The Fintech VC Powerhouse & Penetrating the LATAM Market with Mike Packer of QED Investors

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October 20, 2022

On this week’s guest episode, I sit down with Mike Packer, Partner at QED Investors.

QED is one of the big dogs in FinTech investing. They have roughly $5B of AUM and the firm was founded by one of the founders of Capital One.

We obviously get into all things FinTech, but we also dive into the Latin American market, where Mike happens to focus.

If you’re interested in either fintech or Latam, or the intersection of the two this pod is for you. Enjoy.

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‍Transcript (this is an automated transcript):

MPD: Mike, thanks for being here, dude.

Mike Packer: Thanks for having me, Mark. And interplay. It's great to be here.

MPD: Very cool. I am excited to get into this. There's a lot of stuff I wanna learn from you. Could you start off by giving us an overview of Q E D?

Mike Packer: For sure. So we're an early stage FinTech focused venture firm.

We focus globally with a few exceptions, but pretty spread around the world at this point. We've been around for about 15 years about 5 billion under management. And 21 people are on our investment team. Currently investing out of pair of funds that equal about a billion dollars half focused on the early stage and half focused on growth.

And we are very actively looking for high growth FinTech investments and the future winners.

MPD: What's the profile? It sounds like there's two sides to the house, The early stage and the growth, but. If you were gonna give someone listening and thinking about reaching out to you, a profile, what is that?

Mike Packer: I think we may maybe to our detriment, well we're suckers for anything FinTech, and so we'll talk as early as anybody wants to reach out. We like trading ideas. A lot of us are former operators, really looking to get into, the weeds of how businesses are run and some of the strategy of how to build the initial stages of business.

So we're really pretty, pretty flexible. But I'd say our sweet spot tends to be although all the terms we're speaking in a August 22 all the round terms of new meanings. But I think our typical sweet spot has been a series. Where our company is starting to, if not found product market fit as acute.

A few good hypotheses in terms of channel strategies and scale strategies. And so something that we can work with in terms of data. But that said, we're really setting up our firm to go idea to ipo and we want to be able to back, the best companies at any stage.

And we wanna also be high conviction investors. And so when we invest, at the seed stage or series A stage, to your point we're hoping to follow on with our winners in getting, 20, 30, $50 million into companies over the life and really set up to, to stay influential over time.

So anybody in FinTech who wants to talk we're we're always open for business and hopefully you'll find we know a little bit what we're talking about. You do precede. We have done some precede. We've been testing it a little bit and somewhat in reaction to the market last year but probably more.

Historically we've done it with ideas that we've seen work in other places. So we've been fortunate to be part of, founding a few companies with entrepreneurs and from, from the very beginning of ideas and helping refine ideas. Clear score in the uk wage stream in the uk Fairplay in Mexico, MEU and Mexico.

Just a few examples of businesses we were involved in from the very beginning. And yeah, that's a we refer to that as a bit of a cheat code where we know the product has worked somewhere else. And we've been part of that, those stories. We have a little bit more conviction on taking, that type of product risk.

And you guys typically lead. We do like to lead. We're a large fund. The history of QED is then getting is all about the fund getting bigger and bigger. And so part of the reality of that leads us I guess to use the, a bit of a pun, but leads us to want to lead more because getting the amount of capital work, but that, that usually comes in again at series A or series B, it's much more important.

I think most of our seed efforts and precede efforts are very much collaborative with funds and with entrepreneurs and angels and trying to just be part of the learning and be part of. The initial stages of a company. So we do tend to lead and we do tend to take pretty active roles when we're making making our investments.

And so with that, a lot of times we're setting up the, first, first board or the second iteration of boards and helping the companies get started on their governance journeys as well. That's awesome. That's

MPD: super helpful. I think most entrepreneurs aren't excited about governance process, but getting it right early can make relationships a lot easier.

Mike Packer: Yeah. I don't know if we we make it fun, but but we certainly try to do it in a custom way for companies cuz there's no, there's no one answer for, governance or how to run a board. And we we realize that, and I'm, I personally learning a ton about how.

Influence and think about those types of things because on one hand it's really, you have to do these things as the company gets bigger and managing capital on the other you don't wanna get in the way of running a business. And making sure that there's the right focus of delivering product and go, actually making progress.

MPD: B2B or b2c, or

Mike Packer: both? Both. I think we tended to be more b2c cuz that's where a lot of our experiences have come from. In the past. We've got a pretty strong tie to Capital One. So our founder of QD is Nigel Morris, who's one of the co-founders of Capital One. And I, myself spent a bunch of time there and a few of the other partners did as well.

And through our experiences there were a lot of B to C businesses. And be to small be. I would say we, we throw in the same bucket in terms of small business space. But we do B2B and we've done a bunch of things in the FinTech infrastructure space.

We're pretty excited about. But we tend to not understand or really especially early stage, like the ability to underwrite the sales cycles for large enterprise is something that, we're not expert experts at. And that's a place where we particularly look to partner with other investors as well.

MPD: Yeah, that feels like a whole different animal. Sometimes. The super long sales use asp. Exactly. Customer concentration. The whole nut.

Mike Packer: And if you don't know the segment really well that you're selling into, it's very hard to understand, what the buy decisions are based on. And so you could have best product in the world.

But, poor sales process or, even get out flanked by a simpler product with better kind of sales match. And so that, that's the dynamic. And again, I personally find that hard. I think some of my partners are a little better at that. But yeah, you're exactly right.

We find that be pretty challenging. Okay.

MPD: So b2c B to smb, FinTech global are there characteristics that you're looking for? Are you just, look, are you looking for, marketing equation? What makes something in that world? What's the first lens after sector stage for you guys?

Mike Packer: Yeah, I, I think it's a good question in terms of first lens. Cause I don't think we're necessarily consistent. I think we try to be, holistic looking. What's the potential business model, how do we see the market playing out specifically in terms of how profit pools will move?

Or different kind of game theory of who can win. And then of course, we think about the team a lot. So I think some version of those filters we're trying to work our way through when we see opportunities. And then of course there's some sectors or themes we might be a little bit more excited about at any given time.

But tho those are really what we're trying to do. We're trying to make very long term investments with, particularly large outcomes and not needing to do it overnight. And so needing to see some of the path or at least the initial path and get convinced there is really what we spend a lot of time on.

Okay.

MPD: Now, you mentioned this before, but I did a little homework too, and Noah, you guys have increased your your fun size. Substantially. I wanna distinguish between AUM and fund sizes. Often AUM is calculated as the caring value of the company. So you might have put $2 million in, but if that position's now worth 20, you clock it at 20 on that count.

But one of the big operating metrics that determines how you scale a venture organization is how many dollars you're actually investing. And that's been going up for you guys from what I understand. My, my read on the website was you guys have now deployed 650 million, which is pretty s sizeable.

How has the size of the funds impacted how you guys operate?

Mike Packer: Yeah, it's an amazing question and one that, as or as any fund would, we're constantly discussing internally. I think there's two or two or three things that made. More comfortable for us.

And then I'll get to your question. I think, we had come from a background where we didn't have external LPs. We were fortunate to have particularly Nigel right in, in investing our own capital in our first three, three funds.

So through 2016. And so as we started to think about, where Q EED goes and we realized that one of the big constraints we have was capital and, for better or worse one of the things you'll find at QED is we are very intellectually curious, very much this kind of hands on approach.

And, we found ourselves putting as much. Into a million dollar check as a $4 million check and as much work into a, 10, or excuse me, $2 million position and a 20 million position to use your numbers from before. And so this kind of bandwidth insight was something that had been playing itself out over time.

And the other thing that kind of was happening is we were investing in multiple stages. Again, just we just felt like we were underallocated from a check size. And so once those two realizations started happening, Along the same time being capital constrained, we realized that raising, at bigger funds, we could do basically the same strategy and same bandwidth, same partners, just little larger capital.

Of course, it changed some dynamics, which which is your question but that's been a bit of the theme. And so when I talked earlier about going from, idea to ipo, we really used to have this little niche that we could, we could find lightning in a bottle at Series A, write a three, $5 million check, maybe hope to follow on.

And then, that was that. And again, now we're talking about same level. Again, it is probably increase, but similar levels of conviction and activity and involvement, but larger checks. And so that's been the trend. I think the other thing, we've expanded geography and so we've expanded the partnership because of that.

And then of course the market has has changed dramatically since we started all this in 2017. Might be coming back to what we thought it was just in terms of round sizes and valuations. So yeah, in terms of what we struggle with, we went from a world of, really being able to cooperate with anyone where, you know, if you wanted QED to invest alongside you, that was a lot easier to do you as an invest generic kind of investor.

And we found that was a good source of deal flow for QED early on because we had this expertise, we were willing to put in the time and effort. And so it was very easy for us to work alongside other funds. And then as our funds got bigger, our checks got bigger. So getting round sat round dynamics, cap table dynamics together, put us more into a co competing for deals as opposed to working together for deals.

And then I think the the other challenge that we have is, just where we get to double, triple, quadruple down now has a much more meaningful impact our funds, excuse me. And as fund size increases of course, and we expect our cash on cash returns to, to come down, but we think the ability to back, really sustainable, durable long term long term oriented companies and positions is where we can make a lot of money for our limited partners.

MPD: Yeah. The way I see it, it sounds like there's three levers to expanding your capital base operationally and a venture fund. Either have more partners, You do more deals per partner, larger volume, or you write larger checks per deal. And it sounds like the one you guys held constant from the sound of it was the deals per partner.

And you know what's interesting? When you get to 21, you have 21 partners, right? That's a huge partnership for Venture. I think middle of the roads, probably

Mike Packer: 21, invest investment professional on

MPD: the team. Okay. I was curious how you guys make decisions because one of the things that gets challenging in larger organizations is there's just no way to scale everyone getting as intimate and close with a deal when there's that many deals coming through.

And then how do you figure out the politics of which deals get the following capital? It's a big thing and I think people probably don't think about this on the outside, at a lot of firms they do attribution, which means future LPs and everyone else can see which deal and individual partner did.

And that becomes basically their personal track record, not just the firm's track record. And so you can have dynamics where partners are jockeying for the follow on rounds for their companies versus other partners companies, which may not be the optimal thing for all the LPs just because they wanna make sure they preserve their own personal track record.

So how do you guys navigate a larger team? I'm always interested to hear best practices because I know it's something every firm has to grapple with and is thinking about. Any best practices or thoughts that have made this kind of sing for you guys? Cause I know you guys are, you're got a functional operation over there.

Mike Packer: No I appreciate you having that perception of us. You guys have a good reputation to market, buddy. No I honestly, I think the thing that we have tried to be pretty dogmatic about is the number of deals per partner. And I think in, it's, in times like, Like we've been through the last four or five months where it really hits home.

You've got 8, 9, 10, 15 companies calling you, and that's a lot. But when you're in, when you're in 2021 and everyone's up and to the right, it feels like you can do more. And so I, I do think that gives us a little bit of flexibility. I don't think by any means have we, solved the, agency problem, the personal track record problem, the, whole host of things.

But I think what we try to do maybe 2, 2, 2 things, which I would say we do pretty well. One, is just in terms of like organizationally how we've tried to organize, right? We organize by sub teams within the group and try to create autonomy within those groups. And so instead, So I currently lead our lad am investments.

So I'm not fighting with my partners who are focusing on the US or Africa. We're working as a geograph to prioritize. Correct. Correct. And so that, that helps a little bit. We get to a place where we have, we still have the potential to get to a place where, we're having a capital allocation decision of, a deal here or a deal there, But really what we're trying to do is just have really high conviction on the the absolute bar.

And if we do that, then we all can trust, trust that it gets there. The other thing that we have is escalation internally. So as exposure gets bigger, as capital gets tighter as conflicts or decisions more conflicts both internally, but conflicts in the portfolio, those decisions get a little bit more hairy.

We're escalating those and having having meetings. But to your point, during covid we had the 20 screen investment committee, or excuse me, 20 square investment committees. And we realize that we can't do that for everything. So there was a bit of a trade off there in terms of how we share information and work together.

And I lost my original framework, but I think the other thing that we really believe culturally is that, we're better when we work together. And so how do we create the incentives that, when a good deal is done by one of one of my partners, or when I do a good deal, everybody is winning.

And of course that's about long, longer term incentives in a lot of ways. This game takes very long time. To realize returns. And so it's a great way to

MPD: get rich slowly. That's the VC mantra. .

Mike Packer: Yeah. Yeah. Hope, hopefully get rich slowly. And and yeah, but look I think, and I think we have a lot of people who buy into that.

And we we spend a lot of time trying to build those types of relationships and get the right people into our organization. We have some amazingly talented people, but I think the, one of the things that. Keeps us all together is this kind of culture thing.

And part of that, goes back years and years when, Nigel and Frank have been working together for, I don't even know, the years, but since before my career began. And, I've known Bill sl for 15 years. And a bunch of us kinda have this kind of common language and trust, which we have to bring others into the fold.

But that's the foundation. So I think some combination of that. But again, by no means do we have it solved for, we've got meetings this week to, to talk about our current fund reserves and who thinks they're gonna have deals coming up for the next couple quarters and making sure we're okay with the allocation.

Cause the other thing we haven't done, which I think we may eventually have to do, is think a little bit more explicitly about, allocations on a forward looking basis. We don't make a lot of rules around, Hey, you, you need to do this, put this much capital to work, or do this many deals or whatever.

Which is good. But when things are moving, fast or hot or when we're in a period of uncertainty, you have to be a little bit more thought thoughtful about those things. I feel like

MPD: VC partnerships are a lot like marriages. The more you're talking about the relationship, the more you're talking about how you talk that meta layer you're closer to not screwing it up.

It's half the battle. So it sounds, it sounds like you guys are doing the hard work, which is talking about these things and trying to figure 'em out, because otherwise they just creep up on you.

Mike Packer: No I think that's the last thing anybody wants to happen. But it, but I think the other thing, and this is a lot of credit to Nigel is we've always thought about Q E D as a.

Startup kind of within itself. And we've gone from what, when I joined in 2016, there was six of us. Now there's, 20 plus on the investment team. And plus we have all the operations side of q eed, which is now 10 plus. And so just the dynamics of okay, how do we build for this thing and what's our alignment long term strategy?

And a little bit of just having all of us think through that lens of, hey, there's no necessarily like right answer here. We're still learning. And, this is a big part of a lot of what QED does, right? Just Hey, if it doesn't work, we need to your point, we need to talk about it.

We need to talk about why it doesn't work. And then, try something new and if that doesn't work, we're gonna try something new. And part of that just is accepting the iteration of learning and not wanting to make, same mistakes we've seen other places in the industry.

MPD: Yeah. I think entrepreneur types figure out pretty quickly. You never can get anything right for long, which is okay. And so you start looking for the thing to break, and once you start looking for it, you catch it earlier. So I think there's a little bit of a, there's a superpower in expecting something to crack.

All right. You guys have nailed it. You become one of the preeminent names in the FinTech side of the venture world now. I would love to dive into how you think about the FinTech world. I, there's a hell of a lot in FinTech, especially if you're touching b2b. I know it's more small businesses and consumer.

It's almost a horizontal, I wanna call it a vertical, but it's almost a horizontal. How do you think about segmenting the industry?

Mike Packer: Yeah, it's an interesting, vertical versus horizontal thing. Certainly. The Andre coin, the everything is FinTech. A few years ago, Matt Harris at Bain kind of coined some something similar to the fifth or I can't remember which number it was, I don't wanna mess it up, but coined something very similar to how I, it's horizontal.

And I think we agree. I think we think FinTech touches everything. And and we also think we're still in the extremely early innings. And so when we think about kinda segmenting it, we've got our own, top down view of the world. It's. Manifested as different companies and strategies have evolved over the years.

But I think more than anything, we're trying to stay in tune with almost the bottoms up view of the world. Where are we seeing opportunities pop up? Which type of entre which type of businesses or entrepreneurs, more attracted to, what are the big problem statements that we're seeing, early stage startups go after.

So I think we, we come from it from a two-pronged approach. And we certainly can't cover everything we're trying to be as proactive and research and hypothesis focus as we can. Di dividing things up and prioritizing a bit is super helpful. But but yeah, I think the big categories are the ones you'd find on market maps.

So we would agree, payments, lending, infrastructure. We also focus on sorry, more and more focus on PropTech and InsureTech, which we view as kinda these AJAC seeds because they have the, these really interesting elements of large transactions and risk taking. And so those are the primary spaces I think we're we're playing in.

And then and then yeah we, what we, I think we, we try to do back to the partnership example, right? It's formulated and talk internally about what are the interesting trends that we're seeing, and then just start tackling 'em like that. But but the other thing I think we are also seeing is just the convergence of themes.

A lot of. What's happened in FinTech over the last, let's call it 10 years, right? Is really changing, just about changing the front end little bit of product innovation, maybe some kind of access innovation, a lot of things on the data side as there's been more and more data available, more power to to analyze it.

And so you now it's really about where the new categories gonna merge and where does the horizontal and vertical kind of align? So I, I don't know if yeah, I don't know if we've quite figured out where it's gonna be, but there are a few places that we're very actively looking.

MPD: Ooh, tell us what's the future? Yeah. Look, I segmentation or sectors or opportunities in FinTech?

Mike Packer: Yeah. I think, I think again, we still have a lot of catch up to do. And depending on your view of the world of. How much of banking will be reinvented and how much of financial services will be integrated to other things.

Or just like FinTech is what it is today. All three of those scenarios are enormous markets. But yeah, when I talk about the future, I think the two or maybe three things that we're actively thinking about. One is the whole embedded finance, embedded FinTech embedded, X tech trend that you're seeing.

Platforms, marketplaces, software that at the point of transactions can add financial services or, has a proprietary set of information about a certain client base, whether it's a consumer or small business or even enterprise to be able to. Streamline decision making, purchases financing decisions, et cetera, within a given platform.

I we're very excited about that trend. And we're posting it from a few different angles. One is, FinTech products or FinTech companies that might have the chance to expand their business because that's a very core part. The FinTech option or FinTech product, The very core part of the value proposition and then the flip side, right?

Which is how does a company that you know, might be a marketplace or software provider. Get the capability skill set, organizational know how to build, FinTech into their offering. And so I think you're gonna see those companies emerge. And there's also an infrastructure kind of enablement layer, right?

Is there, is there an entire play where you can just say, Hey this type of software, you wanna add this type of payments, click this button here. Similar to what I think Stripe has done in a lot of, in a lot of ways but much more kind of integrated, I think is the future in an insurance and the same thing, right?

When you have this kind of point in time it's seems inevitable that those things are gonna be much more streamlined given the capability to kinda integrate technologies. The the other one, which is you on everyone's mind is crypto web three, defi whatever you wanna call this leg of the world.

And yeah, I think we've been slowly waiting in and trying to learn and understand what's happening, what can happen. My partner, Frank Rotman, has some amazing threads on Twitter. Maybe we can find one or two to link here. But we've, we, few of us have gone down that rabbit hole and tried to understand where the opportunities will come from.

And there certainly seems to be some promise, particularly in defi and thinking about the protocols and financial services that you can build build around and build on top of, in a new new world. So that's one we're particularly paying attention to and still seeing a.

Activity little bit more high high beta on where it's gonna end up. But still seems to be pretty exciting opportunities in that space.

MPD: We just launched a blockchain funded interplay. I don't know if you knew that. . Have you guys started to actually invest in the space or you're still monitoring?

Mike Packer: So we've made it depends what you mean in the space, but in the kind of crypto web three defi space, I think we've made three, four investments. Maybe, actually maybe a little more than that, but we've primarily started making investments in some of the exchanges. Bit bitso in Mexico was our first one Shake Pay in Canada.

We did. And so this was the, again, back to your B2C question earlier, right? This was something we understood as the consumer value proposition, something that was happening. Of course, we had Coinbase as an example or beacon here. So that was where we started, and then we started looking at a few things in the infrastructure space.

Being able to add crypto to wallets, being able to put stable co coins into, Neobanks, Challenger Banks. We've done a few things there. And then we recently made announced investment in Defi space, a company called Meow, which which is I think one that we're really excited about and have been excited to learn from them and hopefully help them as we look at the traditional finance world, learnings and lessons and how that'll impact things.

So we've made a few, but we are definitely just getting started. And back to your other point about capital allocation. It's been one that has a wide bar on it for us, trying to figure out how to get more capital there, how to structure the team incentives, as a whole host of things that we've been talking about internally there.

MPD: So you made the point that we're in the early days of the FinTech cycle. I think this is actually the year when George Jetson was supposed to be alive. something like,

Mike Packer: I actually someone yes. I feel like I saw on Twitter someone celebrating his birthday recently,

MPD: right? Yeah. Maybe he was just born this year in 22.

Hey what does what does the future of this industry look like? Not the three to five year version with embedded finance and things that are nascent, been happening now. What's the 20 50, 20 60 reality we'll be living in with FinTech if all this stuff comes to fruition?

Mike Packer: I think most things of in FinTech will just be much more natural extensions of what we're like, what we're seeing.

There'll be zero friction making payments. If you qualify for a loan you know how credit is monitored. These things are gonna be completely seamless. So I dunno if we're gonna have chips in our brain or link to our phones or, some hologram that pops up.

But but I think it's just about there. There'll be zero friction. It'll be totally just part of everyday life and not in a overbearing way. So you won't even need to check your app to click to pay a bill. It all happened like automatically. So I think this automation, less friction, seamless, like people are just gonna spend a lot less time there.

I think that'll probably drive profit pools down. It probably makes banks, outside of money center banks probably bank makes banks less relevant. You're still gonna have a kind of I'm not a I don't I'm more of a traditionalist in the sense that I would bet the Fed is still around and the dollar, is still is still around, but outside of the, regulation and making sure that consumer protections are there, there's just gonna be a lot more kind of free flowing activity that, because you can code all these things, right?

And I, it's beyond me of if the AI will take over and in 2032 or whatever, but but I think that's the inevitable thing. And when you're buying a car in the future, it's gonna, you're not gonna have it's very, this is hopefully three years, but it's probably from like 10 to 15, you're not gonna, you're not gonna have to sit in the finance department.

So yeah, I see it just much more open and integrated and seamless. And then I think the really big question, which depending on which side of the bed I wake up on is, how big are the banks? How big is FinTech? How big is, how much of his