Zach Noorani — Foundation Capital

Wednesday, May 25, 2022
Zach Noorani is a partner at Foundation Capital where he leads FinTech investing.
Zach shares why he is excited for composability in finance, why he's still excited for neobanks and why traditional finance is not going to be disrupted by web3 overnight.

Zach Noorani is a partner at Foundation Capital where he leads their FinTech investing. Foundation is on Fund X, has more than $3 billion under management and is one of the most established Sandhill road funds. But of course, Zach is with us in LA.

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Hello, Zach.

Hello, thanks for having me.

Thanks for coming.

I was seeing why we start by talking about investing. What's sort of a sweet spot investment right now for Foundation.

Yeah, we are despite the, the, the assets under management being pretty large you know, we're early stage investors, so, seed a, uh, some amount of B, but really, you know, there's no like too early for us. Uh, some of our. Kind of most, cherish investments or, things that were like, you know, I'm a founder And an idea maybe a PowerPoint deck kind of thing. okay, so your sweet spot is at early stage, and I want to talk a lot about FinTech, but a foundation just to set the stage does more than just.

Yeah. Yeah, no, we, uh, I sorta three kind of categories of focus, enterprise, uh, enterprise software. It infrastructure, is like a big, big chunk of the firm. number of my partners very focused on it and then. consumer internet broadly, you know, stuff like, clubhouse. We were actually the first institutional investor clubhouse.

And then FinTech is like, you know, a, sort of a big, big kind of vertical for us. Uh, That's sort of going back to the nineties And I feel like FinTech is sort of trendy right now, but I'm pretty sure it was not in the nineties. So can you share, some of that journeyYeah.

it was unintentional. I, uh, out of college, It was sort of, you know, too obvious career tracks for like business, see people, it was investment banking and management consulting. And like, uh, Ms. Banking is like lots of hours. And like, a bunch of words that I'm not really even sure what they, meant, like what the activity really was.

And so management consulting was like, okay, let's go do that. And like the most interesting consulting job I could find was actually. More corporate strategy role at capital one. And, I guess from there, was a, lot of exposure to kind of the Vanguard ofwhat's happening in the industry from a innovation perspective, you know, back then originally.

Let's go, um, you know, try to get into the prepaid debit, uh, market. and then it was, wow. This online point of sale finance, uh, is exciting. You know, it, bill me later, you know, now obviously that has like all gone pretty wild and become this kind of be NPL sector.

Um,And so kind of fell into, uh, uh, a fund that capital one, had at the time that I was a political Northfield ventures, that functioned a lot, like Google ventures functions today, uh, which is to say sort of like, Independent investment decisions, optimizing for return, but like, you know, inside the firewall and, um, did that for a few years in about probably halfway through sort of realized like, wow, this is, this is the coolest kind of work I could imagine doing And so since then, yeah, it'sbeen kind of like working with early stage companies, working in early stage companies, you know, really adjusting and FinTech and trying to, you know, get them to succeed and, 1215 years ago, telling someone at a big fund that I was a, FinTech person, FinTech investor, you know, they would get sort of a blank stare, you know, it was just kind of a niche just wasn't.

 you know, outside of like PayPal, there really hadn't been, any notable outcomes. And so fast forward to today, wild to see like the growth, and all dimensions, you know, it's much more than a 10 X thing since then.

 haven't tried to measure it, but it's sort of a, It explosion. if we're good and bad, like there's never been more like really exciting, innovation and, uh, there's just so much happening that I'm finding myself being, you know, really, really energized by, by the same token.

 it's also true that there's never been more capital and that capital has never been less discriminating.

And so, you know, it was. Equal parts, overrated and underrated,

right?the trick is like figuring out which side of that you're on at any given time, but like there's, oh my God. There's certainly like, a ton of seed stage companies today that will be, billion dollar, $10 million businesses, um, that nobody's talking about.

But it's also true that they're like billion dollar companies now. maybe will be billion dollar companies, some years from now.

Well, I mean, that's such an opening I want to talk about. What do you think is overrated? What's underrated early In my venture career, I, I feel like I was slow to learn the lesson that like, just avoid talking shit about,uh, just saying negative things about, other people's companies or any company or anything generally,

But, You know, this final pay later that I mentioned earlier, it's really caught fire, all over the world.

And, we have some investments in space that we're extremely excited about. But I would say like the enthusiasm of the market seems to be without much nuance. And you know, there are reasons to be super excited about, what a buy now pay later is for various reasons.

But like in large part, like, it has to do with, what are the. Alternative options, you know, what are the substitutes for, kind of splitting up a large payment, or getting some access to debt, you know, in real time And so really what we're talking about is credit card. And it sort of like, uh, how many people have, like how much access to transactional credit cards in a given market. And, you know, I think many years from now, what we'll be able to do is sort of demonstrate that like, well, in markets, where there was like a pretty low penetration of credit card, B NPL was able to like really, uh, build some down.

In markets where credit cards were pretty ubiquitous. And you know, there are a lot of different players, a lot of competition. For customers. And so terms and prices were, were pretty, competitive. the outcomes ended up being more constrained.

 and, uh, you know, I don't see that point of view being like, ah, expressed, you know, if you compare the U S to, uh, the Latin America, it's wildly harder conceive of like, where attractive margins are gonna come from and, you know, the first world then, then in Latin America.

 that'd be, you know, be an example. But nonetheless, it's still. Worst case scenario, you know, irrespective of anything affirms, still sells a lot of Peloton and it's an aspect of the business that Peloton doesn't want to have anything to do with. And so like that still deserves to exist.

It's just, you know, having six people fighting for Peloton business, makes it tough for, um, in terms of areas that are. get me very excited. how many do you want to, you want to hear her?

Give me a couple.

Yeah. So, you know, one that's like really, um, you know, we've seen the, kind of the first wave of it or the first several waves of it. But it's really just, the manifestation would really be the neobanks, uh, you know, the Chinese currents, of the world, and really, to some extent the cash app and Venmo as well. Which is really just like mobile. the fact that we are, as individuals, so tethered to this computer, that the financial services products are like starting to be, required and delivered, you know, directly through that device.

And so the idea of. Writing a check and you're going to a bank branch, to, undertake some kind of deposit money with a bank teller, is like completely alien you know, to a young person. and that happened real quick, right in the last five, maybe 10 years.

And you know, so neobanks. it's been a hot sector for a bunch of years now. And so it's a little bit hard to sort of say, Hey, there's going to be a new bank. that's going to a new flashy brand and a good bet that that's going to be able to like, really succeed, you know, it's competitive sector.

But this broader opportunity of, you know, kind of mobile, native, uh, financial services products, you know, a very tiny portion of the universe has really kind of ported over to mobile in a,truly native way, um, in a way that, you know, cash app and, current really have succeeded at doing.

And so, that'll persist for, so now we move to mobile banking what are the other implications? Like does commerce change because as you said, it's cash app, it's everything else, pull that thread more for me and sort of say, what else changes in how we're operating our lives.

 a good question. I mean, cause. even for ,, a, you know, a current, you know, time, a user, formerly perhaps having been like a bank of America customer, how much is their life changed? there's a way to say, well, you know, it's still, they're still swiping debit card, but on the other hand, you know, they were on average by paying 500 bucks a year in fees and penalty fees associated with like, overdrafting their account.

And now their pays Euro. And, that consumer probably is somebody that, you know, makes, below median income, you know, 25 to $50,000 a year, and so $500 and is a huge deal, right?

And then another aspect would be like, these things sound like really small increments, which is like, oh, let me get paid two days earlier. more broadly as see sort of as this notion of like earned wage access, which is just like, I get to get paid rather than every two weeks or every week.

Like literally at the point that I've done the work. and how has that changed in one's life? Well, it's sort of like, well, when you, got, barely enough money to pay your bills and the bills are big chunks and the payroll is big chunks and none of these things are lined up.

Then, you know, you're just constantly running into a situation where you've got to make a bad decision about what not to pay. Whether I should borrow some, uh, egregiously, expensive, uh, dollars to, make it all fit together.

And so I think that's one form of it now, but to like your question more about like, sort of futurism. What would be like totally different. this is your idea. I don't want to steal it, but like, you know, do we slowly get rid of our checkbooks and like, do we slowly get rid of our wallets?

Like, yeah, we totally do. I think we're all gonna be pretty dissatisfied about how long it's really gonna take to like get out of cache entirely. as a product, it works really well. And so, you know, it's going to be hard, but like apple has made some good progress, sort of, enabling digitization of like, DMV records of, of our licenses.

And so it's like pretty soon that, and then our health card and then, payment instruments, like if we're prepared to hold our phone, do we need any of those as well? Like, well, actually less and less and less. That's easy to say. do bank branches end up looking much more like coffee shops, that kind of stuff, like, that's easy to say, but you know, I'm not, the best at being like really imaginative about like, you know, a Jetson sort of, , uh, sort of, topic.

 But I think you actually made a good point, which is the bank branches don't entirely go away and become coffee shops. Cause people still work there. Were you saying.

OEM they'll continue to exists, think for a long, long time, it's just that, even though you and I, and maybe anyone listening to this, like don't have any intention to ever go to a bank branch until we like, you know, buy a house there's still a lot of other activities happening there that don't really relate to us. You know, there are small business bankers, there are commercial, you know, real estate, uh, brokers that all work out of like that same bank branch in many ways.

And like that Salesforce and those relationship managers like that, you know, it's going to be a lot longer from now, before they, you know, don't need to. uh, sit in a, in a hyper-local, kind of market to serve their customers. And so, that real estate still needs you just like doesn't necessarily need to be like the premier real estate in a retail location.

Like, I think that argument gets slimmer and slimmer. so you used the example of be NPL in other countries. What about earn wage act? like, are there good examples that you're looking at of countries that are maybe further ahead?

 no, it's pretty ubiquitous. Like

payroll. as a labor intensive complex process.

And so running payroll is just something know, without really amazing tooling. You were going to do it. And so know that that topic of earned wage access you know, every market that I've, you know, all throughout Latin America, for sure.

And, at least big portions of the, you it's, it's, pretty darn similar. Which is not something you can necessarily say about like a lot of other aspects of financial services,

And what about how we pay? Like we mentioned cash app and Venmo. How is that evolving and and how are those two different like i only use venmo what's happening with them? Well, they're, I mean, they're growing a lot, right? Uh, You know, I think it's just different networks of people, best I can tell, that have, sort of started to adopt one or the other.

And, and so therefore it sort of does tend to be everyone, you know, but they're both grown like crazy. And, you know, in a way that it's probably the product that I'm probably most excited about is that like a consumer, not as an investor, it's just like, it saves you from having to like write checks, and like get cash and you know, it just all kinds of dysfunction or whatever, just annoyance. And so what's happening with them is that like everyone, else is having that insight too.

 whether you're a personal trainer or like,even, medical providers, you're just moving money through it and if you were to look at the data, what's fascinating is that like, much like Facebook and Amazon and Uber.

 Informatica cohort level, the adoption of, these P2P payment apps is. increasing And then he sees his terminal that kind of the smile chart, which is to say that like some portion of a cohort that adopts these products, you know, kind of goes away, like kind of, trails off in the usage.

They actually come back, And then the usage on average those people in the cohort, use it more and more and more as time goes on. So the damn thing rather than being in ever.

 decaying curve, it starts slipping back up. and maybe most people that we're talking to now kind of know this, but like very few companies have sort of achieved that. it literally is like, your Amazons Facebooks and, and Uber's.

and so, that's happening. Right? And so it's like, whoa, like it's an application. we all rely on, on like almost a daily basis. You know, what more will they be able to do? Well, they have big, Neo banking, aspirations, you know, we can all interpret, Square's, cash outs, acquisition, of after you know, we can interpret that differently, but it's, their aspiration to like, perhaps get into to their consumers, among other things, being more of a payment network that, You know, can't complete the entire loop.

Like you don't need to bother with the visa MasterCard in order to pay at a square merchant, if you're a cash app user. And does, you know, be NPL, give them an ability to get, not just to other countries, but to, embedded it in online merchants as well. maybe. uh, futurism, kinda thing that's fun to talk about is like, well, if that adoption kind of really escalated so much, like, have they kind of cut visa, MasterCard, Amex, like those networks out of the system for that, for that transaction.

And like, how threatening does that get, in that market, you know, do they end up knowing so much about us that, you know, there's really, like a lot of e-commerce, kind of feature functionality that you would embed in here in terms of like relevant offers and, discounts and, promotions and really just advertisements.

 certainly seems like that's kind of like PayPal and Venmo conceive of a big portion of their future. That kind of stuff again, I don't feel like that's really like a, like a Jetson thing.

No, but it's different way of looking at it. Like, they have all that data right. Of what everyone's doing. So just, it's not flying cars. I have a different episode on electric helicopters, but like, it is interesting to think about the possibilities Yeah. it's a audacious thing to sort of say. Hey, this credit and debit card network system, is sort of like not long for this world. it's sort of ridiculous to say that, but by the same token, like, it's not actually feasible, right?

 you've got the, internet connected devices, you know, as a consumer and at the merchant. And if they both have kind of funded wallets and, you know, really, it's just like, how do we know that the, money's real and thatyou know, can someone promised me that, we've never reached a time when it's been feasible to talk about this sort of thing, but generally no, it's like, they are Wiley, and thoughtful companies that you know, have plans to, participate in this future as Well,

 Did you call them Wiley?


I like it. Um, Okay. Uh, You were going to say some other trends. I think I just got it. Got us hung up

Oh yeah. Yeah. The other one, um, probably the thing that I'm most excited about would be, development of the open banking phenomenon, one of the ways that I've been, sort of referring to. In uh, cryptoland and Defi they have this term called composability, say like, every application that gets built in Defi is really intended as a, building block. Uh, And so you can really stack things on.

top of each other and really build like really fantastical kind of, you know, super applications that can undertake all different kinds of things that are just wildly complex.

composability in those sort of the Fiat world and sort of the, you know, kind of traditional finance space. And so plaid, you know, it's like first basket example of this, which is to say like, well, let's make it much, much easier to ask. A consumer checking account, both from a, what data is in there, but then also like dollars, intuitive, fund dollars from it.

 So that'd be like first best example, but. are, many more, ways in which that seem kind of, approach, maybe even exactly that approach, that account aggregation approach, can be mimicked. So like a phenomenon that has happened to me. A year and a half ago is people had applied that insight to payroll, to consumer facing payroll.

So basically where you are. And I would go to like, access our W2. Well, what if I,build a set of APIs enables, access to that account? What could I do with. And, you know, it turns out like a lot of different, uh, pretty darn exciting things and some things that might be $10 billion companies unto themselves.

 The ability for a lender to collect a payment directly from a consumers. As opposed to from their bank account. So sort of, you know, a couple of steps later, you know, for subprime consumer that can, reduce losses With that loan, 8%, and so in aggregate that's, tens of billions of dollars of charge offs a year that could be prevented.

If you change the mechanism through which you got repaid. And so what is that? Well, that's a company actually sort of saw my own book here, but, um, it's coming called Highline that they've invested in. That is really an application that makes use of these payroll API. So it's talking about the, the argyles and pinwheels, incidentals and Atomics. And I'm sorry if I missed any. But like that by, by way of example, , there, there are many more of these kinds of verticals to spring up. And then the more of these API layers that exist in the more,creative we can start being about like what applications like Highline, could now get to exist where, and, you know, payroll based lending is not a, a new idea.

But, the ability to do it without having to have any interaction with the employer, is just completely new. And it now makes it feasible to actually think about deploying to the basketball.

What are some of the other big accounts that you would want to

aggregate in that manner?

mean, the lending, broadly, right? you know, first and foremost to just access from like a personal financial management perspective, right? How much more do I have to pay on my auto loan? you know, what options do I have for, forbearance or, early payoff, or refi. But even for that, just like how much more do I have to pay off?

You know, you gotta go deal either, look at your paper statement or you have to log in to that account. Giving a true bill access to that account. All of a sudden they can start, informing you. Like, no, this is exactly where you are with that loan, And so like, that's, that's interesting and useful, but the next step from there is like, well, what if it's the case that, you know, most classically right interest rates that fall in, from 6% of 2% and.

 you know, I've gone from owning 11% of my house to, 34% of my house. there's an opportunity for me to, lower my payments, to refine that mortgage, lower payments substantially and cash out a bunch of dollars. And. The way in which you could imagine delivering that to a consumer, if it was like pretty easy to access that account servicing, uh, to sort of say like, oh yeah, no, we'll just kind of watch it.

And let you know when you're a good candidate, when there's like a really strong reason to go through with the refi. but by the way, a lot of those mechanics we can just kind of do for you. You don't need to really worry about it. So automating the management of like all your various loans and bills.

 That'd be like one. Um, And they're definitely, you know, lots of people kind of working on, sort of how to bring that to us. there's an interesting analog here in auto insurance great company called get Jerry, um, that everyone should check out.

So it turns out we should all be likegetting quotes for our auto insurance, every like 20 months, if you haven't done that, then you're paying, like 30% more than you should be, on a monthly basis for the same exact damn.

G E T. Is that

Yeah. Well, the county Gerry, G E R R Y not an investment mind, so sadly not selling my own book.

I'm changing a little, You talked about, Composability

but you didn't quite say web three. What are your thoughts on, what do I mean, that's a big thing, but are there certain areas that you think are really exciting? Do you think that everyone's just gone a little crazy?

You know, I I have spent a lot of time decades in traditional kind of finance and kind of like immersing myself in the, ridiculous complexity, and how each of these kinds of products really kind of operates.

And You know, the idea that sort of say a public blockchain, you know, sort of replicating a lot of this functionality and public blockchains will be, a blessing and we'll, revolutionize a lot of, aspects of finished services like I'm sure that's true. It's just the, the degree of difficulty of that it's a little intimidating, you know, and so it sort of pushes me to sort of say like, well, what are activities that don't exist in the real world?

Or that like, You know, More fairly or viewed as like broken, to say that like, ACH, ACH is a, is a good old punching bag. the payment rail in the U S um, because it is slow, That it is broken and needs replacing and sort of thing. It has many limitations, but, man does it work, uh, and it works at?

incredible scale.

And do we have trust in it? And, you know, those things are, sort of invaluable and,so like I would contend that like, well, it's not broken, it's just limited. Right? Like, and so like, well, what, what would get to exist if like the equivalent of ACH, you know, kind of offend now if an ally was ubiquitously accessible and, and some of the limitations of that had been solved so that it was on par with, ACH, but like instant, you know, what will be do differently and how much better would it be?

Like, okay. But like from a web three perspective or from a perspective, it's sort of like, can help it be more seduced by like, what are the activities that like,Are actually broken. So not from like an ACH being broken, or just like don't exist. Right? Like, so NFTs are interesting because they're like, a completely native, construct, right.

And so. You know what stems from those in terms of what people want to do with them increasingly, like we'll be net new. And so, you know, there won't even be a way to deliver this in. There would have been, would have been privileged to think about how to like deliver it in a more traditional financial perspective.

Okay. So let me try to pressure test that. International payments. You know, e-commerce seller trying to buy goods from China. It takes four, five days for their payments to clear Broken enough to look for a blockchain solution.

Yeah. I mean, there's an enormous amount energy, you know, going into that, very category, like it's hard to say that, you know, there isn't a much better way to do that though, you know, for whom, right? Like for some constituents, it's it's irksome, but the process exists and it is reliable, you know?

And then, you know, uh, large enterprises, you know, multinational banks of the large enterprises, right? Like their system it's expensive, but it is sort of functional. what they had to exchange, you know, there was, um, you know,, an agreed upon stable coin, you know, that, had ubiquitous adoption and,was regulated safe is they would, Save some costs.

There's a lot of humans kind of, engaging with swift and, uh, those sort of platforms. And, you know, it will be quicker. And so working Catholic is probably slimmed down kind of working capital needs and various kinds of ways, that sort of thing. So like, yeah, it'd be incrementally better before individuals.

 it is a barrier you could probably argue too, commerce, across different geographies, the fact that it's sort of, there isn't a place you would go other than like, you know, sort of Western union and that like, Fee structure

Like there was so expensive that you couldn't even sort of think about like doing a relatively low margin kind of activity. And so, yeah. I, you know, eventually I think that stuff has to, sort of take hold, but I, I wouldn't necessarily have guesses for, for how it's going to happen.

Zach, I'm going to move into questions about you. Zac ad foundation who are you like are you the goofy one the optimist the pessimistWithin foundation, You know, what I, I first started from, I was, doing a lot of the data analysis you know, sort of, uh, let's actually like build a model here. Let's, look at the raw data and reconstruct the unit economics, that kind of stuff.

That was, you know, years ago You know these days, my hope is that, uh, people would say that, you know, at least, like a couple of times a week, I get a, really strong, like one liner in there,

 you know, my hope, but you know, it's in the eye of the beholder.

And so, uh, you'd have to ask other people, Where are you from? What's your.

 I'm from outside of Boston, uh, north shore of Massachusetts, So kind of as far away from there, I guess, and still be in the U S uh, uh, yeah, you know, I guess I'm a new transplant to Los Angeles, new single family home person. That's been a, it's been a big step. My girlfriend and I are, learning to be caretakers of a whole house and that's, it's a pain in the ass.


How would your friends describe.

 You know, I'd like to think, that they would say I'm the funny one, you know, I really would, but, will they say that, like, I don't know, it's like, Mid, probably not, you know? And so what would they say? Like, I, you know, I'm not sure,

You're kind of self-deprecating.

 you know, there's some sarcasm there. you know, it is true that I, I really Do not want to be perceived as taking myself very seriously. That's, that's not something that I'm excited about.

Do you remember this conversation? When we first met at a clock tower, happy hour, you were poking fun at VCs who take themselves too seriously. And I think you were comparing venture with real estate

Oh, yeah. I think what I said was like, we're not that different from like commercial real estate brokers.

 it's a very high value activity, it's a sales role.

 but also some like real, like sophisticated. It's like, you need to understand the transaction. you know, there's some real risk here, but it's sort of like, we're not that different, from that whole type of employment but like in the media and then, Yeah. there's this self seriousness about the, you know, even just the term Metro capital, that is, uh, you know, it's a lot,

Yeah. Your website is kind of serious. There are a variety of quotes. I wanted to pull out from your website because they're serious, but one is just like each one of us is constantly striving to be better. I wanted to ask you exactly how are you constantly striving to be better?

I am trying very hard to, uh, be able to play a tennis match that I'm proud of.


Yeah. I'm halfway there, but like, I think there's a lot of stuff for me. It's very, it's just pretty much more personal.

It's sort of like, how do I, um, live a, happier, more fulfilled life, you know? And I think work is, It's a very important piece of that for me, but like, it's, you know, so most of, I guess what I think about it from a betterment perspective is like, it's kind of outside of that.

It's like, how do I hold? How do I hold work? balanced, you know, kind of perspective,

uh, Relative to everything else, what else is there that I really want to care about? And you know, how do I, pursue that more directly, Yeah, it's interesting. If, if I had to guess how much of my energy goes towards work, it would be a really high percentage of my energy

And also how closely my work and happiness are tied together.

So you're saying, like whether or not you're happy, relates to how work is




I don't know that I'm different. It just, I aspire to like move some of the allocation, my happiness away from that. Cause that sounds a little crazy.

Right, right. That's what I mean, it sounds like kind of crazy, but I think it's true for me.

well, Zach, thank you for talking to me, I love talking to you about FinTech. You're very smart on all of this. So things were coming on the podcast and sharing all your thoughts.

Of course. No, thank you. Thank you for having me. then I think you're supposed to say, but Let's do it again.

Let's do it again. Great. Well, maybe play some tennis one or the other.

Yeah. Look forward.