They are not alone, however.

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Today news broke that , an online search giant and mobile hardware aspirant, is joining the mix. Yes, it’s not just and and and and and and and . Banking now also encompasses Mountain View.

As :

Google will soon offer checking accounts to consumers, becoming the latest Silicon Valley heavyweight to push into finance. […] Google is setting its sights fairly low. Checking accounts are a commoditized product, and people don’t switch very often. But they contain a treasure trove of information, including how much money people make, where they shop and what bills they pay.

The story goes on to note that Google won’t “sell checking-account users’ financial data.” (Fellow technology giants and have for for ad targeting that was provided for security purposes; Google itself has a history of .) That point matters for both attracting customers (who, presumably, would rather their financial data remain private), and generating revenue (Google could resort to the sort of fees that some banks use to monetize checking accounts).

Two quick points. First, the trend of tech companies adding banking features is spreading more widely than we expected. We should have thought bigger.

Second, a trend that I’ve kept tabs on for about a half-decade is continuing. Back in 2014, I wrote about how major tech giants were working to expand their product lines horizontally, that the most valuable tech shops were offering an increasingly broad array of products far from their core offerings.

Quoting briefly from that piece, here’s how I described the situation in light of a then-current Apple product decision:

Apple’s aggressive product expansion is hardly shocking. Along with the other platform companies, it is building a wider and more diverse set of offerings: If a product, program or service can run on Apple’s platform, it wants to build it in-house.

You can see this plainly in the case of cloud storage. Google, Amazon, Microsoft and, now, Apple all offer consumer-facing cloud storage, for example. They can bake it into their web products (Google) or their operating system and productivity apps (Microsoft) or use it to drive their device experience (Apple).

You can see the analogy between that point and Google moving into checking accounts.  We’re seeing the collision of big tech’s platform push and the startup trend of adding checking accounts and debit cards.

Understanding what the giants might get out of a banking push isn’t clear. For startups, the move seems to be a simple focus on revenue and juicing more long-term value from already-acquired customers. What might Google get out of the same effort? I would have said data for targeting and the like, but as we’ve seen, Google doesn’t intend to roll in that direction. If checking accounts can generate enough revenue to be material to Google isn’t clear.

Illustration: .

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But, notably, it’s not just startups that started off life looking to build a neo bank who are building out banking-like services. In fact, so many startups are racing to offer banking tools that an had to be amended to break the examples into several sections for the sake of bucketing and clarity.

In the coming weeks, we’ll explore more deeply why the startup banking gold-rush is under way. Today we’ll lay out the players and talk over the broad strokes of what’s going on.

Recent News

News broke earlier this month that , a well-known startup that we’ve covered before, is in the process of raising new capital at what a “valuation north of $5 billion.” The news wasn’t too surprising. Chime has been on a tear lately, raising this March, the preceding May.

A quarter-billion of venture capital in under a year isn’t enough for Chime, which appears ready to take on more capital. It’s a leading company in the neo banking rush, which, suddenly, is looking more and more like a crowded race as participants of all sorts join the fray.

Chime’s success in terms of fundraising and valuation growth is a good indicator that it’s doing something that investors covet. And as private investors value growth above all else, it’s easy to guess that revenue expansion is what Chime is delivering.

Interchange, Part One

The sheer number of startup players moving into banking services is staggering. (You can see the players from this piece in a list .)

Crunchbase News was tipped off about the boom last year when covering , a company that was initially focused on providing a savings service to users. Acorns moved into the banking space , and at the same time, was hunting a $100 million round at a valuation of $700 million move, which we wrote about, too.

When we caught up with Acorns, CEO cited the firm’s debit card as a revenue source. And that brings us to interchange, a key method by which companies in the space make money.

Skipping all the technical talk, interchange fees effectively allow companies like Acorns and Chime to charge a small fee when one of their customers uses one of their debit cards. This makes offering a debit card (and constituent accounts) an attractive offering.

Of course, banks make a ton of money off interest rate spreads. But the quick and regular influx of revenue from interchange has helped attract outsized interest in becoming a bank. In short, lots of startups that started somewhere else in the world of finance have slowly come to circle more traditional banking services as a way to add growth to their businesses.

After all, why not expand into something that seems like a sure win?

Consumer Debit

The Acorns example is canonical in some ways, but also nearly too simple; the startup was already focused on a savings product, adding a way for its users to spend some of their money wasn’t a hugely surprising move.

It also wasn’t shocking that and , two early leaders in the robo-advising space are also launching checking and debit services. Wealthfront announced a high-yield savings account and promised a debit card later this year. Betterment also put together banking accounts and debit cards for its users .

But moving into checking-styled accounts was a bit more of a stretch. The well-funded startup has launched cash management accounts .

, the popular consumer-to-consumer money-transfer service? It .

There are even more exotic examples. , a unicorn best known for student loan debt refinancing and its , earlier this year, a “new, hybrid account” that includes “debit card functionality” among other things.

Then there’s Uber, . The group is working on an Uber debit card for drivers to manage real-time earnings and track spending and a re-launched Uber credit card for riders to gain points and rewards. The team will also roll out a digital wallet and connected bank accounts in the coming year, per a blog post from the company.

Interchange, Part Two

Let’s return to the engine powering all the news we just summarized, namely interchange revenue.

The that Chime made money off debit card interchange fees in 2018, saying that the company generates revenue “by collecting a fee from Visa every time its customers use [its] debit card to make a payment.” CNBC Betterment was going to “profit off of part of the interchange fee charged when you swipe a debit card” in 2019. TechCrunch Robinhood’s debit card earlier this month, noting that the firm “earns money by taking a chunk of the interchange fees from transactions on its debit card.”

You get the picture. But there’s even more activity than merely the consumer-oriented banking boom.

Corporate Revenue

Oftentimes, it’s hard for startups, innately risky and volatile, to get a traditional bank to give them a loan. They just don’t fit the bill. So, naturally, a slew of startups are rising to help with this pain point and become banks and check-writers as a result.

Let’s start with the billboard in the room, Brex. The startup created a charge card for startups that otherwise wouldn’t get money through traditional lending

Most recently, the San Francisco company has created a new offering to compete with traditional banks: cash. Brex Cash was created to minimize the expense and time of wiring money through a traditional bank. Intelligently, this is tapping into startups that its original Brex Card wouldn’t fit well, namely small businesses that need to meet invoice charges, unexpected purchases, and salaries.

The last time we caught up with Henrique Dubugras, a co-founder of Brex, he said the company is looking to be a bank account replacement.

He also pointed to an anecdote: was able to grab money from Brex when it was only four people and at a seed round. Now it’s a unicorn, surpassing $1 billion in valuation. (Brex itself is valued at $2.6 billion.)

Let’s get back to listing examples. Beyond and before come and . Stripe is best known for its work providing payment technology to digital companies. Square is best known for its work providing payment technology to IRL companies.

Each, however, are adding banking services to their product mix. Stripe, after adding lending services, is . Square, in contrast, is .

Of course, it’s not all interchange in the corporate world. Stripe and Square both offer lending and so forth. But it seems reasonably clear that the bug that has bitten the consumer-focused fintech and fin-services world has bitten its corporate-focused analog as well.

More To Come

We need to look more into the mechanics of the debit card boom, because like all booms, it will eventually oversaturate and lead to consolidation. But for now, it’s all systems go on becoming a bank.

It’s odd, though. Back in 2017, we bet folks would have expected crypto to have taken over this market by now.

Illustration:

as a trading platform was predicated on of low-cost services and mobile accessibility. Offering free trades on the go, Robinhood became a popular hub for to get into buying and selling equities for less.

Rounds and rounds of capital later (Robinhood has ), the company’s model, proven out by swelling usage numbers, is attracting copycats. As we reported a few weeks back, traditional online brokerages have begun swinging towards Robinhood’s most-famous price by offering zero-cost trades.

Robinhood showed the market that customers were ready to stop overpaying for equity trades. But now that Robinhood has shamed incumbents into following suit, what’s next for the company?

Now What?

Robinhood has changed its market, yes, but in the process has seen one of its key advantages diluted by larger trading companies following suit. The scale of the copying is now pandemic. Here’s (condensed and reformatted by Crunchbase News):

Fidelity announced Thursday that it will no longer charge customers to trade US stocks, [ETFs] or options. The company […] joins a growing list of brokers that have slashed online trading fees in quick succession. Charles Schwab last week eliminated commissions for trading stocks [while] TD Ameritrade and E-Trade have also ditched commissions.

So much for low-cost trades setting Robinhood apart.

Robinhood’s mobile app could remain an advantage, but certainly its pricing scheme is no longer going to direct as many users through the door as it once did. Could the changed reality of the market that the unicorn is competing inside of slow Robinhood’s growth, and thus curtail its future fundraising ability?

Perhaps, though the company is well-capitalized. DST Global led Robinhood’s $110 million 2017 Series C. And its $363 million 2018 Series D. And its $323 million 2019 Series E. Surely Robinhood has a chunk of that money left over. But past having cash-on-hand, the trendy unicorn has something else up its sleeve.

Banking

It would be too easy to say that the increasingly competitive, zero-fee trading landscape is very worrisome for Robinhood if the company didn’t have other products that could pick up slack in its growth figures.

You recall that Robinhood has crypto trading (notably crypto competitor Coinbase recently  to ). However, Robinhood has also moved, yet again, into banking services.

Here’s , announced earlier in the week:

This time it actually has insurance. Zero-fee stock-trading app Robinhood is launching Cash Management, a new feature that earns users 2.05% APY interest on uninvested money in their account with the ability to spend it through a special Mastercard debit card.

Crunchbase News has learned that Robinhood has more than 300,000 people on the waitlist for the feature.

Moving into banking is something of a regular step in 2019 for companies that work with money in some capacity. SoFi moved into the cash-and-debit market earlier this year with an offering which it called “a new, hybrid account offering high-yield interest” after starting out with student loan services. Acorns added a debit card after starting in savings accounts and easy investing. Chime started off as a bank, but also features the usual debit card service. ( that Chime is raising new money at a new, higher $5 billion valuation.)

Competition

Why is every service getting a debit card into the hands of its users? In 2014, back when Chime raised its $18 million Series B, TechCrunch reported that the company “earns about 1.5 percent in fees per transaction” that went through its debit card.

So Robinhood has a second and third act underway while its former rivals match its low-cost equity trades. But will crypto trading and banking move the needle when each category has a host of well-funded competition?

The funding point isn’t an exaggeration. , a crypto trading competitor, has in known capital to date from investors like , , and . Chime has in known capital to date, including money from , , , and, notably, DST Global. Acorns, completing our point, has raised $207 million, including raising from and .

There are two stories here, then. First, that Robinhood attacked a market with radically low pricing (thanks to the power of software), drawing blood early and forcing change from competitors after it had racked up a substantial user base. However, Robinhood’s second act could prove tricky given the number of players in the cash-and-debit-card game.

In a nearly ironic sense, then, Robinhood’s runaway success growing its market footprint with free trades worked so well that its competitors broke out the copy machines. Now Robinhood has to craft a more diversified growth path, but where there’s more competition and it’s not the first mover.

We’ll see!

Illustration: .

News broke this morning that will reduce its commissions . As while reporting the news this morning, the move is part of a trend that has also seen and reduce trading fees.

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Shares of Schwab competitors and Schwab itself are down today. This, of course, brings up Robinhood and its platform that charges end-users nothing to trade stocks.

The genius of early product work was that it took something that could be priced nigh-zero in a digital world (trading) and set its actual price near the marginal cost of the transaction. By excising the margin, the then-startup attracted legions of fans, and, afterward, .

According to its most recent funding round, a $323 million Series E in 2019, Robinhood is worth $7.6 billion today. That’s not to say that its road has been smooth. The company ran afoul of effectively everyone when it ; Robinhood has also , something not uncommon for high-growth startups.

All the same, Robinhood’s pitch to consumers that there was no reason to pay $4.99 or $7.99 or $9.99 just to execute an equity trade worked. Throw in the company’s tools like options and margin products, and Robinhood was offering quite a lot for not too much money. Incumbents had to compete, therefore, on price and features.

Robinhood’s launch was an asteroid impact into the fees-for-trades equity world. Schwab’s move today is the first die-off of a dinosaur revenue stream.

Yet Again

Before I torture that analogy further, let’s remind ourselves of when we last touched on the theme of startups impacting incumbents. In early August we wrote that , a publicly-traded banking service, had been repriced by the market by nearly half after it disclosed a diminished future outlook in an earnings report.

Green Dot placed the blame for its smaller revenue and profit expectations on the back of what its CEO described as “so-called neobanks,” the sort of firm like Chime and Acorns that we’ve covered extensively over the years.

In the case of Green Dot, well-funded upstarts were taking parts of the market away. and et al often have a focus on slim fees, and features. In that way they are similar to Robinhood as we’ve seen above; a market that was too comfortable in its pricing found itself under attack from younger competitors unfocused on short-term profitability.

������Ƶ tend to win in these situations, even if they don’t switch providers. Schwab customers just got a fee cut, for example, without having to move to a startup platform. I’ve written skeptically (here, here) about Robinhood’s valuation, yes, but I also want to note that its impact on regular folks has so far been positive at least in one way.

There is excess amidst tech startups and other venture-backed companies. There are silly valuations. There are bad actors. But let’s not forget that sometimes startups do have the ability to disrupt pricing regimes that made no sense. As marginal costs fall, so should prices. And quickly.

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Today that , a neo-bank we’ve covered before, picked up one million new accounts since June. Chime now has five million accounts, and its CEO indicated to the publication that when his company was smaller it took four years to collect one million subscribers—the same feat it accomplished during 2019’s Summer season.

Growth looks quick at Chime, a fintech startup which , led by , in March of this year. The company’s other roughly $100 million in comes from , (a firm I recently interviewed and should write about), , and .

Looking back through the public archives, here are a few milestones regarding Chime’s growth:

• Summer, 2018: 1 million accounts.
• March 2019: (“triple” its tally from “last summer”).
• June 2019: (“quadrupled its customer base to 4 million in a single year”).
• September 2019: 5 million accounts.

Chime was founded in 2013, so you can see the company’s growth has mostly come in the past 12 to 18 months. Those growth figures do come after the firm raised its two largest rounds: its and the previously-mentioned $200 million round from March 2019.

The firm, therefore, had more capital on-hand to help it power its growth figures. We’ve covered both the rise in neo-banking capital infusions, the rising customer acquisition costs in the space, and the impact that the sector’s growth appetite is having on incumbents.

Competition

In the spirit of fairness, I reached out to , which works in similar spaces as Chime (the two don’t like to be compared directly), regarding its account growth history. The company got back to Crunchbase News this evening. We’ve included their new number in the below, which includes numbers found in various media reports:

• December 2016: .
• May 2018: .
• July 2018: .
• November 2018: .
• January 2019: .
• September 2019: 6.2 million accounts.

Plotting both companies’ accounts growth onto the same chart, we get this:

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Gené: I want to welcome you both. This is new for us to have two partners. Why the name “Homebrew”?

Hunter: Homebrew was named after the Homebrew Computer Club. As a history major, there’s a certain respect for the shoulders we stand upon. It harkens back to the spirit of you do it for the love and passion, not just the disruption and economics. You’ve benefited from what came before you. So there’s a certain mentality as you continue to pay it forward.

With Homebrew we’ve taken a concentrated involved approach, as opposed to a more passive lottery ticket style, to be able to share some of those learnings across the founders in the portfolio.

Gené: How did you both meet?

Hunter: I ended up at , relatively quickly, but not necessarily intentionally. Google was still a private company, but was well known. One of the things that caused me to leave is that I wanted to touch millions, hundreds of millions of people. That very much matched Google’s ambitions. And that’s where Satya and I met. I joined late 2003 and he joined earlier in 2003. And we are on the same team. First literally on the same team, and then working under the same VP. We spent 2003 to the end of 2006 working on AdSense. The first project we worked on together is how do you bring AdSense from smaller self service websites into the larger publishers.

Satya then left to go to in 2007. And I moved over to just as it had been acquired. Google had moved from 1,000 to 12,000 people over the three years. It was just starting to change. Things were becoming institutionalized. YouTube was very much again the intersection of community and creativity.

Gené: YouTube was a bold acquisition by Google. It felt at the time as if the acquisition came out of nowhere.

Hunter: People were not congratulating YouTube. It was called Google’s folly. They’re spending a billion and a half dollars, for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, announced the acquisition. Somebody asked Eric, you paid a lot of money. How do you know that was the right amount? Eric paused for a second and said it’s definitely not the right amount. It’s either way too high or way too low. And we will know in 10 years.

Google was the perfect late stage venture capitalist to invest in YouTube.

Gené: At the time the big issues were how does YouTube make money and copyright?

Hunter: Copyright was the large one. YouTube did safe harbor and was DMCA compliant. They built copyright rights management into the licensing tool to help creators manage their content. When it came to terms of service and community standards, our big concerns back then had to do with spam, with people trying to crawl up the leaderboards. And making sure that ahead of some of the sophisticated systems that we were later able to build, that there was no pornography.

YouTube was starting to internationalize, and we realized what a dramatic world wide impact it would have. We were trying to understand and respect local laws, and sometimes local norms in countries where maybe we didn’t have a presence to operate, but we had users. During my first few years it was not taking Silicon Valley assumptions and layering them across the world. At the same time knowing you stood for access to information. This rolled right into the Arab Spring. A protestor who got shot was one of the first tests. This is violent. This is blood. This is somebody dying. This is historically important.

If you pull those strings hard enough, do you get to where we are today. It’s a challenge of a global company, global audience. We were dealing with year two through year six problems, not year fifteen problems.

Gené: Do you feel like YouTube spiraled out of control?

Hunter: I haven’t been there for seven years now. I feel like each phase has its set of challenges. The team is dealing with challenges that are often the byproduct of what worked, incredible growth, building algorithm around attention, and what the unintended consequences of that are. Google has always been a place where people have been willing to advocate for the right long term decision, no matter what the short term resources or business impact is. I hope the complexity of some of this decision making and the implementation of policy doesn’t get in the way of doing the right things. I have a lot of confidence in the people over there.

Gené: Hunter and Satya, you both have a product background. How did you come together to decide it’s the two of you that should start Homebrew in 2013?

Hunter: Satya left Google early 2007 to go back to venture. People we knew called him back into duty and he went to run product at Twitter for the better part of two years pre-IPO, building what is today. When he left late summer 2012, and unbeknownst to him, I was also thinking about leaving Google at the end of the year.

Gené: What is different about Homebrew?

Satya: Coming from product backgrounds, we thought about Homebrew as a product. So we tried to identify the white space in the market, and for us that was at the seed stage. While there are lots of sources of capital, there were very few investors who were willing to be the investor of record. As angel investors and advisors to lots of companies, we were often the first call when founders were having some operational issues like hiring somebody, a product question, even though there were larger checks on the cap table. We saw this gap where the early stages of company building are incredibly difficult. Most of the time founders don’t have all the skills needed to scale a company for year zero through three. And they were asking for help, and there was no one willing to give it to them. And so the thesis behind Homebrew was to be that investor of record, come to that conversation with empathy having been on the operator side. And to do that for a small number of companies each year, where our focus was not going to be looking for the next investment, but really spending time with the founders.

Hunter: So much capital is coming into the seed stage. There’s no capital gap structurally at the seed stage. Maybe there was 15 years ago. That doesn’t mean that fundraising is equitable or easy. That’s a whole other discussion. But there’s lots of capital.

That capital has come to market in forms that sometimes have more to do with the needs of the investors, than the needs of the entrepreneurs. Increasingly large funds that are multi-stage, and or the size of the fund predetermine what success looks like. It’s just math. We co-invest with those people all the time They’re wonderful. Especially as companies get bigger and know what to do with $20 million, what to do with $27 million. You can’t grow a company without that.

Similarly, there are more and more people who like writing here either institutionally or individually 20, 30, 40, 50 smaller checks, a year. I sometimes joke, they have a general partner name Darwin, because what they do is see who survives. It’s often not in investors’ short term interest to take the model we do. Which is to keep your fund size constrained, concentrate on early investments, and spend more time servicing the deal, than trying to win it. We get involved at the seed and then stay operationally supportive into the Series B. We commit to a three to five year runway with these companies. There’s not many people willing or able to take on that model.

Satya: And this stems from why we created Homebrew in the first place. It was not to become venture capitalists. We would not naturally enjoying being venture capitalists. We really enjoyed building Homebrew, because it’s focused on what we thought for us was the most interesting thing to do was work side by side with founders to help them build businesses.

Gené: What is a Homebrew company?

Satya: A Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company’s success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven’t had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.

Gené: Are you wanting to be the Andreessen Horowitz services model at seed?

Satya: We’re trying to practice venture capital, the way it was originally practiced, when it wasn’t just capital. It was this notion that your investors are part of your team. They’re not your managers. While they’re on your cap table and you’re responsible to them to some degree, you’re not reporting to them.

Hunter: I was surprised to find that the market gap at venture was returning emails, showing up for meetings, spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we would pick up the phone, we will answer the email, we will be on the whiteboard with you.

Satya: All companies at this stage really have to do three things well. They have to build a product, distribute that product, and build a team. So that’s where we spent a lot of time.

Gené: What do you mean by investing in the bottom-up economy?

Satya: The notion of bottom-up economy is based on this overarching arc that we see within the technology industry. As technology is getting cheaper and more flexible, more accessible, it’s finally being leveraged by constituencies, and industries that haven’t yet leveraged it. That means everything from enabling the business of one, to empowering teams within larger organizations. It’s about democratizing access to products, services, data, marketplaces, and revenue streams. That’s what the bottom-up economy encompasses. We tend to say we like to invest in sexy software for unsexy industries. So it’s a lot of financial services, healthcare, manufacturing, logistics, retail, everything from kids clothing to autonomous cars.

Hunter: You don’t see a lot of stuff in the portfolio that’s meant to sell into the top 50 CMOs or the top one percent of consumers. was an early fund one investment, also an early fund one exit. But we came to that with the prepared mind, given some of our experiences at Google and beyond, with AI and computer vision. All of a sudden you’re given some credibility and through [Vogt] the CEO there, you’re given a set of founder relationships and you start pulling the strings and it leads to a few companies in the second portfolio.

Some things are evergreen. We just have incredible domain expertise in fintech, . I don’t think there is anybody who has a better seed portfolio in financial services over the last six years. But then there’s other things where your own personal interest, or meeting the right founder at the right time, you start to build a market presence, build the capability and then you just have to decide how far you want to follow that down or not. So now the stuff we’re doing in automation, and computer vision is less to do with autonomous cars, and more to do with manufacturing.

Gené: How did the investment in Cruise happen?

Hunter: There’s been two investments in our first six, seven years that started with a password protected video. Both of those turned out to be very good investments. Kyle sent us a password protected video of him driving down the 101 Highway to demo day with periods of the drive, having no hands or feet on the wheel. Ok, we are in. At the time people thought if this was going to happen, it was going to be Google, there’s going to be an Apple car. People were not talking about componentry, what do you do with LIDAR? This is why GM bought them. That acquisition was 18 months after the seed round. And people say, how did they come up with this number for that acquisition. The GM board decided what percentage of the market cap they wanted to spend to de-risk the rest of it.

Gené: Your most recent fund in 2018 was $90 million. How are you planning to invest that fund?

Hunter: So we’ve stayed very much the same since the first fund. Each fund is a byproduct of how many companies we think we’re going to invest in doing six to eight a year. And what’s the check size needed to get to 10 to 15 percent ownership in a seed round.

Our first fund was about 20 companies over two and a half years. Our second fund was 27 companies over three and a half years. And when we went to set up fund three, we decided to do it even a little bit longer. So it’s targeting to be about 32 companies over four and a half years. If you are going to live up to the expectation that you set for founders, that cascades through fund size and fund strategy.

Gené: How much do you need to invest in this market to get your 10 to 15 percent? And are you co-investing?

Satya: We always co-invest. We’re big believers that syndicates add real value at the seed stage to get various skills, experiences, and relationships. Our average investment is probably a million dollars now, but anywhere between half a million to two million as a range. The average investment has had to tick up a little bit from when we started as round size and valuations have gone up.

Gené: How large is a typical seed round?

Satya: $3 million on an average but anywhere between $2 and $4 million is pretty established as a Bay Area seed round.

Hunter: We had a geographic collar on ourselves for the first few years. We didn’t want to stray too far out of California or New York because we really want to make sure we could deploy our model without spreading ourselves too thin. As we gain confidence, we’ve been willing to make investments in Portland, Boston, Salt Lake, San Diego, and Toronto.

In the 1990s software was a vertical. Now, every business has a software component, and sometimes the best companies being built in some of these verticals have an academic background or domain expertise that’s not necessarily native to Silicon Valley. And so we look at each geo as — is it neutral to positive for this company to be located here. Are we going to invest in a Spotify competitor in Kansas City? Probably not. Is there a lot of really compelling vertical AI work being done out of Toronto because of the university footprint there? Absolutely.

In a competitive market, how do you make sure that for the handful of verticals that we have the deepest expertise, how do we make sure we’re top choice, for founders in that area? Because there’s lots of wonderfully smart investors, lots of capital. It’s not just enough to be thought of as ‘they’re good people.’ You need to be preferenced. And so we’ve done a lot of work around some of the co-investor relationships, some of the founder relationships. In year seven, we’re finally starting to see our own proprietary deal flow from employees at the first companies. Either those companies got acquired and handcuffs are off, or people invested in doing things. We’re starting to see referrals from the companies that we back in fund one.

Satya: We really think of ourselves as seed phase investors. So while our average check is a million dollars. We’re happy to be the $200,000 check in the pre-seed, or the last $2 million that goes into the company right before the Series A. Our focus is in that early period where companies are largely pre-product market fit. Pre-product or post-product with some early customers.

Gené: You have around 20 exits with Cruise being the biggest. That is a high count of exits six years in.

Hunter: Because we’re investing in companies that are often innovating within traditional verticals, they’re quick to the customer, and quick to revenue. They are proving their worth. Why do companies choose to be acquired? Somebody is willing to pay into the future, to bring them in-house. Which means that they’ve done very well in their first few years, and developed something. Another reason is founders feel there’s a compelling offer on the table, and they’ve constructed a cap table that allows them to take that offer. We want teams to be able to play both offense, and maintain optionality until they decide that they know who they are, and raising several hundred millions of dollars of venture capital is what they need to get there.

I’ll give you an example of a company in our first fund that has provided a meaningful return. in the construction SaaS that Autodesk bought earlier this year for $265 million in cash. That company had some growth term sheets on the table, could have played forward, but decided based upon where they were in their own development that Autodesk would be a natural partner for them, the roles they would be given there, that it was something that founders wanted to do. Not controversial because they hadn’t made promises to the cap table, and raised at valuations that made only a $300 million exit a loss. Right? I would be really happy if each fund, produced one or two public companies, and a bunch of outcomes that were really great for the founders, really great for their teams, and really great for their investors, because they didn’t get so far out over their skis, that they closed too many doors prematurely.

Satya: Because we’re investing early, we’re investing in people, and our commitment is to those people. There are also situations in which things don’t work out as everybody had hoped. Maybe the offers that they’re getting aren’t of the nature that Buildingconnected got. Because our commitment is to those people, it’s our job to make sure that we help them find a home for them and their employees that ends up helping them move forward with their careers. Part of what you see reflected on the website are also acquisitions, where we’re just doing our job as good investors and good partners to these teams, and helping them land in places that are going to be positive.

Hunter: Do the early investors have not just conviction, but alignment? Some of these first time funds need to keep a company alive, so their LPs don’t ask, how come these companies are failing? Or in the face of a good offer, that wouldn’t move the needle for the fund, so they make it hard on the company and tell the companies to play on. Because it’s not a $5 billion company, it doesn’t matter to us.

Gené: Why do you do this? A lot of firms would step away.

Hunter: The best rationale is when there’s both self-interest, intersecting with it’s the right thing to do. So the self interest is those founders become incredible evangelists for us. More and more smart founders when they do diligence want to talk to founders in a portfolio where things didn’t work out, not just the ones that did. If you can get one, two, three times your money back on your dollars you get to recycle that back into the companies that are going to do that. For a sub $100 million dollar fund, we can turn that into something that actually does contribute back and we put that into a , into a , into a .

Satya: And it comes back to we didn’t start Homebrew to start a fund. We started Homebrew because we saw that there was a lack of service being provided to founders.

Hunter: I hope when we turn off the lights, years and years from now, one of the things we can say is we were the best version of who we wanted to be. We don’t want to be a junior version of Andreessen Horowitz, we don’t want to be First Round 2.0. We don’t want to be an incubator, accelerator, crypto, or whatever flavor of the month is.

We always say the way to get better fund over fund is just to make one better decision.

Gené: How many companies do you meet?

Satya: 3,000 intros, and we meet about 800.

Gené: Are a lot of the deals coming through other seed investors?

Satya: It’s about two thirds through founders, entrepreneurs, and executives in our network. It’s about one quarter from other investors, and the rest is some combination of inbound/outbound.

Hunter: So there’s this interesting trend. There’s a bunch of wonderful funds that write these $100K to $250K checks. There’s certain pockets of entrepreneurs that they’re pretty well connected to, because it’s the ex-Airbnb guy. The challenge that some of those funds face is that there is a surplus of their dollars, and they can’t make a round come together by themselves. And they’re very interested in placing the lead, not just because they care about the company, but because if they place the lead, they’re less likely to get squeezed down. Oh, I know you want $250k but sorry you’re only getting $100k.

And so one of the interesting trends over the last seven years is the increase in volume and quality of introductions from that segment of the smaller supporting seed funds, who really need to protect their allocation. Why we play nicely with them is because we’re not trying to do 80 percent of a round. They’re hoping a founder protects their allocation, but you also really need the funds to protect their allocation. That’s definitely been one of the interesting structural changes in seed that has impacted where we see deals from. It’s definitely different than 2013.

Gené: Satya, you were at Twitter as the VP of Product when Twitter was making some crucial decisions about enabling an ecosystem through a platform or becoming a destination. And they went with destination. In retrospect, do you think Twitter made the right call?

Satya: I would argue in many ways we didn’t make a decision. We tried to play the middle. And I think it’s pretty clear, in retrospect, that was the wrong answer. And frankly, I think it was probably clear to a lot of people internally, it was the wrong answer then. There was a whole host of reasons why that played out the way that it did. They did both because they closed down the platform to a smaller set, but they still wanted to be a platform. And of course they’re driving towards being a destination. I think there was a little bit of wanting to be both, but doing neither well.

Gené: Was that the biggest question Twitter was trying to answer at the time?

Satya: It was everything from making sure the service stayed up, to monetization. It was pre-IPO. Platform was certainly a big component of it. You might recall a time when there were no photos or images on Twitter. That was a big decision to do even that. So there were lots and lots of decisions that played into what Twitter became. I do think that it would be a very different service if it had moved to the platform direction. I think potentially a much more broadly used service.

Gené: What are two companies in your portfolio that you’re excited by and why?

Satya: We’re investors in a company called . Shield AI was started by two brothers, one who was a Navy Seal and the other who was an engineer at MIT. And the brother who was a Navy Seal came back for his tour of duty in Iraq and Afghanistan, and he came to the realization that none of his colleagues, fellow soldiers died in battle. They died when they were doing reconnaissance into areas where there was no information about the building or the terrain that they were going into. And it seemedd crazy to him that that can’t be solved in some different way. And so he got together with his brother, and they decided to build a company called Shield AI, which is developing fully autonomous drones for the public sector. These drones can by themselves navigate into buildings and caves. Collect intelligence about what’s going on inside through thermal cameras, regular cameras and then communicate that back to people who can do analysis on it.

Gené: Is this product targeted at the military?

Satya: The public sector broadly, but DoD obviously is a big target of theirs. And so we seeded that company a few years back. Andreessen Horowitz did the Series A. The company is in the process of closing its Series B. And already the impact that companies are having in terms of keeping people out of harm’s way (both military personnel and citizens) is phenomenal. A company that nobody will probably ever hear about. It is based down in San Diego. But a company that has such a powerful mission around ensuring the safety of civilian and military lives. And started by founders for all the right reasons. One we’re super excited to be part of. And an example of a company that stems from the work that we did at Cruise. Because these fully autonomous drones are using computer vision and all the same types of technologies, that allowed us to have a point-of-view around that market.

The other company is called . They started based on the idea that every software company has become a payments company. They all want to be able to accept payments and disperse payment. And the norm for doing that is by signing up with a processor and paying that processor three percent or whatever that might be.

What Finix is doing is creating the software infrastructure for any software company to become a payments company itself. Instead of paying three percent you then turn that into a revenue center. It’s also software driven, it can be adopted and used by companies of any size. And so we think of it as democratizing access to a financial services infrastructure, helping a whole generation of software companies create more value for themselves and their employees and their customers.

Gené: Who do they sell to?

Satya: They are targeting marketplaces, software companies, and financial services companies.They work with companies like Lightspeed POS, they work with companies like Visa. Literally any company that wants to be able to accept payment of some kind, credit card or otherwise.

Gené: How do they charge?

Satya: It’s software based subscription plus transaction. We seeded that company. And , , and led the A recently. Incredible founding story where the founder is a self taught engineer, first generation college graduate, with a Latino American background and just the hardest working guy you could ever meet.

Gené: Thank you I think we have it.

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Well-funded startups, to be precise. , a company that provides banking services with a focus on pre-paid cards, saw its share price fall from the upper $40s to the high $20 after reporting its second-quarter earnings.

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What caused the firm to lose such a sharp percent of its worth? Green Dot pointed at competition from one of our most-watched startup categories, the neo-banks.

Downgrades

Green Dot did not disappoint investors by reporting underwhelming . In fact, the company beat on revenue ($278.3 million; GAAP) and earnings per share ($0.90; non-GAAP, diluted).

So what caused the firm to drop so sharply? The future. As :

Shares in the bank known for issuing prepaid debit cards fell 42% to $27.42 on Thursday after it scaled back its revenue and profit outlook for the rest of the year, citing competition from financial-tech startups that offer checking and savings accounts.

How sharp were the changes that led to such a dramatic repricing of Green Dot’s equity, and therefore the company itself? Pretty sharp, as it turns out.

You can read the company’s entire “Updated Outlook” in its earnings report , but the short version goes as follows:

• Full-year non-GAAP revenue of $1.060 billion to $1.080 billion against prior guidance of $1.114 billion to $1.134 billion. (The company employs precise revenue numbers due to the granularity of its growth.)
• Full-year adjusted EBITDA (an adjusted profit metric) of $240 million to $244 million, down from prior guidance of $255 million to $261 million.
• Full-year adjusted earnings per share (EPS) of $2.71 to $2.77, lower than the previously expected $2.82 and $2.91 in per-share adjusted EPS.

So Green Dot expects smaller revenues, lower adjusted profit, and slimmer profit-per-share. Investors reacted by hitting the “sell” button. Let’s return now to who is to blame, from the company’s perspective.

Who Is To Blame?

Companies like , , and others are at fault, it seems. According to the , Green Dot’s CEO said the following:

Several so-called neobanks flush with new rounds of venture capital [are] spending a record amount of marketing dollars to convert customers to their largely free bank account offerings. […] There’s little doubt in our minds that the increased marketing spend from so many competitors in aggregate is taking its toll on our new-customer acquisition.

Astute and regular readers of Crunchbase News should not be surprised at this result.

Continuing our coverage of neo-banks, we noted a slide in Mary Meeker’s Internet trends report showing that, among the startup cohort, customer acquisition costs (CAC) are rising. Why would CAC rise among neo-banking startups? In short because as more companies with more dollars pursue the same sorts of channels to reach the same sort of customers, the cost to acquire a marginal customer increases.

Startups are tasked with growth. So, when a number of startups target the same customers, they are going up against companies with similar charters (fast growth) and bank accounts (venture-backed).

This happens in any category where companies compete. Especially startups. The market has seen, for example, as more companies have been founded, more money invested, and the startups themselves have gone hunting for new signups in similar space.

Your Instagram feed is a good reminder about where some venture dollars go: , , and more. The list and creative marketing campaigns continue.

Regarding neo-banks, recall how much money they have raised in rapid succession. From our coverage from just two months ago:

Money is chasing the [neo-banks]. Chime has raised a , including  earlier this year. Robinhood has , including  last year. SoFi has , including $500 million this year. Acorns has , including .

To summarize, neo-banks are well-financed and in a hurry. Their hunger to buy new users and — hopefully — customers, is leading to more expensive CAC. And that’s dragging incumbent growth rates down.

The question now becomes can any of the wealthy neo-banks do what Green Dot already has: Grow, , and generate profit. (Green Dot had positive net income of nearly $35 million in Q2 2019. That’s more in net income than most neo-banks did in total revenue during Q2 2019, I’d reckon.)

Illustration: .

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Over the past year we’ve kept tabs on companies like , , , and as a trend we call neo-banking grows.

The collection of companies we keep in mind didn’t necessarily start life as banking startups. Indeed, Acorns started off life as a savings app before adding a debit card. Robinhood began life as a company that let you trade stocks for free. Last year it tried to create high-yield savings accounts before messing it up. SoFi was famous early for its work in student loans, now it offers “online and mobile banking” per its website.

Chime has been a neo-bank since I can recall, but as you can tell from the list, there’s a lot of action in the market for your deposits and debit transactions.

Money is chasing the trend. Chime has raised a , including earlier this year. Robinhood has , including last year. SoFi has , including $500 million this year. Acorns has , including .

All that money is going to product and teams and work and offices, of course. But I wonder if a large chunk isn’t also earmarked for customer acquisition (SoFi’s stadium deal fits here, I reckon) costs. And those, we just learned, are rising.

Here’s a chart from (our notes here):

I think that that is pretty easy to read, but here’s what I’m seeing regardless: A rising customer acquisition cost (CAC) for the type of company we’ve been tracking.

This should not surprise. If you give a lot of competing companies a lot of money, they tend to spend it trying to grow faster than their rivals. Incumbency is the ultimate cool in Silicon Valley. And if someone will pay you to buy that status, hey, why not.

As we wrote back when Chime raised its latest round:

Chime CEO  told Crunchbase News that Chime has gone through “explosive, triple-digit growth rates” since its May 2018 Series C. Last year, the startup had about 1 million accounts, and upon announcing this new round, Chime has 3 million bank accounts.

Growth is easy when your channels aren’t saturated. This can give a company a lower-than-reality view of its long-term CAC. But as you raise more, you can eat a higher CAC as you add features and tooling and the like that adds lifetime value to each customer.

But costs still go up. And as Meeker’s chart makes plain, we’re seeing the effects of that now.

Illustration: .

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The new push of cash will be used to launch new products in both credit building and short-term lending, broadening the smartphone-friendly company’s offerings, Chime said in its press release.

Chime’s appeal comes from its lack of fees. “No overdraft. No minimum balance. No monthly service fees. No foreign transaction fees. No transfer fees,”. If you couldn’t tell, it’s targeting a millennial audience that wants an easy-to-use banking app.

Just a little less than a year ago following its $70 million , the San Francisco company was valued at $500 million post-money, . Since that round, Chime grew its staff to 120 people and acquired fintech company Pinch, for an undisclosed amount. This fresh flow of capital will also expand the team to 200 people, the company said.

Chime CEO told Crunchbase News that Chime has gone through “explosive, triple-digit growth rates” since its May 2018 Series C. Last year, the startup had about 1 million accounts, and upon announcing this new round, Chime has 3 million bank accounts.

The company does not share its revenue.

“What’s most exciting (is that) a majority of new accounts each month, (our) largest channel of growth is from existing members referring their friends and family,” he said. Further, he said the best kind of growth comes from when customers are advocating for it.

Britt said DST’s involvement shows that international investors are realizing that online banking is inevitably going to happen in the United States as well.

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