Welcome back to Inside the Mind of a VC, a series of interviews in which we speak with Venture Capitalists. In the hot seat this time is Tina Aufiero, Senior Vice President and Managing Director at Safeguard. Tina brings 20+ years of experience in venture, PE, M&A, and Strategy to Safeguard where she oversees the fintech vertical and is responsible for the firm’s early-stage and growth-stage investments. The Safeguard portfolio includes T-Rex, Pneuron, and Transactis. We caught up with Tina to talk about her start in investing with Bill Gross at Idealab, her time at Goldman’s Principal Strategic Investments Group, the state of the fintech ecosystem, and much, much more.
AlleyWatch: Tell us about your journey into the venture business and how you came to be Managing Director at Safeguard Scientifics?
Tina Aufiero, Safeguard: I got my first taste for early-stage investing when I did a graduate study with Idealab, the Bill Gross accelerator on the West Coast. I worked with a fintech company that was eventually acquired by Envestnet, a large, multi-billion dollar publicly traded company. After graduate school, I relocated back to the East Coast, to New York City, and I’ve been investing in and/or acquiring fintech companies ever since, for nearly 16 years now.
In my first role post grad school, I worked alongside One Equity Partners trying to drive growth in a real-time financial information and transaction services company. After selling that business to Thomson Reuters, I joined Goldman Sachs’ Principal Strategic Investments Group where I led numerous financial technology investments including trading venues (e.g. exchanges, ATSs), alternative research platforms, and data and analytics, to name a few key focus areas. When strategic investing activity slowed, predominantly as a result of regulatory burdens, I left Goldman to run corporate development for one my portfolio companies, where I led the acquisition of a bond ATS and an algo/machine learning company.
As VC interest in the fintech sector extended beyond a consumer focus to include institutional and capital markets technology, individuals with Wall Street experience were targeted by venture capital firms looking to enter this segment of fintech investing. I chose Safeguard because of its model (evergreen structure, lead investor), deep history and the opportunity to build a practice from ground up.
In 2 key areas: establishing both a deep domain expertise and an expansive professional network. When I first got to NYC, I did not have experience in fintech beyond the work I did with Idealab. I was quite green at that time.
Now, 16 years later, given the depth of our industry experience, we can thoroughly evaluate opportunities quite expeditiously. And, if additional input/expertise is required, we are just one degree of separation, at most, from an expert that can assist to round out our evaluation. That is the power of a network developed over a decade and half and I have found it to be of infinite value as we build a new fintech practice here at Safeguard.
Say more about what you’re building at Safeguard. Is there an investment thesis that’s driving your efforts?
Investing in the financial services sector requires an appreciation not only for the new, transformational technologies, but also an acknowledgment that a significant overhaul of legacy technology is required. I think it is safe to say that the digital divide in financial services is expansive.
On one end of the spectrum, we are focused on the modernization of institutional and capital markets technology, where some trades are still confirmed via fax and Excel is still the primary tool for structuring certain asset-backed securities. The recognition that these legacy technologies and processes are inefficient, costly and create significant risk exposure is key to our thesis.
On the other end of the spectrum, we are in a time of rapid and escalating technological advancements that will cut across all industries and will have enormous impact on financial services. This dichotomy, I believe, will fuel significant investment opportunities in fintech for years to come.
I contrast this current reality to the state of affairs in play when I first joined Goldman in late 2004. At that time, we had an almost unilateral thesis that supported much of our investment activity. And that was as follows: voice-trading / voice-broking will give way to electronic trading and this wave will progress through multiple asset classes. The progression started with the equities markets and migrated through foreign exchange, certain commodities, derivatives, and more recently to credit products.
Today, the landscape is far more complicated, characterized by both the challenge of an installed base of legacy technology and the opportunities driven by digital transformation. As such our thesis in multilateral. In addition to investing in legacy technology upgrades, such as enhanced modeling and analysis capabilities to displace Excel, we are looking at applications of artificial intelligence & machine learning, virtual reality, blockchain, behavioral biometrics, quantum computing, and quantum safe solutions.
Safeguard invests principally at the A and B stages, but will be opportunistic at the Seed stage and will do follow-on rounds. Is there a sweet spot that Safeguard is most comfortable investing at, and what do you look for as you invest across the different stages?
Our sweet spot is Series B. And yes, as you point out, we have a fair amount of flexibility as to stage and check size. We certainly will do A – it depends on traction and valuation. On a rare occasion, we will enter at a C or D round, but that’s atypical.
We generally write initial checks in the $5-8M range. But again, that is a general range. I have proposed initial investments as low as $3M and as high as $15M in this year alone, which demonstrates the flexibility. We prefer to be the lead investor and try to achieve a meaningful ownership stake on initial investment, which is the real driver of check size. We earmark follow-on capital at a ratio of about 5 to 1 and look to cap overall investment at the $25M mark.
Given your background at Goldman Sachs, a famed investment bank, and your focus on all things fintech, I’m curious your reaction to recent comments by Jamie Dimon, the CEO of another famed investment bank, J.P. Morgan, who called bitcoin a “fraud.” How do you respond to those comments and what do they imply about the viability of bitcoin and other cryptocurrencies going forward?
On the topic of cryptocurrency, I certainly have concerns about the risks to uniformed investors who are participating in coin offerings. I do, however, believe that the concept of cryptocurrency is here to stay and that there are important applications such as cross border asset transfers and providing a means for the unbanked to receive payment for work performed. As an example, there are programs now in place to teach Afghani women to code. As many of these women do not have bank accounts, payment for services is most commonly done in bitcoin.
What mistakes do entrepreneurs make when pitching to you?
To me, the biggest mistake is failing to clearly articulate and concretely define the value proposition early in the conversation. It is not unusual that I have to stop an entrepreneur midway through a pitch to say, “Can you pause there and tell me what problem you are trying to solve?” This needs to be stated upfront. As the dialogue proceeds, I will want to hear the full story. What is your addressable market? Can you discuss your go-to-market strategy? How do you intend to price your offering? What is your revenue forecast? But, this should follow a robust description of the offering and why this solution is needed in the marketplace. After all, knowing the impressive credentials of the management team is only interesting if I feel there is a viable business for that team to run.
There’s been a lot of attention recently about “the rise of the rest” – that is, entrepreneurship expanding beyond the usual hubs of Silicon Valley, New York City, Boston, and so on. Nestled in Radnor, PA, Safeguard itself is not in a traditional entrepreneurial hub. Does that present challenges or complexities for you?
I don’t think it does. Given the fact that I spent 16 years in New York and, as such, I am deeply ingrained in the fintech network there, it does not present any real challenges for us. I am in NYC almost every week for at least a day or two, it’s an hour train ride, the equivalent of many New York City commutes. And, New York is really the hub for the type of fintech investing that I do. Silicon Valley tends to have a more consumer-oriented focus and I generally do not see competition for deals coming from that region.
We are working hard to build the Safeguard brand in the New York fintech community and beyond, capitalizing on our established relationships there.
How do you compare the level of fintech innovation that’s taking place in New York versus Silicon Valley and other entrepreneurial hubs?
I would credit the West Coast and Silicon Valley in particular with being the leader in consumer-focused fintech, and I would credit that wave with bringing traditional venture capital to focus on fintech as a sector of interest.
With fintech then on the radar of the VC community, the interest expanded beyond consumer apps and on-line lending to solutions in insurance, wealth management and capital markets where a proximity to Wall Street is a strategic advantage. I believe NYC, and perhaps to a lesser extent cities like Boston, Philadelphia and D.C., will lead in the future waves of fintech investing.
The top Wall Street banks have had strategic investing groups for over a decade at this point, so there is a natural pool of people in the region who have been investing in fintech for quite some time and are taking up the charge at many of the fintech-focused VCs in the area.
How is Safeguard different from the other fintech investors out there?
Deep domain expertise coupled with an innovative approach to identifying need states / pain points for industry participants.
We have created a cross-industry collaborative that will bring together global corporations in banking and asset management, healthcare and pharmaceuticals, and retail / CPG to identify innovation needs that cut across these verticals. We will source start-ups that address these need states and introduce them to the collaborative participants. The collaborative participants will have the opportunity, but not the requirement, to invest alongside Safeguard. We view this as a win-win-win proposition. For the ventures, there is instant access to leading industry participants who can offer pilot support and/or investment. For the large corps, Safeguard does the heavy lifting of consolidating trends, sourcing, and managing the ventures in a way that shields them from the “crushing weight” that often accompanies strategic investment. And, for Safeguard, we source from an informed state with a strong understanding of industry needs and a pool of participants to vet the adequacy of a start-up’s offerings.
What trends are you watching closely in 2017?
We have covered many of these, but to summarize here we are tracking and investing in the following areas:
- Artificial intelligence/machine learning/advanced and predictive analytics
- Security, with particular focus on behavioral biometrics and quantum safe solutions
- And a broad bucket of other innovative solutions to enhance/replace legacy technology
I have the idea that large financial institutions can be very slow to adopt new solutions. Is that an accurate perception, and if so, what can be done to mitigate it?
Yes, I think that is generally a fair perception. It is difficult, though, to put all financial institutions in the same bucket. Some have been quite progressive, forward looking and willing to embrace impeding change. Some have preferred to take a fast-follower approach and others have simply lagged behind on innovation.
That said, we are talking about large, complex global organizations with myriad businesses burdened by steep regulations and legacy technology. “Nimble” is just not achievable in these circumstances.
What we have seen, though, is an uptick in effort by many large financial institutions to embrace innovation and to better position for current and future trends that will impact the industry. There is recognition that this is a transformational time for the industry fueled by new and disruptive technologies, competition from unburdened start-ups, and a dramatic shift in customer demands as millennials come of age. Some solutions being adopted by financial services players include the creation of innovation centers, the launch of industry wide sandboxes as well as partnering and investing in fintech start-ups, opting for collaboration over disintermediation.
Favorite book and why?
Unfortunately, outside of industry blogs, newsletters, and bedtime stories, the last 18 months have afforded little time for leisure reading. So, I’ll go with my current nightly read of “Goodnight Stories for Rebel Girls”, a collection of short biographies about women that have impacted the course of history. These strong female role models have bolstered my 6 year old daughter’s “go-getter” attitude and reinforced her brothers’ views around the strength of woman.
What’s the most underhyped part of the tech ecosystem?
I don’t know if its “underhyped” or just under the radar for most industry participants at this point, but the first thing that comes to mind is quantum computing. Experts in this field believe that large scale commercial quantum computing could be available as early as 2025. That is just 8 years away. And, according to those same experts, the processing capabilities found in quantum computers will challenge current security measures that are based on cryptography, creating an imminent threat to the foundational security that protects digital transactions. If that is the case, action to overhaul security at major financial institutions needs to start soon, if not now, given the magnitude of upgrade required. We are looking at this area, identifying ventures that are making strides in quantum safe solutions and hoping to raise awareness amongst industry participants.
Is there someone in the tech ecosystem or investment community you really admire? Why?
There are many that I admire. Two that are high on my list include Jonathan Korngold, the Global Head of Financial Services at General Atlantic and Tom Jessop, now the President at Chain and former Goldman Sachs MD. Both are utterly brilliant and incredibly gracious, an enviable combination.