When the investment banking world abruptly burst at the seams last week, one question raised was: What about financial services startups that have been selling into big firms like Merrill Lynch and Lehman Brothers? That query begged another: What about the venture capital firms that specialize in funding financial services startups?
Apparently the answer for both is that danger plus crisis could equal opportunity.
Gardiner Garrard is an optimist who espouses that view anyway — and good thing. He’s the managing director of Total Technology Ventures, an Atlanta-based venture firm that provides capital to early-to-late stage financial services companies, as well as IT-driven businesses that cater to the financial services industry.
“I don’t know that anyone would have anticipated it would get as bad as it has in the last couple of weeks,” says Garrard. “Some of our companies sell technology to banks or to financial services companies that have seen their sales drop.” Still, he says, “I have a number of companies taking advantage of the opportunity.”
Interactive Advisory Software in Marietta, Ga., is one TTV-backed company on which Garrard is now more bullish than ever, for example. The six-year-old company sells a portfolio management platform to independent wealth managers and financial planners — a group that looks to balloon as financial professionals and their client lists stream out of Lehman and Merrill. FTrans and Green Dot are two others that may buoy the venture firm. Atlanta-based FTrans has been selling analytics technologies to banks wanting to make safer loans since 2003, and 10-year-old Green Dot sells prepaid MasterCard and Visa debit cards to customers without banking accounts through retailers like Walgreens and CVS.
Larry Cheng, a partner with Fidelity Ventures in Boston, is of a similar mind to Garrard. Though Cheng says Fidelity might need a new way to assess security applications — “We’ve been very successful in investing in security companies that started in financial services, then broadened out, but we’d have to look more closely [at that process] now” — he, too, sees a silver lining around the breakdown on Wall Street. Recent events aren’t only good for two Fidelity-backed financial services startups, he says, it creates an opportunity for companies he has yet to see.
One of Fidelity’s beneficiaries, says Cheng, may be San Francisco-based Prosper, an online marketplace for people-to-people lending. “Debt is still a legitimate asset class for consumers, and there’s no way to get access to it right now.” That could translate into new customers for the three-year-old, he says. Cheng is also hoping that San Francisco-based Xoom, an international, online, money-transfer service, may be goosed by the market turmoil.
Meanwhile, Cheng cites the massive failure of ratings agencies in assessing risk as an opening for savvy entrepreneurs who may be eager to get it right. “Who is going to emerge to assess risk in derivative products? I think that could be a huge opportunity.”
“I’m not living in fantasyland here,” says Garrard. That doesn’t change that “a lot of the economy’s growth has been through residential lending,” he adds. “And to me, what’s neat are innovative companies finding ways for the [survivors] to grow with less capital risk. There will be a whole bunch of banks who come out of this stronger,” he says.