools that were put out there, that companies bought and stuff. But what we provide is an important bridge. But see a lot of our investors here, like the Bank of America's, it's not only what they like, the diversity, the investment part. It's also access to our portfolio companies, which provide solutions to problems that they can't fix. They don't have that innovation. They're not nimble, and you can connect them. And that provides them an opportunity to also get a leg up too, because it's all about making things easier for the big corporates to actually achieve something as well.
Jonas Christensen 26:41
Yeah. And I can imagine having that ecosystem of companies talking to each other, sharing what worked and what didn't, just as importantly you're going to save months and years, sometimes in your journey of just learning from other people's mistakes. ''Don't do what you're about to do now. It cost us six months of progress. Do something else'', that sort of thing. It's not funding. It's not money, but it's just as golden because your only nonrenewable resources is time, essentially. And you burn too much of that. You'd run out of runway, both financially and personal energy put into these sorts of things. Human being wants to see some progress. Now, Scott, I think we should broaden the discussion a little bit, if you're okay with that. I'm interested in your opinion on generally this sort of venture capital scene or the startup scene in a broader sense, because where potentially, if we're not already in it, experiencing this sort of global downturn in economies around the world driven by inflation. We've got rising interest rates. And there's just tightening of funds coming from central banks and governments around the world. The segments that you're targeting, AI, FinTech and cyber security. Where do you see companies or, I suppose dimensions of those verticals being most exposed to risk in this sort of time of funding and borrowing costs going up, and so on, and which will be the ones powering ahead?
Scott Heyes 28:09
So the ones that are really struggling at the moment, and it is a function of growth at all costs, getting funding on a idea. That's gone. So, it's back to proper business fundamentals now. What's the pathway to growth? Where's your revenue? What's the product? How are you looking after clients? What's the problem you're solving? So the ones that have really struggled, and which were back in this ''Growth at all costs'' blitzscaling and let the consumer, the B2C because the customer acquisition cost to get a client was just so high. But with funding, as they kept growing and getting more clients, you got to feed the beast. And in the past, funding was easier, right? Once you got 10,000 clients, then you jumped to 100,000, then you do the next series of funding in venture capital. That's all dried up now, because even then wasn't profitable. And so, those sort of companies have struggled. We've seen in Australia, the classic ''Buy now, pay later'' but that sort of model was all predicated on 0% interest rates and also a good healthy economy of people not defaulting. But even when that explodes, you need capital that's cheap to fund that beast. And once the cost of capital goes up and all that, they all struggle. And also, once they get a few defaults, you get hit from both sides. And that's the same for Neo banks. We've seen it in Australia, too. There was four or five Neo banks, I don't know how many there at the moment, they've all been acquired or formed by the wayside. They hit a certain inflection point. Also financial services banker, banked a lot of these challenges and banks and stuff. But they naturally as a growth, they tend to cap out with their existing providers of debt or equity. And there's nowhere else to go. This the market turns and the cycle is not there and they're not profitable. That's where the struggle is. So, they're the ones that are struggling. The ones obviously that are doing well, what we're seeing is the ones who provide like infrastructure or essential services to financial services. There's still a lot of organisations that operate on, like, spreadsheets paper and practices that are really inefficient. But they've always done it that way or it's the cheap way to do it. So, we're seeing companies that provide that service, where it's infrastructure, a insurance or making it easier or decisioning or AI around who's going to actually refinance their mortgage, or what's the likely customer behaviour based on data and patterns. What's happening there? So, it's really businesses that can save money, increase efficiencies in business processes, and workflows, but also generate revenue. That's the ones that's doing well. And another classic example, Australia, cybersecurity. It's just top of mind. They got a couple of cybersecurity companies. One of them's it's like the gold standard here. It's first synthetic fraud, which is a massive problem over here, in banks and credit unions, especially community banks and credit unions whose tech stacks not good, it's old, it's tired, they don't have the capital. And what happens there is someone grabs, say your name, my social security number, someone else's address, they make up a fake profile. They get a loan online, and then make one payment and disappear over here, that's it's estimated about 20% of all loans to those institutions are fraudulent. So this company here, which has been backed by the Federal Reserve, this has said, ''This is the gold standard'', but just sift out those bad actors straightaway, using AI. And I call it synthetic fraud. Stuff that's just massive and that's where the opportunities are. We sought in Australia for those data breaches, cybersecurity there. There is no better case in point that this is real and that's where the growth is.
Jonas Christensen 31:39
Yeah, it's when half your country's population gets hacked in a month or two, then you notice something about it, which is what's happened here in Australia. We had a second largest telecoms provider Optus being hacked. I think there was 2 million people getting exposed and then Medibank which is an old - The government insurer of healthcare, which is now privatised. 9.7 million exposed records and people in that and the country is 24/25 million or so. So,you can do the math on those two overlaps, of course, but yeah, it's pretty big. And we see these all around the world all the time. Scott, what I'm hearing you say, if I paraphrase is there will be more of a focus on B2B type businesses, in part because they do often provide some sort of essential service to those organisation or a cost cutting service to those organisation, efficiency service. But at least as important is the path to revenue. You need fewer bigger customers, as opposed to hundreds of thousands of Miss data paying $39.99/a month or whatever. It might be smaller amounts. Is that correctly understood?
Scott Heyes 32:52
Yeah, look the B2C is harder because the cost of getting a customer, especially not at scale, is just astronomical. And it's hard to get that path to profitability. So that whole Blitzscaling marketplace, it's a really hard proposition. B2B: that's what you want. You want good clients that you grow with. Ultimately, you and the, grow together, and it's a simple solution. What you won't see is people getting rid of a whole tech stack at a bank. So the number one optimal play here is you actually need to better plug and play. You've got to be adaptable to all different systems and stuff. If you create less friction with these corporates, that's how you'll generate more revenue and get traction and scale fast. But also in the counterfactual fashion, not for everyone. There's pretty good businesses out there. VC is about picking those businesses that are going to grow. They've got scale and it's a global outlook. There's plenty of good businesses out there that don't fit that criteria. It's not for everyone. And that's a particular way you just need to talk about it and think about.
Jonas Christensen 33:56
Yeah, some segments I have in my head is, and of course I'm not a VC so I have only a peripheral appreciation for how it all works, but there is at the bottom of the attractiveness scale now, which maybe over the last 10 years was actually a lot higher up, is the company that can grow to big numbers but not necessarily big profitability straightaway. So, without bagging them in any sort of way, think of Uber, right. They don't make a profit, but they have hundreds of millions of customers. And it has a massive evaluation attached to it, of course, but at the same time, hello, they're making money. So, those sorts of companies are way less attractive now because of many of the reasons you've already listed. Then you have this category that are making money by themselves. And maybe they are actually in theory less attracted to VC funding because they are potentially able to bootstrap and get there themselves but organic growth. The ones that fit the bill are probably the ones that can generate some revenue themselves but they can, let's just say blitzscale or whatever you call it. They can really leapfrog with some funding. So, how do you as a fund pick where to invest? What is the criteria that you're looking for in an organisation to pick which ones to put your limited resources into and time?
Scott Heyes 35:24
Although, it probably gets back to what we're saying. We look at these infrastructure play that I think I mentioned, that whole embedded finance, which is an infrastructure player, right. And more retailers, they're owning their own merchant capabilities, or whether that's just white labelled from an infrastructure player. And they can just slide in or they provide the solution for them. We've got one company that does mortgage prediction of who's going to refinance. And so, banks don't have to build that technology. They just need the plug and play. And it can be applied to them and they get real data that helps them in their business and retain clients, generate more revenue and better cross-sell type stuff. So it's really just thinking with that sort of lens. we're lucky because we get so much inbound referral that we can be a bit choosy, and who's talking today. We're getting about 50 decks a day, so half of them probably aren't relevant. So if anyone's thinking that they want to get VC funding, all I'd say is do your homework. It's pretty clear on our website or LinkedIn what we invest in. And just some other advice there is that VCs won't change their thesis. That's why they're invested in for a specific thesis. So we're FinTech, AI, cybersecurity. We're not HealthTech. We're not Biotech. We're not gonna invest in crypto. We don't do that stuff and it clearly states that. By actually spamming VCs with stuff like that, you're only wasting your time but also theirs. You've really got to do the research on who's a good fit for you. And also, if you're looking for funding as a founder, you want to ask a lot of questions. Right? You want to see where that VC is. Are they actually deploying? Is the fund almost deployed or they started their fundraising? What are their parameters? What stage do they invest in? So we're invested in Series A and B, now Fund-three. We're not doing seed. There could be some good opportunities, but that's not our focus and our lifestyle life stage. That's not our focus at the moment. We probably will go back to the seed, as we evolve and Fund-three is done, and then provide that continuation, where seed and we go to series A and B again. That's the evolution for us. But it's very important to ask the VC or potential investors where they are in their funding lifecycle and who they're actually looking at. It's probably quite interesting, but you just got to do the work. It's hard, but you just got to try and do it the same. Who are the ideal investors? If someone clearly states that don't invest in FinTech, why bother?
Jonas Christensen 37:45
Yeah, very true. So there is a venture investment fund out there for everyone, but it's probably not you always, or rarely is it.
Hi, there, dear listener. I just want to quickly let you know that I have recently published a book with six other authors, called ''Demystifying AI For The Enterprise: A Playbook For Digital Transformation''. If you'd like to learn more about the book, then head over to www.leadersofanalytics.com/ai. Now back to the show.
I'm interested, Scott, in the criteria here around the individuals that are behind these organisations. So you've talked about the types of industries that you invest in or verticals. You've talked about some of the criteria for what they should look like, such as predominantly B2B and they've got to have a plugin function that really works for cost cutting, or whatever it might be. There's a few things there. But behind all that, behind the business case, behind the signal from the market that this is an attractive proposition, there is the operator, the people who are going to execute the mission. How do you decide the right people or what do you look for? What are the sort of characteristics of those founders that typically make or break?
Scott Heyes 39:04
Yeah, it's probably no different to normal finance. Really, it's the integrity the person. It's sort of street smarts. But what we've found is actually the hungry startup founder is probably a lot better than, I don't know, that educated person with all the degrees type thing. Right? And that gets back to the employee who's used to be sitting in a big corporate as opposed to the scrappy underdog who is used to get out there, being jack of all trades and selling. And look, most of our deals, to be honest now come from our network, our LP base. And from our LP bases, there's founders in there as well. They got their own connections. So, we get good referrals in from our network. So, the opportunity there too is if you become part of our network as an investor, you have a) - Like, for me when I moved to America, I didn't know hardly anyone. But this has opened up the world to me, and we've got investors from Ireland, also Australia. And we're also looking for more investors and for example, the more investors we get in Australia, the more we can help the Australian ecosystem and invest back in there. Because a lot of our LP's investors, we rely on them to do a lot of the work for us too. So, you can be active if you want. And so that's where a lot of that comes from. And it gets back to what I mentioned before, that three months due diligence is really crucial, especially over here. People present really well. Everyone's awesome, but it's actually good to see them work under pressure, and when things don't go right, how they react and treat others. And that's very important for us. So that's why we do the three months due diligence. Let's say, you would have heard, like the Target Global's investing in a day with a massive term sheet and all that. That's not our approach. We really partner with people. And we want to make sure the partnership is good. And as I say, up to 20 font, it's longer than a lot of marriages these days. So, you want to get along with the people you're working with.
Jonas Christensen 40:50
Yeah, absolutely. And that really is such a key, right? You can sell your soul to the, not just the highest bidder, but the first bidder. And that can be very bad for the investor, but also for the investee. And if you're not clicking over time, it is a marriage, then you end up with this sort of unhappy marriage that is very financially intertwined and you can't just undo it. Scott, I'm interested in your view on more generally what are the trends in these three verticals that you invest in, AI, Cybersecurity and Fintech, that are worth watching in the next 2 - 5 years? Because we are going through an explosion in the technology that sits behind them and the use cases, but we're also having this cost of funds, which is actually really important in this part of the maturity cycle of these businesses. What should we watch in the next 2 - 5 years in this space?
Scott Heyes 41:44
The thing is: AI is really big, right? And AI is at the intersection of everything. It's behind all the Fintech. It's behind cybersecurity. And we've seen with the phenomenon: ChatGPT. What's going on there? But that's conversational piece and how it's more real and it's not just a chatbot and how you can generate some pretty good stuff. I think that's the space you can watch and it applies to all these industries. But as mentioned before, cybersecurity is just massive. Just the way things are at the moment and you got to protect your stuff. And people get a bit lax and then things happen, right, that shouldn't happen with bad actors. And one of our companies is that what they do is every step of the way as you code, it'll tell you whether there's a flaw or not in that code. So it's secure development Ops, and most incursions of cyber attack occur because some code was wrong and left open a little backdoor for someone to get in. And people just move on and it just doesn't get fixed. This sort of operationally stops at every step of the way while you're doing that code. That's actually been on the offensive, not defensive. So, that's a massive opportunity too and going forward. So, I think it's stuff that's just intentional, helps business processes and flows, helps make decisions. But it's not even just cost cutting. It's more revenue generation, as well, because they bring out more opportunities. How often do we hear that a bank is so siloed that the private bank doesn't know what the corporate bank's doing? The corporate bank doesn't know what the retail banks doing without beening there. And they just don't know. You've got these customer base, which is the one brand but so much opportunity. That's why this wealth management and banking has never really worked. They've always been siloed. In theory, it's meant to work, but it just doesn't work. There's all these different kingdoms and items and people don't talk and systems don't talk and stuff like that. So anything that can take friction out, make that easier, that's probably where you need to look. It's just ultimate end user. It's just got to be easy. If it's easy and it works. And we've got one of our companies, the first investment out of fund three. It's a future work company. And it's pretty cool. And that's like Slack, but it's like 3D CAD. So you can actually, especially advanced manufacturing, and this is where it's really targeted, or say the resource industry, if you're in the middle of the Pilbara and your caterpillar truck breaks down, the engine, and you can actually pull the engine apart, using a paper manual. And in real time, converse with people, with the caterpillar factory to get the right part to actually fix that engine in real time. You can just spin it around and collaborate. These tools and stuff are coming. And that's what's exciting because it's not in a 2D world. It's a 3D a world that's real, but also global. So you know, there's some exciting stuff coming and there's where we believe the opportunities are,
Jonas Christensen 44:34
I did have a look at that on your website. And a picture tells a thousand words, so I do encourage listeners to go and have a look at the visual of what that actually looks like when you see these 3D manufacturing models versus the usual IKEA manual kind of look and feel of standard manuals. Scott, the things you raised there, I couldn't agree more. Especially the cybersecurity part. It just feels if you're a human In the modern world, it's only a matter of time before your personal information is going to end up on the internet and you're going to get hacked and someone can copy your personality. A personality? Your personal identity, I should say. Hopefully, the personality is the thing we can retain. But that's just not good enough for society as a whole. So surely, this must be something that is going to be real hard, because also the regulation is going to push towards that. And the AI piece of that is just that the AI is more - I should point out, AI is more of a capability sitting underneath all these things than the product itself in most cases. With that, Scott, I think we're sort of towards the end of the discussion. It's been really interesting. I've got two questions left for you. One is for you to pay it forward by telling us all who you would like to see as the next guest on Leaders of Analytics and why?
Scott Heyes 45:54
Two names, I'll give you one. So, Greg Woolf. He's the CEO and founder of our company called FiVerity. And that's the one that's synthetic fraud. It fights that with cybersecurity. You're an analytics guy and data guy and he was the face of IBM Watson. So he's no better person to speak about that. That'd be awesome. But there's also one in Sydney, Australia. His name's Michael Kingston, and his company's Seeda. And he's gives the power of data to individual businesses and they can get real data on who their client is, where they're from, and real powerful stuff, or just plug and play. No data science, no data analyst. Your local store can just plug and play into that. And he's got a very interesting background too. So I'm more than happy to recommend those two. One for the Australian audience and one for the global with FiVerity.
Jonas Christensen 46:44
Brilliant, they are great recommendations, Scott and I will definitely be following those apps. And hopefully, listeners will hear from those two in due course. Lastly, where can people find out more about you, connect with you and get a hold of more information about you and the Mendoza capital?
Scott Heyes 47:01
Yeah. So the easiest and the fastest: I'm very active on LinkedIn. So, LinkedIn over here is a business tool and everyone uses it. You can reach out to me on LinkedIn. Mendoza Ventures is on LinkedIn too. Website got a lot of good information. It's got a lot of our articles. We've had a lot of good recent press. And you can get a real feel for us. Our portfolio companies on there too. So yeah, mendoza-ventures.com. And you'll get a lot more information. And from that, it's got all our LinkedIn profiles, too. You can outreach there as well. They're the easiest ones.
Jonas Christensen 47:30
So listeners, do go and check all that out and I have the link to it in the show notes for you. So it's very easy to find. Scott Heyes, thank you so much for being on Leaders of Analytics today. It's been really interesting to learn about VC funding, more generally about your particular approach, your story and the Mendoza Ventures story and just to get a glimpse into the opportunity that's out there for the world to see and yet to come. So thanks for taking the time to be on the show, and all the best for you in the future.
Scott Heyes 48:04
Thanks for the opportunity and I enjoyed the conversation. Thank you.