As the financial crisis on Wall Street lingers, the situation has raised questions about the venture-backed financial services startups that have been selling into such big firms as Merrill Lynch (sold to Bank of America) and Lehman Brothers (which filed bankruptcy protection). What would become of the companies and the venture firms that specialize in funding financial services startups?
Depending who you ask, the outlook varies.
Mark Ashida, managing director at
“What’s happened is that banks have been overwhelmed by too much paper and have a hard time making decisions,” says Ashida, whose firm recently led a Series C round in DepotPoint, a Bellevue, Wash.-based developer of a platform for managing the real estate foreclosure process.
Ashida, who specializes in enterprise software, says that he expects investors will continue to fund companies that count the financial services sector as one of several industries they serve. OVP, for example, invested in Serus, a Mountain View, Calif.-based provider of operations management software that markets to the manufacturing, IT and financial services sectors.
However, Ashida notes, “I seriously doubt that any VC today is looking at companies where the major market is selling to financial institutions.”
Ashida says that he’s skeptical whether the credit crisis could open up opportunities for startups serving beleaguered financial firms. “We would not invest in a company [wanting] to take advantage of the credit crisis,” he says, adding that it’s impossible to predict what the financial services industry will look like in a few years.
On the flip side, there are plenty of investors eager to see a silver lining in the gloom.
Gardiner Garrard is one such optimist. He has to be. He’s the managing director of
“I don’t know that anyone would have anticipated it would get as bad as it has in the last couple of weeks,” Garrard says. “Some of our companies sell technology to banks or to financial services companies that have seen their sales drop.” Still, he says, “I have a number of companies taking advantage of the opportunity.”
Meanwhile, Garrard is bullish about Interactive Advisory Software, a Marietta, Ga.-based company that sells a portfolio management platform to independent wealth managers and financial planners, a group that looks to balloon as financial professionals and their client lists stream out of Lehman and Merrill. Whether newly cash-strapped Americans will require their many services has yet to be seen. The 6-year-old company has raised about $5 million from TTV.
FTrans and Green Dot are two other companies that Garrard thinks may buoy TTV. Since 2003, Atlanta-based FTrans has been selling analytics technologies to banks wanting to make safer loans. And 10-year-old Green Dot sells pre-paid MasterCard and Visa debit cards to customers without banking accounts through such retailers as Walgreens and CVS.
Larry Cheng, a partner with
Though Cheng says Fidelity might need a new way to assess security applications, he, too, sees a silver lining within the gloom. Recent events are not only good for two Fidelity-backed financial services startups, he says, it creates an opportunity for companies he has yet to see.
One of Fidelity’s beneficiaries, according to Cheng, is San Francisco-based
That could translate into new customers for 3-year-old Prosper, which has raised $40 million in funding from Fidelity,
Cheng is also hoping that San Francisco-based Xoom, an international, online, money-transfer service, may be unaffected by the market turmoil. Xoom has raised about $49 million from Fidelity, DAG,
Cheng and Garrard say that they aren’t being unrealistic. Quite the opposite.
“I do think real opportunities will open up,” Cheng says. One in particular, he cites, involves the failure of ratings agencies in assessing risk. “Who is going to emerge to assess risk in derivative products?”
“I’m not living in fantasy land here,” Garrard says. “A lot of the economy’s growth has been through residential lending. And what’s neat are innovative companies finding ways for the [survivors] to grow with less capital risk. There will be a whole bunch of banks who come out of this stronger.”