Dan Rosen, Founder and General Partner at Commerce Ventures, talks about the evolution of fintech over the last two decades. Dan shares real-life examples of innovative fintech entrepreneurs building solutions that touch customers and businesses in a meaningful way, and his thoughts on whether or not now is still a good time to start a company in the fintech space.
Dan Rosen, Founder and General Partner at Commerce Ventures, talks about the evolution of fintech over the last two decades. Dan shares real-life examples of innovative fintech entrepreneurs building solutions that touch customers and businesses in a meaningful way, and his thoughts on whether or not now is still a good time to start a company in the fintech space.
In this episode, you’ll learn:
[4:57] Why many of the early investments in FinTech were in enablers and infrastructure
[9:27] Having domain expertise is good, but passionate outsiders are doing equally great in modern FinTech
[13:46] How telling your journey first connects you with the right investor
[19:04] Have we reached peak FinTech, or is there more to go?
Dan Rosen is the Founder and General Partner at Commerce Ventures. Dan is one of the original FinTech VCs and has been investing in tech startups for 20 years. He focuses on technology innovations in the payments, financial services and insurance fields, serves on the boards of Blooom, ClickSWITCH, Kin and Socure, and participates as an observer on several other portfolio boards, such as BillGO and MX Technologies.
Fun Fact: Dan funded his adolescent baseball card and comic book collecting habits by delivering the Boston Globe newspaper early each morning (rain or shine).
Commerce Ventures is a Silicon Valley-based early stage venture capital firm focused on investing and empowering the next generation of technology innovators in the retail and financial services industries. Portfolio companies include: bill.com. BILLGO, ClickSWITCH, InAUTH, Kin, MARQETA, Blooom, Theatro, Boomtown, Vestwell, Mulberry and Socure.
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In college, he started an online pawn business, out of his dorm room and then went and worked at a pawnshop for a year to really understand the industry and started this company kind of with those insights in mind, creating a product that served the market in a way that he felt was more productive and much more consumer-friendly.
Gopi Rangan: You are listening to The Sure Shot Entrepreneur, a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Welcome to The Sure Shot Entrepreneur. My guest today is Dan Rosen. He's the Founder and General Partner at Commerce Ventures. Dan is one of the original FinTech VCs. He invested in companies like bill.com, BILLGO, ClickSWITCH, InAUTH, Kin, MARQETA, and many others. Let's talk to him to find out what he looks for in entrepreneurs, how he makes investment decisions, and what's exciting in FinTech, Dan, welcome to The Sure Shot Entrepreneur.
Dan Rosen: Thank you. Thanks for having me.
Gopi Rangan: Let's start with your childhood. You grew up in Boston. How was that? And how did that shape your outlook?
Dan Rosen: Yeah, I did grow up in the Boston area. I was born in Boston, grew up in a town called Randolph, about 15 minutes south of Boston. What I learned over time was our 30,000-plus-people town was actually a decent-sized suburb. But I think a lot of the circumstances of my childhood led me to where I'd say, which is growing up in a lower middle-income town and family and an ethnically mixed town and set of educational circumstances and having to work part-time jobs while in school and delivering papers, just working towards goals, financial ones and educational ones too. Growing up in Randolph was pretty awesome, in my idea of the classic idyllic childhood, growing up in America where you can ride your bike throughout the town, certainly play around the neighborhood with the neighborhood kids, and all that.
Gopi Rangan: From there, how did your journey evolve to become a venture capital investor?
Dan Rosen: For me, entrepreneurship in a way started when I was a paper delivery boy, like 11 or 12, delivering The Boston Globe, just running your own franchise, being able to take control of your ability to earn money on your own, and build a business if you will.
But over time, I've continued to be exhilarated by the concept of entrepreneurship. Then in college started, along with a good friend of mine from high school, a small web design business, and had several run-ins with entrepreneurship as the perspective entrepreneur. I was on a wrestling trip with the wrestling team for my college, where we visited California and visited the offices of one of our alumni, Ted Schlein, who is a lot of time Kleiner Perkins partner, and was a wrestling alum as well.
Ted brought us all into his offices on Saturday or Sunday and explained to the folks on the team kind of what venture capital was and the role that Kleiner had played in the funding and support of many successful startups that had taken traditional venture capital funding. Most of the people in the room took away from that experience the sense of wonderment about the power of venture capital and how interesting of a role that plays in the entrepreneurial ecosystem. For me, I thought, gosh, if I could ever do that would be the most exciting job I could have. And the reason was that you'd blend being around this thrilling entrepreneurial ecosystem and journey where you're supporting the entrepreneurs as opposed to being the principal entrepreneur yourself.
For whatever reason, that spoke to me. It just felt like a profession that was really exhilarating. Fast forward to graduating from college, I started my first job out of school, which was putting lending systems into banks. So, in a way, my FinTech journey started right out of college. I even got to work at some of the largest banks in the world, but also with the first digital bank in the country, Security First Network Bank.
Even though that was kind of exciting, in 1999 being at a consulting firm wasn't. I started reverting back to entrepreneurship to think about doing something different. In that process of researching sources of capital for the startup I was working on, I discovered an opportunity at a venture fund that was hiring.
That actually was the first entry into the venture capital industry. As a profession. For me, it was a company called Reach Internet Incubator. It was an incubator model with an associated venture fund. I don't talk much about it because it was such a short stint. I joined them in March of 2000, and by September, the firm had run out of money and couldn't raise a new fund. It was at that point that I found an opportunity at HarbourVest. I was super lucky to find that opportunity.
Gopi Rangan: So you started your exposure to the business world as a paperboy. You went through this entire journey seeing the ups and downs through the internet revolution in 1999 and later. Eventually, you decided to start Commerce Ventures. How did you start Commerce Ventures?
Dan Rosen: I had been in venture 10, 11 years. And when I looked back at my business school essays, there was this, "what do you want to be, and why?" kind of a question. My vision for what I was going to do after business school was to go join an established firm with a great brand, and then eventually start my own venture firm. So somewhere in my brain existed this idea that I was eventually someday going to start my own venture firm. When I graduated from business school, I joined Highland Capital. I was in the Boston office there for four and a half years and I ended up moving to the west coast for the last year and a half of my time with them. Honestly, I think I forgot about that goal, but as Highland was working through its own evolution and figuring out what the future was, and going through a generational transition, I realized that it was going to be harder to reach my goal of being a partner and being a successful venture investor by staying inside of a very established multi-decade firm than it might be if I went out on my own and really either be successful or make mistakes and live and die if you will. So in 2011, I knew I wanted to do something different. I just had this instinct that I was gonna be more likely to be able to make the types of investments I wanted in a new role. So I started thinking about what that was. At the time I had been focused on FinTech from back in 2007, 2008 onward. And I had been investing in mobile and mobile infrastructure and its intersection with a bunch of different big industries. The area that I thought was most interesting to invest in was this area I call commerce, or I called commerce at the time, which was really all about how mobility and the advent of digital innovations, we're fundamentally transforming retail and financial services.
Gopi Rangan: Those were the early days of FinTech. Not a lot of innovation existed in banking and other parts of financial services.
Dan Rosen: A hundred percent, right? Yeah, it was so early, in fact, that, if you remember, Gopi, FinTech meant something different back then. When I first started learning about FinTech as a venture investor, I learned from people like Matt Harris, Matt was a pioneer. And I know you know him well, as an investor in FinTech. But FinTech in those days was much more about tech than it was about startup financial services.
Gopi Rangan: Yeah, the Yodlee's of the world - companies that built infrastructure for large banks, even in mainframe systems, perhaps - that was the technology that existed until maybe the early 2000s. Later, services started happening. How can you build solutions that touch customers and businesses in a meaningful way? And that was the beginning of the revolution of FinTech; when you started.
Dan Rosen: That's right. The first investment I made in what we call FinTech now, but back then it was really a financial services startup, was a company called PerkStreet, which really was the Chime model, just a number of years earlier. Seeing how hard that was to do for an entrepreneur to get a sponsor bank to build the interfaces on top of really outdated infrastructure led me to the infrastructure and enabler investment theme, which is why most of our early investments in FinTech were really in enablers and infrastructure.
Gopi Rangan: So you launched Commerce Ventures in 2012?
Dan Rosen: Yeah, so I left Highland in late 2012 to raise the fund, and the first investment was in Q1 of 2013. Since then we've raised four main funds, a little over $250 million of assets under management. But our most recent fund is the $155-million fund that we raised in June. We've invested in roughly a hundred companies since getting started.
Gopi Rangan: Wow!
Dan Rosen: Super... Yeah, I know. I have that reaction myself sometimes. When I heard it from our controller, it was hard to believe because it sort of sneaks up on you a little bit, especially once you have a team and you're not doing every investment yourself. I benefited from getting lucky with the first few investments, Marqeta being our very first investment. And then having a very nice successful run has been an enormous boon for our firm and our brand. But we're also fortunate that just by investing in FinTech infrastructure back when we started, it was pretty likely that you would be successful. So we had a number of very successful investments in that first fund, many of which are still on their journey, but there was Marqeta, there was bill.com. Just those two together are valued combined over $50 billion today. But then there's Forter, there's MX, there's a variety of other companies in that first fund that have been successful or that are succeeding. We really benefited from that, but that's honestly a lot of good timing.
Gopi Rangan: Congratulations on the tremendous progress over the past few years. In such a short time, you've made a real big firm out of the early days when you first made the investment in Marqeta. What do you look for in entrepreneurs? Can you give an example of one of your recent investments; how did the conversation start? What do you do in your first one or two meetings to learn about the business and the founders?
Dan Rosen: Being an entrepreneur is fundamentally an irrational thing, right? The metaphor I always love is: you're jumping off a cliff and then building an airplane before you hit the ground. If you've ever gone bungee jumping, you recognize how much your brain struggles with the irrationality of forcing yourself off of a perfectly safe bridge, it's the same thing for an entrepreneur you're looking for is somebody who understands, that is maybe irrational, and is totally at peace with it, and for mastery, is actually an expert or even is drawn to the exhilaration of that irrational cliff diving, knowing there's no safety net and betting on themselves. So you're looking for a personality type.
Ideally, you're also looking for a bunch of relevant expertise, knowledge, insights, functional background. In regulated areas like financial services, that often ends up being somebody who's coming from the industry in some way. They may have been in another FinTech firm. They may have been at a large regulated institution. But it's difficult for somebody who hasn't operated in this environment to fully appreciate all of the nuances that you find once you try to create a regulated financial institution or provide truly high-grade infrastructure to financial institutions or startup financial institutions.
So there's this balancing act between being risk-taking and the ability to promote what you're doing and recruit capital, recruit talent. And at the same time, the recognition and respect of the challenge; how challenging it is to build these things in a way that attracts customers and supports those customers, whether it be a consumer or financial institution. Those are different journeys for a lot of different reasons.
Gopi Rangan: How important is domain experience? You mentioned that this is a complicated world, but I've also seen entrepreneurs come from the outside and they tend to have fresh thinking. There are so many examples of that where entrepreneurs may not have the expertise in a sector, and there are enough expertise in the world that they can reach out to for help, but that spirit of entrepreneurship, that fresh thinking, the innovativeness, and the creativeness carries a lot of value, or do you index more on domain expertise?
Dan Rosen: I think there are two different approaches that both can yield a positive result. Let me give you two examples. Jason Gardner, a really good example of somebody who had payments experience. He was a co-founder of PropertyBridge, which was a property-related payments business that MoneyGram ended up acquiring. So he was co-founder there, understood payments reasonably well, but he went into the card-issuing world and that was a new area for him.
He knew enough to know what type of additional experience and expertise he would have to recruit. And so he did. He had some real background in payments, but even folks who have a lot of background in the broader area that they're operating in recognize that there's a lot of nuances to doing something new if you are doing something that's slightly different and you're still learning on the job, for sure. Jason's at one end of the spectrum, which is coming from the domain expertise.
On the other end of the spectrum, we recently invested in a business called Pinglend. This is a startup innovating in the pawn loan industry. Without sharing unreleased data about the round that they raised, I can tell you the CEO, James, didn't work in the pawn industry for 10 years, but he was fascinated by it as a really smart, driven, self-educated entrepreneur in the area. In college, he started an online pawn business out of his dorm room and then went and worked at a pawnshop for a year to really understand the industry and started this company with those insights in mind, creating a product that served the market in a way that he felt was more productive and much more consumer-friendly than pawn loans are. So even though he's relatively young, even though he didn't have a decade of experience in the area, the passion that he had for the opportunity he was pursuing led him to go very deep, very quickly. Probably, he knows more about the industry that he's operating in than most people would who were just operating behind a pawn shop counter for five to 10 years because he approached it with that obsessive zeal and desire to learn, but with a lens towards innovating.
Gopi Rangan: This is a great real-life example of how an outsider who had a passion for that topic and had some experience in the early part of their career, came back and built an amazing business out of that. When you engage with entrepreneurs in the first one or two meetings, how is the conversation? What questions do you ask them? What information are you looking for?
Dan Rosen: I'm always trying to understand their journey. That's one of the most important things to me because understanding where somebody comes from, what their experience has been like, tells you a lot about their motivations and who they are as a person to work with. You can't know everything from it, but it tells you so much. In a world where they're trying to make a monetary investment decision and you have fundamentally limited time and information with which to make that decision, it's critical to just understand who the person is, as well as developing a personal relationship. That bond is critical to having a productive relationship with an entrepreneur.
So, I really start with who are you? What was your journey? And in the response I'm looking for insights into your character, insights into what kind of environment you've been in, what you're drawn to throughout your professional, maybe even personal journey. That's the first thing. One of the companies in which we invested is in growth credit. This is a company where the CEO has been working on the problem of credit building for eight years across two incarnations of what is now growth credit. You can understand his journey, from being born in Africa, growing up in France, coming to the US, being an athlete in college, and not understanding the financial ecosystem here as a consumer and the damage that can happen when you get that first college credit card and don't keep it current, missing payments, and what happens to your credit score over time. He achieved success in his early career inside of startups, and then eventually was able to start his own company. You learn a lot about somebody by seeing how they deal with adversity and what types of things they're drawn to. You get a sense of the energy and passions of the person. In that particular case. That was a company I read about in the LinkedIn news article, cold messaged Joe and got on a call just to learn more and then just was really, yeah, I love the mission of what he was building and he was building on Marqeta, which gave me the sense that there was maybe some common reference points that I could lean in on to understand who Joe is to work with and as a person, which did end up being the case. We knew a lot of people in common. But once I got on the call, I was just impressed by who he is as an entrepreneur -super mindful, very intentional, and really that persistent energy around entrepreneurship and having to win in a cause that was a very positive mission.
Gopi Rangan: I see that who you are, why you do things matter a lot to you. And I see that in your own story and how you thought about starting Commerce Ventures, your journey during business school when you had that chance to think about why things matter before you embark on something, you see that thread in those early conversations with founders.
Dan Rosen: Yeah, I think that's a good insight, which is me projecting my value system on the people that I might consider working with. We all have our models. Yeah.
Gopi Rangan: What's your most common reason to say no? You meet an entrepreneur. A few conversations have happened, two, three meetings. You've done a little bit of due diligence, spoken to others to educate yourself, and then you come really close and you say, no, why does that happen?
Dan Rosen: The most common reason that I say no to an opportunity is that it doesn't meet the strategy that we put forth as a firm. We're sector-focused, so we've set a very specific mandate for ourselves that we've pitched to our investors and they've bought into. Now the most common reason we say no, it's usually before one meeting or after one meeting, is we just don't feel like there's a fit between our mandate and focus and the company's pursuits.
That's the most obvious one, but that happens quickly. Closely linked to that is even if it's generally in our area of FinTech, but we don't think it's in our specific areas where we can be very helpful, we'll often decline to proceed because we feel like there is enough opportunity out there where we can be helpful. We should be investing in companies where we can make a difference. The second most likely reason we might decline to move forward is if we don't feel like there is a good fit, interpersonally with the team, for whatever reason. If we don't feel like the working dynamic will be right, then we may decline to proceed.
Sometimes that's about different styles and feeling like it would be difficult to collaborate. A lot of times it's just about entrepreneurs who might be looking for capital, but not looking for help or not looking for a partner. We're not trying to just wire money and touch base once a year. That's just not our approach.
Many of our entrepreneurs are fiercely independent, but that doesn't prevent us from helping them. A good example of that is we're working with a large bank's FinTech coverage team. They throw a FinTech conference once a year and we co-host a small event alongside that, which enables us to invite a few startups from our portfolio to showcase to their set of public equity investors or client bases. Even just by identifying a few of our companies that we think fit themes that are important, and extending that invitation, these are companies that are all doing well. We're helping them in a way that they probably wouldn't have asked for. There are always ways you can be helpful regardless of whether or not the company is struggling or feels like they are super independent and don't need help. We feel like our ability to help shouldn't be relying on the entrepreneur feeling like they desperately need it.
Gopi Rangan: The first thing is they need to fit within your scope. You look at retail, payments, banking, and insurance, and if there is a fit there, then it makes sense. And you also want to find a way where you can be valuable to the entrepreneur. You can play an active role in supporting them in their journey. You don't want to be a passive investor who just buys stocks and waits for a time to sell. That's not interesting. Thank you for that clarification, that makes a lot of sense. The FinTech sector has received more than $300 billion in venture capital funding.
Have we reached peak FinTech, or is there more to go? If an entrepreneur comes to you and asked you: I'm thinking about starting a company. I have some ideas in the FinTech space. Is now still a good time to start a company in the fintech space?
Dan Rosen: I still think it is. It obviously depends on what the company is. I think we have reached a local peak in terms of the evolution of FinTech, but that's more about the amount of capital flowing in relative to the total opportunity for digestion of innovation in the near term. So there's an ever-increasing amount of capital flowing into the space. And yet at the same time, the set of customers, the set of institutions can only digest so much innovation in this short period of time. What ends up happening is you end up with a lot of cloning and 'me too' kind of startups being started and being funded. And then a bunch of nichification, if you will, of innovation where, "well we're going to do X, but for this very specific segment of the economy." To some extent that makes sense- that segmentation or micro-segmentation- but beyond a certain point, it's derivative and we'll see a lot of those overly niche innovations end up burning off.
Gopi Rangan: Yeah, nichification and 'me-toos' are signs that maybe the sector is maturing. And there are a lot of ideas that are becoming now imitations or going after a very small sliver of the market, which is not attractive for venture capital.
Dan Rosen: I'd also say there's an evolution here, right? We've seen a terrific run with a bunch of companies that were funded 5 to 10 years ago that are now at a scale that they've been able to go public through an IPO or a SPAC or direct listing. And now we're seeing a whole new set of large public companies that can invest in and acquire other FinTech businesses and also just deliver innovation at scale.
We don't even know what the full potential of FinTech is, which is why I'd say, I think about this as a sort of a local peak or a local maximum in the evolution of FinTech... because as the concept of financial services becomes inherently digital and perhaps inherently embedded in other experiences and software et cetera., we might uncover a whole bunch of new opportunities. That's why a lot of people are excited about decentralized finance and crypto. There may be a whole new set of opportunities that were just difficult to imagine in a world that was more analog. I do think there will continue to be dramatic growth potential in the space. The question is, will there be some sort of a pullback before we continue growth? And my suspicion is YES.
Gopi Rangan: The financial services market is multiple trillion dollars and there's lots of room for innovation. I'm sure we'll hit a few more peaks along the way in the future. I want to ask you a question, more of a philosophical question about venture capital. You've been in the venture capital sector for many years now. Things are different compared to the time when you started, it's evolving. If you were to change one thing about the industry, what would you change?
Dan Rosen: The most important thing is just to continue to invest in diversifying the participants. I think we're improving as an industry, but we have a long way to go.
We need to bring in a set of entrepreneurs and investors who are representative of the population as a whole in order to solve the problems of the population. I'm sure there's a number of other things we could be doing better as an industry, but that feels like the piece that's the hardest to make progress on, so probably the one that needs the most long-term focus and effort. We as a firm are very committed to a set of causes around diversity and inclusion. We're embarking upon a number of initiatives to really try to make a difference there. We've created the fellowship and effort to bring underrepresented people into venture. We've done a lot around diversifying our deal flow or in seeking out diverse deal flow and investing in diverse founders. But the big thing; we are in the process of creating kind of a DEI fund. We hope to help some of the founders that we're seeing in our areas of focus to get more resources.
Gopi Rangan: Yeah, as we bring entrepreneurs who think differently, who have different backgrounds, they uncover untapped opportunities that other mainstream folks haven't really considered. That opens up lots of opportunities for new businesses to be created. But it's great to see that you're making a conscious effort to make some changes, to make diversity and inclusion a reality. I want to ask you about your community involvement. Is there a non-profit organization you are passionate about? Which one?
Dan Rosen: The nonprofit work that I and my family are probably most associated with is actually the school that our daughters go to, which is an Italian immersion school that practices Reggio Emilia. It's a wonderful, delightful community of educators and parents.
Gopi Rangan: Dan, thank you so much for spending time with me sharing real-life examples based on your investments, sharing specific stories about conversations you had with founders. This is very insightful. I look forward to sharing your nuggets of wisdom.
Dan Rosen: Thanks for having me. I really appreciate it.
Gopi Rangan: Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to real-life stories about early believers supporting ambitious entrepreneurs.
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