Modern Capital Options for Today’s Diverse Tech: An Interview with Battery Ventures

Martino Tramontin •

An interview with Aaron Rinberg, VP, Battery Ventures

Battery Ventures has sought out cutting-edge, category-defining tech businesses since 1983. Working out of Battery’s Israel office, Aaron works on a variety of deal structures including venture, growth equity and buyouts across multiple tech sectors. He is currently involved with Battery portfolio companies in fintech (Affirm*, Cross River Bank*, N26* and of course, Soldo*) and a host of other sectors from autonomy (Kodiak Robotics*) to HR (Hibob*). The views expressed herein are the interviewee’s own and not those of Battery Ventures or of any person or organization affiliated or doing business with Battery Ventures. Further, the information herein is not intended for use by any current or potential investor in any investment fund affiliated with Battery Ventures.

Battery Ventures covers both venture growth and PE funding. It seems that as technologies are changing and becoming more complex, the time to maturity and therefore risk are also increasing. Are deals different today? Has the landscape changed?

The landscape hasn’t changed.  You identify a problem in the market, you propose a solution, and you then go off to build a product that people will buy.  From that, you try to build a big business that’s very profitable and will generate equity value for your shareholders. So venture has not changed that much. 

That said, the amount of technology that’s available and necessary to create solutions for the problems that we have today is drastically different to the sorts of problems that folks were solving a few years ago. 

But the fact that the tech is deeper doesn’t mean that it’s necessarily more expensive to get at. In fact, we see many community-driven, open-source projects that allow entrepreneurs to implement technology in a more scalable manner than was the case before. Instead of having to get highly specialised talent in-house, you can leverage work that’s already been done elsewhere and implement it in your own solutions.  

This is the case even in some extremely complex executions. Take the implementation of AI in clinical radiology – a very specific vertical.  In the first wave of solutions, these companies had proprietary datasets. To build a company, they needed to fully tag a dataset, which is expensive because they needed a trained radiologist to go through many x-rays and produce many mock-ups for the machine or the neural network and also then decide how the data should be injected. Today, we’ve seen ever more datasets become openly available, lowering the barrier to entry.  This is the case in many other areas of technology. 

Insofar as the amount of capital required is concerned, I see a general trend of companies staying private for longer.  That’s neither a good nor a bad thing – it’s just a product of the times. Previously, in order to raise those larger rounds, a company would have had to access both private and public markets. Nowadays, that financing is amply available in private markets without the administrative complexity of public reporting. Thus, if the management, board and shareholders think it’s in a company’s best interests to stay private for longer, in order to generate more equity value, and without the burden of being focused on quarterly reporting to the public markets, then that’s a win-win situation.

The amount of technology that’s available and necessary to create solutions for the problems that we have today is drastically different to the sorts of problems that folks were solving years ago.  But the tech is not necessarily more expensive to get at. In fact, we see a lot of community-driven, open-source projects that allow entrepreneurs to implement technology in a more scalable manner than was the case before.

Are there other reasons that companies choose to stay private for longer? It is a challenging regulatory environment, but can a business scale faster by staying private?

I don’t know if ‘scale faster private’ is the right way to put it, but you can be “longer term greedy” when you’re private because you’re not so focused on the day-to-day trading of the stock or the quarterly reporting. Public companies are under tremendous pressure to deliver results every three months, whereas private companies are only obliged to deliver annually.  The private markets tend to be more forgiving if you have a down quarter.

You talk about powering up your investments. What do you bring to your portfolio beyond money?  

Our EIR programme spans both the venture growth and private equity portfolios. At the venture stage, an EIR is an “Entrepreneur in Residence”. At the PE stage, you will get an “Executive In Residence”. We partner with individuals who’ve “done it before” and who can lend their expertise to business leaders facing a challenge for the first time. 

At the early stage, that means anything from hiring to scaling.  At the later stage, the typical challenge is for a CEO, now owned by a Private Equity fund, to execute their first M&A. It would be great for them to be able to talk to a senior executive who has managed 20 such events over the course of their career.

We have an internal resource around business development that’s focused on opening doors into mainly Fortune 500/1000 companies – the sort of businesses that would not immediately be accessible to a venture-backed company with just 25 people and a good idea.  We’ve also got internal resources around, for example, marketing and hiring – all at a strategic level. We won’t write the press releases or run the executive search, but we will make referrals and create the processes which will professionalise our portfolio’s approach. 

On top of that, we also fundamentally borrow from our experience.  The tenure of the general partners at Battery is quite long, which means they’ve seen most challenges before.  The longer you do things, and the more people you interact with, the more you can connect to service providers who can provide real leverage to early stage businesses. 

Recommendations from an investment can go a long way; and the aim is to allow entrepreneurs to shortcut many of the mishaps that can befall early-stage companies. We’re partners – we’re not looking to run the company – but we do want to add more value than just dollars.

Where are the squeezes at the moment?  Most VCs I have spoken to say that talent is always the big challenge in the high-growth space.

I like to say: ‘Good talent is always available… and always missing’. It’s an easy challenge to jump on –  talent is always going to be a squeeze.

I would say that a major but underestimated challenge is processes.  Growing a company rapidly demands having the best processes in place. Take the sales funnel: how do you make sure that you’re not dropping quality leads, or failing to follow up with prospects? How do you make sure that you’ve got the right people talking to those prospects? Some people are naturally more adept at making introductions. Others are better at hunting down the lead and then closing a deal. Processes are not exciting, but they are crucial.

As a company grows between its rounds, what metrics do you look for? How do you quantify operational and financial growth in a meaningful way when there are often no firm foundations and the business is changing all the time?

There’s no one right answer. We try to understand how a business will ultimately be valued. SaaS companies, for example, are typically valued by multiples of ARR [Annual Recurring Revenue]; financial-oriented businesses will be measured on a multiple of book value. 

We then look to optimise operations to grow that specific metric as rapidly as possible without breaking the business.  For SaaS companies, then, the fundamental question is: how do you grow ARR without burning through tons of cash?

What sectors are getting you excited at the moment?

Fintech is an obvious choice. We have seen plenty of innovation across the whole financial technology services industry.  It’ll be great to see some public liquidity events – either acquisitions by large public companies or IPOs – because most of the equity value has been generated in private markets and it’ll be great to see how the broader investing public views these businesses…

There’s still a ton of white space, even within the neo-bank space alone, to create competitive offerings. This is just the beginning. Revolut has just raised $500M at a $5.5BN valuation, but I’m certain that that is just the tip of the iceberg.   There’s no reason that there shouldn’t be three or four Revoluts.

Would that validate the sector, perhaps democratise it?

It would validate that the equity value being created is just the beginning of the story. The expectation is that everything you create in private markets is just the beginning; and when investment opportunities are more broadly available, these companies can then get feedback from public market investors. 

Those public market investors play an important role in shifting sentiment, because I actually think that in fintech particularly, there’s an element of supply risk.  If a large organisation wants to contract with a small, private service provider, how can they be sure that 18 months from now they won’t go out of business? Public companies have more visibility into the health of their suppliers, so as an enterprise, would you rather go with SAP or the new startup that may have a better product, but may not be here in a couple of years?

We see this most in the neo-banks. They tend to provide a much better service at a much lower cost.  But I think that the vast majority of individuals run a neo-bank account alongside, rather than instead of, their traditional bank account. Is there a risk that Barclays might go bankrupt? Sure – but the perceived risk is much higher for the neo-bank community. 

I think the regulator actually lends enormous validity into insurance technology and fintech because they are able to put in place the checks and balances that ensure these businesses are scaling properly.  Fintech and insurtech are probably the two areas where you don’t want to break things, because when you do so, you put other people’s capital at risk.

What’s the direction for fintech in the next year or two?

On the challenger bank side, we must look at specific economies.  The UK High Street features Barclays, Royal Bank of Scotland, Lloyds and HSBC, followed by smaller retail banks like Santander, for example.  All of these banks are worth billions of dollars.

Yet in the neo-bank landscape, there are only two major players: Monzo and Revolut. There’s still a ton of white space, even within the neo-bank space alone, to create competitive offerings. There is so much equity value in banking, so in my personal opinion, this is just the beginning. Revolut has just raised $500M at a $5.5BN valuation, but I’m certain that that is just the tip of the iceberg.   There’s no reason that there shouldn’t be three or four Revoluts.  

Furthermore, the neo-banks are managing to scale in a way that creates global brands, whereas many of the holes in the operations of traditional financial services were around cross-border payments. It’ll be interesting to see how those barriers get broken down to create new value.

Generally, it will also be easier for neo-banks to integrate additional services from specific providers with particular deep expertise; and then white-label them to the consumer. Take the example of N26* [the Battery funded neo-bank] which has fully integrated Transferwise to enable functionality at a lower price and with better service than would be available as separate services.

What tools are going to disrupt fintech next?  Everyone is talking about AI…

If I knew that, then I’d be a much better investor!

We’re still in the early innings. A lot of base infrastructure needs to be revamped in a scalable manner before we start optimising using technologies that are still somewhat in their early stages.  Right now, AI is more of a buzzword than an actual feature.

I have to ask you about Brexit. You have skin in the game in N26*, who have just announced that they’re leaving the UK.  Is that a consequence of Brexit?

Yes. It’s stated unequivocally in the N26* blog. The UK has left the European Union, and N26* is now not able to operate in the UK with a European banking licence.  Soldo*, conversely, went through a dual licencing programme, where it is regulated both under the FCA in the UK and under the Irish regulatory body in order to operate across the European Union, irrespective of where the buck ultimately stops after the transitionary services agreement with the European Union.

And Brexit for investors?

I would say, so far, for the venture capital business, the effect of Brexit has been minimum to none, but it’s become another question to ask when we’re doing our due diligence.

Battery Ventures provides investment advisory services solely to privately offered funds. Battery Ventures neither solicits nor makes its services available to the public or other advisory clients.  For more information about Battery Ventures’ potential financing capabilities for prospective portfolio companies, please refer to our website.*Denotes a past or present Battery portfolio company. For a full list of all Battery investments, please click here.