Investor Patrick Kavanagh talks about fintech and investing trends

Patrick Kavanagh was an early angel investor in Robinhood and is the co-founder of British fintech Atlantic Money. He is an expert in the tough fintech fundraising environment.

Kavanagh believes businesses should go back to the drawing board, eliminating unprofitable customers and employees who aren’t focused on high-value customers, to create a loyal customer base and a small, effective team of employees. employees.

What are your origins? Can you tell us a bit more about Robinhood and Atlantic Money?

I was born in Seattle and spent time in Germany before returning to the United States for high school and college. I studied finance at the University of Washington before working with some of the largest quantitative hedge funds in the world.

While launching quantitative trading companies, I met the future founders of Robinhood and became one of their first angel investors in 2013.

I joined full-time as the second member of Robinhood’s business team, where my role included special projects, partnerships, recruiting, as well as building and executing Robinhood’s cryptocurrency strategy. the company. In my last two years I ran International, where I researched all major fintech markets and verticals across Europe.

Leaving Robinhood ahead of the IPO in late 2020, I co-founded Atlantic Money with my Robinhood colleague, Neeraj Baid, to target the most important segments of financial services that remain vulnerable to disruptive business models, leveraging my research and my experience over the past decade. .

Atlantic Money is the only international money transfer provider to offer a flat fee of £3 for transfers of up to £1,000,000 at the mid-market interbank exchange rate (0% exchange fee).

While major financial institutions transfer unlimited money around the world at effectively zero cost, securing the live exchange rate by working directly with each other, retail customers are still being charged escalating fees and unjustifiable exchange rates by the most “profitable” providers – getting a worse deal when they send more money.

And yet, the cost of sending money internationally is largely fixed per transaction, even when sending large amounts.

Atlantic Money offers customers rates previously reserved for banks, which lowers the cost of larger transfers – sums over £1,000 – by up to 99% compared to all other money transfer companies.

You have an interesting take on super apps – can you tell us about it?

Early fintech and tech challengers disrupted the status quo, bringing better technology, improved customer experience and better value for money.

But in a battle to attract venture capital dollars and stratospheric valuations, many are losing focus, rapidly expanding into new product areas and rapidly hiring hundreds of employees. Their strategy has been largely undifferentiated as they all want to create the next “super app” with all kinds of services for their customers, neglecting their most frequent and loyal customers who want service delivered in the best and most cost effective way. .

Indeed, the most loyal customers end up subsidizing efforts to add services that don’t actually benefit them.

If tech companies are serious about easing their current staffing pressures, they should review all of their lines of business and services, and ruthlessly cut those that aren’t delivering value to their customers. Otherwise, their most loyal and valuable customers will turn to second-generation disruptors, which have lean teams and are focused on offering fewer and better services.

Fintech funding is drying up – what do you think are the main causes?

VCs are increasingly skeptical of the risk appetite associated with unprofitable growth, as well as the costs of customer acquisition and monetization. Further proof that basic economics makes sense is what they want to see. The era of subsidizing unsustainable growth seems to have passed in the rearview mirror for now.

How can fintechs attract investors in this difficult market? Are there any leads they should follow?

Investors will likely continue to invest in companies that possess three characteristics for the rest of the year. They are:

A clear path to profitability

The last few years have been very optimistic about growth prospects, due to the drastic change in usage and adoption during Covid-19. Many companies have seen three to four years of growth in one or two quarters, and people have been caught up in the hype. Growth multiples have increased, and now they are contracting. People cared a lot about revenue growth at that time, but didn’t pay much attention to margins. Now everyone is cleaning up their operations and focusing on streamlining, to try to get more of the benefits the pandemic has given them.

Unit economics is so simple you can calculate it on a napkin

Investors love business models that are easy to understand and tell a story. Risk appetite around unprofitable growth has dropped significantly. Companies that also focus on customer segmentation and create corresponding targeted products will likely be rewarded for their efforts.

Target very large markets

The return to a more conservative investment outlook means investors will likely take established market sizes as benchmarks, rather than betting on how big future TAMs might grow. That’s why you focus a lot on areas like aerospace, logistics, and other more traditional businesses that are huge, but potentially slower moving.

Is the funding shortage a temporary problem? Do you see it clearing up soon? Or will it be up to fintechs to offer more attractive and agile offers to redress the market?

Public market valuations and poor recent IPO performance are likely to dampen the optimism that has fueled valuations during Covid-19. These markets will likely need to recover somewhat for venture capitalists to continue to invest aggressively. At the same time, most investors have investment horizons of 7-10 years and are comfortable with this uncertainty; they can simply adjust the prices they are willing to pay downward for the time being.

Is there any light at the end of the tunnel in terms of the current global economic climate? And if so, what is it?

There seems to be a significant diversion in GDP growth, inflation and overall political stability country by country at the moment. These factors will likely lead to a much more polarizing set of economic outcomes than in the previous globalized economy. It seems quite likely that as we see more decoupling between major economies, the notion of global economic climate will become less relevant. Countries that ensure a stable energy supply, avoid political gridlock, and control fiscal spending are likely to come out on top.