Investor Patrick Kavanagh talks fintech and investment trends

Patrick Kavanagh was one of the first angel investors in Robinhood and is the co-founder of UK fintech-based Atlantic Money. He is an expert in the challenging fundraising environment for fintechs.

Kavanagh believes that companies should go back to the drawing board, weed out unprofitable customers and employees who are not focused on high-value customers, in order to create a base of loyal customers and a small and efficient team of employees.

What is your background? Can you tell us a little bit about Robinhood and Atlantic Money?

I was born in Seattle and went on to spend time in Germany before returning to the US for high school and college. I studied finance at the University of Washington before working with some of the world’s leading quantitative hedge funds.

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

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

When I left Robinhood before the IPO in late 2020, I co-founded Atlantic Money with my Robinhood colleague, Neeraj Baid, to target the largest segments of financial services that remain vulnerable to disruptive business models, leveraging my research and experience that last decade. .

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

While major financial institutions move unlimited money around the world at virtually zero cost, and secure the live exchange rate by working directly with each other, retail customers are still burdened with progressive fees and unreasonable exchange rates by the most “cost-effective” 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 brings the rates previously reserved for the banks to its customers, driving the cost of larger transfers – sums over £1,000 – up to 99% lower than all other money transfer companies.

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

The first fintech and technology challengers disrupted the status quo, providing better technology, improved customer experience and value for money.

But in a scramble to attract VC dollars and stratospheric valuations, many lose focus, quickly expand into new product areas and hire hundreds of employees, quickly. Their strategy has been largely undifferentiated as they all want to build the next ‘super app’ with all kinds of services for their customers, neglecting the most frequent and loyal customers who want a service delivered in the best and most cost effective way.

In fact, the most loyal customers end up subsidizing the effort to add services that don’t actually benefit them.

If tech companies really want to alleviate their current staffing pressures, they should take a fresh look at all of their business lines and services, and ruthlessly cut those that don’t add value to their customers. Otherwise, their most loyal and valuable customers will turn to second-generation disruptors, who have lean teams and a laser focus on offering fewer, better services.

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

VCs are increasingly skeptical of the appetite for risk associated with unprofitable growth, and the cost of customer acquisition and revenue generation. More evidence that core economics makes sense is what they want to see. The era of subsidizing unsustainable growth looks in the rearview mirror for the time being.

How can fintech appeal to investors in this challenging market? Are there any paths they should follow?

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

A clear path to profitability

The last few years have been very optimistic about growth prospects, due to the dramatic change in usage and adoption during Covid-19. Many companies saw three to four years of growth in one or two quarters, and people got caught up in the hype. The growth multiples expanded, and now they are contracting. People cared a lot about top-line revenue growth in those times, but didn’t pay close attention to margins. Now everyone is cleaning up their operations, and focusing on getting slimmer, to try to squeeze more out of the profits they have received from the pandemic.

Unit economics is so simple that you can calculate them on a napkin

Investors love business models that are easy to understand and tell a story around. The risk appetite around unprofitable growth has decreased dramatically. Companies that also focus on customer segmentation, and build targeted products to match, are likely to be rewarded for their efforts.

Target very large markets

The retreat to a more conservative investment outlook means investors are likely to look to established market sizes as benchmarks, rather than betting on how big future TAMs might be. This is why you see a lot of focus on areas like aviation, logistics and other more traditional businesses that are huge but potentially slower.

Is the funding drought a temporary problem? Do you see it getting resolved soon? Or will it be down to fintechs providing more appealing and agile offerings to turn the market around?

Public market valuations and the poor performance of recent IPOs are likely to dampen the optimism that drove valuations during Covid-19. These markets will likely need to recover somewhat for VCs to continue investing aggressively. At the same time, most investors have a seven-10 year investment horizon and are comfortable with this uncertainty; they can only adjust the prices they are willing to pay downward for now.

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

There appears to be considerable variation in GDP growth, inflation and general political stability on a country-by-country basis at the moment. These factors are likely to lead to a much more polarizing set of economic outcomes than in the earlier globalized economy. It seems quite likely that as we see more decoupling between major economies, the notion of a global economic climate will become less relevant. The countries that ensure a stable energy supply, avoid political crisis and control financial expenditure are likely to advance.