The “Three Ds” Of Payments Startup Investing

What's Next In Payments®
8:58 AM EDT February 18th, 2013

The world of payments startup investment is an exciting place, but what makes budding payments giants attractive to those willing to put their capital at stake? PYMNTS.com spoke with Arjan Schütte, founder and managing partner at Core Innovation Capital, about his company’s “three Ds” approach to investment, why scale matters, and how payments’ dynamic nature makes investing in the industry a “liberating” experience.

The “Three Ds” Of Payments Startup Investing

What's Next In Payments®
1:20 PM EDT February 17th, 2013

What makes a payments startup attractive to investors?

It’s a question that’s easy to look amid news of massive funding rounds, exciting new technologies and innovative ways to solve old problems in the payments space. Look at any company’s announcement of their latest funding, and you’ll see perhaps just a sentence or two about the angels, venture capitalists and individual backers who make the dreams and ambitions of payments startups possible.

So what do investors truly look for when looking to broaden their payments portfolios? Which attributes are most necessary to courting investment success?

PYMNTS.com spoke with Arjan Schütte, founder and managing partner at Core Innovation Capital, to get a glimpse of payments investing from the investor’s side.

“Core Innovation Capital has been investing for quite a while in what we perceive to be the most exciting and innovative financial technology companies that serve the emerging middle class,” Schütte said.

Active since 2004, Schütte said Core IC currently works with about one percent of all innovators who send “inbound calls,” and that his firm uses “the three Ds” of banking to determine who they’ll work with: digitization, democratization and disruption.

“From a digital perspective, we really see an opportunity to digitize the trillion-dollar cash economy that the consumer segments represent,” Schütte explained. “There’s a tremendous opportunity to bring democratization to financial services that are otherwise joined only by the very few. And finally there are a number of large incumbents that we think are poised for disruption.”

Some of the companies that meet Schütte’s “three Ds” criteria: SavvyMoney, a “do it yourself” guide to debt repayment; L2C, a company creating “new predictive credit, collection and marketing scores”; and Progreso Financiero, which looks to bring financial services to the enormous population of underbanked Hispanics in the U.S.

Core IC also backs Plastyc, a company we spoke with recently, and that Schütte says is special for its interesting in prepaid, a technology he’s “long perceived to have transformative ability on the lives of the middle class.”

Schütte said that in addition to the digital, democratic and disruptive qualities his portfolio companies share, the last piece of the investment puzzle is simple: scale.

“A company needs to be able to both play in a space that’s doing about a billion dollars in revenue, so that there’s a real growth opportunity, and the company needs to be able to reach at least a million customers within a couple of years for us really get excited about it,” Schütte explained.

Finally, Schütte also touched on the rapid innovation in the payments industry, and whether that made it easier or harder for a company such as Core IC to invest. But while constant change threatens to make once-sound investments seem obsolete within a matter of months, Schütte insisted that the industry’s dynamic nature was a boon to his company.

“It makes it exciting, honestly. If there weren’t the constant innovation we would have fairly few ideas to pick form, right? So the fact that there is so much going on in the payments space really allows us to be very discriminating about the companies that we like best,” Schütte said.

“We get to marry both the inbound entrepreneurs with our outbound point of view with where the industry is going, to really find the best ideas out there. It’s incredibly liberating, honestly.”

To hear more Schütte on Core IC’s investment strategies, change within the payments industry and more, listen to the full podcast below.

   

(If you are having trouble with the audio player, click here.)


Arjan Schütte is the founder and a managing partner of Core Innovation Capital, a venture capital fund targeting financial technology companies that serve underbanked consumers in the U.S. He is also a Senior Advisor to the Center for Financial Services Innovation, the nation’s leading authority on the underbanked market. He was previously a senior manager at CFSI from its inception until Core was launched in 2010.

Schütte is a passionate industry expert. He is cited broadly, and regularly speaks at industry conferences. Through CFSI and Core, he has invested in some of the most innovative companies serving the underbanked, including AccountNow, iSend, L2C, CircleLending (acquired by Virgin Group), and Plastyc. Schütte serves on the board of portfolio company SavvyMoney, and is an advisory board member for TIO Networks, Progreso Financiero, BillFloat and PayPerks. Schütte formerly served as a director for RentBureau, which was acquired by Experian.

Prior, Schütte spent 12 years as an entrepreneur in several venture backed companies in technology leadership, consulting and general management roles at Pierian Spring Software, Cognitive Concepts (was sold to Houghton Mifflin), Capella Learning (now NASDAQ: CPLA), and DoTheGood, among others.

Schütte earned an MS from the Media Laboratory at the Massachusetts Institute of Technology, as an Interval Research Fellow, and earned his BA in Philosophy and Communication at Lewis & Clark College.

He lives in New York City with his wife and two young children.

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