David Blumberg, founder and managing partner of Blumberg Capital, doesn’t underestimate the value of investing in the fintech industry.
About 29% of the early-stage venture capital firm’s portfolio is comprised of fintech companies, Blumberg told FinLedger in an interview. Blumberg Capital has over $650 million in assets under management.
The firm has invested in startups like employee engagement company WorkJam and insurtech Joshu, which raised a $3.7 million seed round led by Blumberg Capital. Other notable fintech companies the VC firm has invested in include Lendio and Fundbox.
Blumberg spoke with FinLedger about the firm’s fintech investment strategy and the opportunities he sees ahead.
Editor’s note: Interview has been edited for brevity and clarity.
FL: Why does your firm invest so heavily in the fintech space?
Blumberg: We’re investing in the trend of the virtualization of the economy and the ability to do more with less. Computers are better at counting numbers than humans are and machine learning algorithms are better at analyzing massive amounts of data… All that data was never able to be analyzed at scale. Now, using artificial intelligence, mining the big data we can create incredible insights and we transform raw information into knowledge and then into useful actions. That’s what’s happening. Blumberg Capital is investing essentially in the automation of the white collar economy across many different verticals. We started with fintech because fintech is traditionally a business that was always driven by software at high margins, [it’s] very competitive so they’re always looking for an edge, and we would help them find or retain that edge by improving their results. [Through] better pricing, better optimization, better analysis — all afforded by computerization and increasingly software and increasingly within software, artificial intelligence.
FL: DeFi seems to be the news buzzword lately. What are your thoughts on DeFi companies and investing in them?
Blumberg: We’re definitely keeping up with the trend and educating ourselves; it’s a new wild west area. There’s some extra risks. We’re looking for things like new security in the infrastructure that is needed. A new platform generally acquires a new kind of security, or new kinds of communications infrastructure that underlies it, and would help with applications that are enabled by blockchain. [We’re] looking more for those kinds of things. We haven’t made an investment yet, but we’re definitely interested.
FL: What areas within fintech are hot for investing right now?
Blumberg: We’ve always felt that the SMB area was underserved. The nice thing about technology is that it’s making available applications and benefits that were previously reserved for only governments, large corporations and wealthy family offices. But now, because the technology is getting more widespread, less expensive, etc. small businesses can afford to use those kinds of technologies. I can give you a number of examples, but that’s the basic theme — it’s democratizing the use of application. A lot of focus for our portfolio has been on SMB enablement.
FL: How do you think fintech will fare coming out of the pandemic?
Blumberg: The short answer is great. There are some warning clouds on the horizon that could affect it with all the fiscal stimulus, with all the easy money that’s being printed, there could be a bout of inflation, which is not wonderful for anybody except maybe banks. But we think that technology is coming to rescue us in many ways that things are getting easier to do, safer to do, cheaper to do for the average person [and] for the average small business.
What we’re seeing is that our companies came out of it stronger than perhaps we imagined. Some of them were able to make great acquisitions, on very good terms, because not everybody did so well. But we were able to be survivors in those cases, we were also able to see low default rates from our lending companies. This is not obvious. It’s a testament to the excellent results we’re getting from AI algorithms that are doing credit underwriting. Big, famous private equity firms turned down companies like Lendio, Fundbox and Katapult just before the crisis, because [they said] “Oh, well, times are good. If you’re lending to subprime or small business, you’re okay now. But when a crisis comes, you guys are going to get killed.”
In fact, the opposite happened. All those companies did really well, partly because we had really good automated AI-driven credit underwriting models, where we were able to quickly tighten up the credit box, so that we didn’t lend to just everybody, but only to those that were very good qualified scores. We had relatively low default rates. We had very few problems with collections. It’s just worked out amazingly well. We’ve had a lot of new customer acquisition in this time and so we have a much bigger base to now market to, going forward.