Activant Capital is no stranger to fintech.
The Greenwich, Connecticut-based private investment firm has backed the likes of Better.com, payments infrastructure company Finix and checkout experience platform Bolt.
Steve Sarracino founded the firm in 2012 and operates it with a long-term view and under the philosophy of “We don’t invest in the pail and shovel. We invest in the sandbox.” Activant has raised three funds to date – the latest one having been announced in April 2020 at $257 million. Activant’s assets under management total over $500 million.
FinLedger talked with Sarracino about how the payments space has changed over the years, what model has the potential to the SaaS model and why he believes COVID-19 has actually slowed the pace of development. Answers have been edited for clarity and brevity.
FL: How long have you been investing in fintechs? What does Activant see as one of the biggest industry shifts taking place right now?
Sarracino: I’ve been in and around it almost my whole career. My grandfather taught me how to read the stock charts and I started my career at Robertson Stephens. There, I did a lot of commerce and payments, which at the time was so different. Back then it was more about the merchant acquirers. Fast forward to today. With every one of our companies, we deploy a payments or fintech angle. If you’re charging for something, there’s going to be money changing hands.
I think SaaS has been an incredible business model for a long time and it will continue to be. But what’s emerging now is what we call value share transactional business models. A lot of them are built off the backbones of solid payments or piping infrastructure that allows you to charge based on the number of transactions. A lot of businesses we looked at started out as SaaS. But now they’re transitioning to charging for the amount of premium they’re putting through their system. The model just allows you to grow with your customer base. That’s why Shopify has gotten so big. They just allowed themselves to grow, because they do have their SaaS and transactional revenue.
FL: That’s an interesting perspective. So, would you say SaaS is dead then?
Sarracino: That would be a great headline, but it would be wrong. You know, SaaS isn’t an old business model. Before that, we had so-called ASPs, if you remember like Citrix and others that were application service providers, and they charged similarly to the SaaS model. But after 9/11 in 2001, almost all of those businesses failed with a few exceptions. So we in the valley got together and reinvented this thing called SaaS, but it’s the exact same business model, which is just charging recurring payments, rather than the license model, which is mostly upfront and heavily sales-driven.
You didn’t have a multi-tenant cloud back then either, which can make a lot more sense in SaaS. So that has obviously exploded. But are we seeing some SaaS fatigue? When things get tight, you know it’s very easy to cut. It’s like HR and marketing, you know if it’s not directly revenue generating, it can be cut. But when you’re transactional, you can shrink and grow with your customers.
So if we hit hard times and hit a recession, business models transition to transactional because SaaS is a one-year decision, versus shrinking with your customers. I do think you’re going to see people with SaaS business models transition to transactional and marketplace models.
Most of our businesses are [already] actually transactional versus SaaS. But SaaS companies will still be around.
FL: What’s Activant’s overarching view of the origin of fintech companies today?
Sarracino: The way we think about fintech is if you’re going to digitally transform, are you going to enable incumbents to compete an, serve its customers the way they want to be served today? Or do you crumple it up and throw it out and build from the bottom up as a brand new way to operate in that industry. We’ve invested in both.
An example of where you crumpled up is Better.com, a brand new from scratch mortgage originator and underwriter. It’s doing things differently in its own way. I think they’ve kind of really – to use the cliche term “disrupted” the whole mortgage lending industry.
FL: What drew Activant to invest in Better.com to begin with?
Sarracino: I love competing against old slow incumbents. Even before investing in the company, I was like, “Why do you want to go into a branch to get a mortgage and deal with that whole process?” And Better.com can do it so much cheaper because they cut out all this cost. So back then we loved it and then COVID hit and guess what, they’re providing the mortgage but at a much lower cost, and our competitors are still gouging customers. We’re trying to keep prices really low and keep the process streamlined and efficient to be like the Amazon of money for consumers. Vishal [CEO and founder], like a lot of our CEOs, is super driven with a relentless focus on the customer. And he’s just a brilliant manager and leader.
FL: As I recall, he started that company based on his own personal frustrations with the mortgage lending process and didn’t have an industry background. What are your thoughts on that?
Sarracino: I think sometimes people think you have to have that industry background or else how do you know what to do? But I I see both sides of it really and sometimes that outside perspective can be super advantageous as well. But if you come from the outside, you need to hire the right people around you, and mortgage is complicated. And that’s why you haven’t seen really young people start up in the Bay Area and go into mortgage because it’s so regulated. You need to be approved in a state to operate, and it requires a lot of industry knowledge.
FL: What other areas does Activant find particularly compelling these days?
Sarracino: We’re spending a lot of time in insurance right now. It’s like – how do you enable the incumbents to do even better? With a lot of fintech products, the name of the game is customer acquisition. It’s so expensive to acquire customers that if you’ve got a customer acquisition model, you should be able to offer them a bunch of products that are at a really advantageous price and with a great experience. That’s how you’re going to win. But from an investor perspective, the acquisition cost is just so expensive.
FL: Google’s spending all this money developing a digital wallet. What are your thoughts on that?
Sarracino: We’ve been trying to crack the code on getting off the interchange rails long term. And the best way to do that is with a wallet. And so we’ve seen, which is really interesting, are some companies that through their checkout process can actually create wallets for you and provide that one click checkout experience. That that to us is a gigantic market, because you’re now capturing consumers – not just like who they are, but also allowing them to like to one-click checkout in a very secure way. And then be able to flip the user account, say like, “Hey, here’s all of your purchases, here’s your subscription, you can turn them off, you literally don’t have to do anything, it’s all here for you, again, in a secure way.” And it’s what people kind of tried to do, but they never fully got there. That’s an area we’re super pumped about. It’s going to happen. It just hasn’t happened yet. But I don’t think we’re that far away.
Visa and Mastercard are great companies and have done some amazing things. But the interchange fees are crazy. It’s gone crazy. And that’s why you see so much investment in the merchant acquirers because once they acquire the merchant, they can get a bigger part of the interchange fee.
FL: We’re seeing a lot of the big financial institutions scrambling as the pandemic continues and demand for digital services increase. In some cases, they’re getting hammered by the startups that were already doing it. What are your thoughts on that?
Sarracino: COVID has changed mindsets, and it’s structurally changed the way the incumbents are thinking about digitizing or transforming digitally. But it hasn’t accelerated technology by any stretch. So what we thought might happen in like, three, five, or 10 years, from a technology standpoint, or just from an experience standpoint, is going to happen now, probably in the next 18 months. And it’s already in process. So it’s been great for consumer experience. But if anything, it’s slowed down the pace of development, because I don’t care what anyone says it is, it is hard to coordinate development, when everyone is at home. And if you talk to other CEOs that are honest about it, they’ll tell you, it’s hard.
The incumbents are funny. Take Goldman, one of the most amazing companies ever, and they named their banking solution after a man [Marcus], which I just don’t get. And they haven’t done the best job rolling it out. I don’t know if it’s more of a technology problem or more of a go-to-market problem because if you look at some of the digitally native or neobanks, they’re acquiring customers quickly. The market motion is so much different with the startups and incumbents have to embrace new go to market motions if they want to compete.