Fintech theme with business woman using a tablet computer
The dealmaking in the tech world got off to an early start this year. Visa announced a $5.3 billion acquisition of Plaid, which develops APIs to make it easy to share banking and other financial information. This has allowed the company to capitalize on the megatrend of fintech startups like Acorns, Betterment, Chime, Transferwise and Venmo. About a quarter of the population in the US–who have bank accounts–benefit from the service.
According to a blog post from Plaid co-founder Zach Perret: “What started with two founders building in a cramped conference room has become an incredible network that enables millions of consumers to interact with over 2,500 digital finance products. When we began our journey, nobody had heard of fintech—and today we have a growing fintech ecosystem that is significantly improving the way that consumers live their financial lives. Consumers now rely on fintech services in so many ways: to pay their bills, to send money to friends, to grow their savings, to manage their student loans, and to create budgets they rely on to reach their goals.”
Keep in mind that Plaid raised a total of $310 million since its inception. So yes, all investors did quite well on this deal. The premium valuation also is an indication of the strategic importance of the company. If anything, Visa may be taking a defensive action, as the core credit card business could be vulnerable to disruption.
“There are more than 40 fintech unicorns worth more than $150 billion,” said Lisa Wu, who is a partner at Norwest Venture Partners (the firm participated in Plaid’s Series C round). “Despite the emergence of numerous fintech unicorns, we are still in the early innings with significant opportunity for startups to continue to take market share from older, larger financial companies.”
So then, what are some of the lessons here for entrepreneurs? What made Plaid stand out among the many other players in the fintech world? Well, let’s take a look:
Solving A Real Problem: When Perret and William Hockey started the company, the original focus was on building tools for consumers to manage and track their personal finances (the name for the app was “Sliver”). But they soon realized that this was extremely difficult to pull off because of the archaic processes of connecting to bank accounts.
So this sparked an inspiration: Why not build a system to make this easier?
The pivot was a game changer.
“Creating efficiencies in finance is a growing trend, but Plaid basically became the pipes,” said Ian Kane, who is the CEO and founder of TERNIO. “Data is the new oil in the digital age and Plaid was able to do something really simple—make it easier for other startups to get financial data. Instead of having obscure letters/numbers, startups now had the Merchant and Address easily accessible. The company also gave startups an exceptionally easy way to link personal bank account info to an app for auto recurring charges. And finally, startups saved 1 to 2% on transactions without using Mastercard and VISA payment rails.”
Scale: This gets lots of buzz. But few companies truly can create scalable platforms.
“What Plaid has done successfully is build a business that is central to powering the large and growing suppliers of digital fintech services,” said Iris Choi, a partner at Floodgate. “The company elegantly scaled their use cases from payments to data aggregation and beyond. In parallel, they scaled their business model so they could take more of the pie. Most billion dollar companies need multiple products. The trick for startups, with limited resources, is knowing when to scale and how to allocate resources across existing offerings versus new offerings.”
Dealmaking: This often does not get enough attention. But M&A can certainly be critical for startup success. And this was certainly the case with Plaid.
“Plaid bought Quovo two years ago to move beyond just banking, and into broader financial services and investments,” said Kyle Lui, who is a partner at DCM. “The idea was to provide a more holistic platform for financial services providers.”
Plaid’s savvy dealmaking also applied to its funding strategy. “The company engaged in high-value corporate partnering, which led initially to Visa being a partner and investor,” said Charley Moore, the CEO of Rocket Lawyer. “Ultimately, this commitment to products and partners led to one of the most valuable startup exits in history.”
Tom (@ttaulli) is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction.