Why are we so excited about HMBradley that we broke our own ‘rules’?
About 12 years ago, I made my first FinTech investment in a seed-stage (read: just co-founders and a business plan) challenger bank called PerkStreet Financial. No one had heard of “Neobanks” — this was pre-Chime, pre-Varo, even pre-Simple. Back then, FinTech was a niche that few people followed. PerkStreet was a mainstream, online checking account provider for everyday Americans, and they were pretty good at it…they were just too early for the market. Today, venture-backed FinTech Neobanks have helped over 20 million consumers open up online checking and savings accounts, and that trend only seems to be accelerating.
Investing in PerkStreet taught me a lot of lessons, perhaps the most important of which is that consumer financial services are generally commodities. As a result, comparing the businesses that deliver them to software businesses (and valuing them as such) just doesn’t work. When I started Commerce Ventures, I concluded that we were unlikely to invest in many financial services startups (given their commodity, capital intensive nature), but we focused instead on companies providing technology for financial services (our definition of “FinTech”). Over the past 8 years, we’ve watched as consumer FinTechs have raised billions of dollars to try to compete with the world’s largest banks…and we’ve been very comfortable sitting out of those battles (for the most part)…until now.
After many years of testing our negative bias and searching for disconfirming information, we finally found a team who made a compelling case that venture dollars can build a valuable “Neobank” — they are the team at HMBradley. What’s different about HMBradley? Well, lots of things…but what was most compelling to us was how focused the team is on building and operating capital efficiently. Here’s how:
- They actually built a differentiated product (with a high NPS), enabling them to benefit from strong word of mouth/organic awareness building. This reduces overall customer acquisition cost (CAC) and thus enables the business to be more capital efficient.
- The company’s lean approach to product development enabled them to bring product to market quickly with a small, high-powered team and then ensure it resonates with consumers. Careful planning and persistent customer development kept capital requirements low during this phase.
- By focusing on developing an integrated (multi-product) experience the company has positioned itself to cross-sell high margin (read: credit) products to deposit customers with minimal added friction. This means higher revenues and lifetime value (LTV) for the same CAC…thus more capital efficiency.
- HMBradley’s unique sponsor bank relationship (providing access to both sides of the balance sheet) enables them to attain profitability quickly…even at early scale.
In addition to loving this team and the product they’ve built, our bet on HMBradley is that the company can reach profitable scale even with modest amounts of venture funding. This positions them to fund their own growth to levels that will represent extremely exciting venture outcomes…even if the eventual valuation multiples are constrained to traditional financial institution peers.
We also believe that the credit card industry is long overdue for a shakeup, and that players (like HMBradley) who can crack the code on CAC will be well positioned to steal share away from the big incumbent issuers. To date, we have made several infrastructure investments to support this thesis, including Canopy (real-time, servicing system of record) and Bloom Credit (API-centric developer platform for accessing credit bureau infrastructure). We have also invested in Grow Credit, who is helping consumers prove their creditworthiness and using credit card technology as part of their solution. Stay tuned for more investments around this thesis in modern credit card issuance.
In the end, rules are meant to be tested…and sometimes broken. We’re so excited to be breaking our own rules here!!