20VC Why Bundling Does Not Work, How The Best Founders Analyse Unit Economics, Why The Way We Approach Mental Health in Venture and Startups is Wrong with Nigel Morris, CoFounder & Managing Partner @ QED Investors

In this episode of "20 VC," Harry Stebbings interviews Nigel Morris, co-founder and managing partner of QED Investors, a leading fintech-focused venture firm. Morris, also a Capital One co-founder, discusses his transition from operations to venture capital and emphasizes the importance of unit economics in early-stage investments. He shares insights on the challenges of cross-selling in fintech and the potential for bundling services by companies like Newbank. Morris also stresses the importance of mental health awareness, drawing from personal experiences and the tragic loss of a QED partner. Additionally, he highlights the need for diversity in venture capital and the value of nurturing genuine relationships in the industry. The conversation also touches on the competitive nature of fintech, the role of banks in the venture ecosystem, and two recent QED investments: Bitso, a crypto-focused platform, and Fontes, an accelerator in Mexico City.

• Nigel Morris, cofounder and managing partner of QED Investors, has a significant impact on the fintech industry.
• QED Investors is renowned for its investments in several unicorns like Credit Karma, Newbank, and Klarna.
• Nigel cofounded Capital One, which he helped grow into a $20 billion company with over 15,000 employees.
• He also holds board positions at various prestigious institutions and companies.

"And so with that, I'm thrilled to welcome Nigel Morris, cofounder and managing partner of QED Investors, one of the leading fintech focused venture firms of the last decade, with numerous unicorn investments including Credit Karma, Newbank, Avant Sofi, Klana, Greens Guy."

The quote introduces Nigel Morris and highlights the success of QED Investors in the fintech space, emphasizing its influence through investments in prominent companies.

• Nigel Morris shares his journey from running Capital One to starting QED Investors.
• His career at Capital One was marked by significant growth and the development of the "What's in your wallet?" brand.
• Morris experienced a desire for new challenges and intellectual stimulation, leading to his departure from Capital One.
• After a period of broadening his experiences, he, along with former Capital One colleagues, began investing through a family office platform, which evolved into QED.

"But look, it's been a journey of me putting 1ft in front of another and figuring it out day by day."

The quote encapsulates Morris's approach to his career transition, emphasizing a step-by-step process rather than a premeditated plan.

• Nigel Morris describes the pivotal decision to transform QED from a family office to a venture capital firm.
• He had three criteria for making this transition: being good at investing, being wanted by portfolio companies, and enjoying the work.
• The decision to scale QED was influenced by the growing opportunity in digitalization and the desire to build something impactful.
• The "Rubicon crossing event" signifies a commitment to professionalizing QED and accepting the responsibilities that come with managing a large fund.

"I stood at the banks of the proverbial Rubicon for some time, recognizing and with clarity, knowing that I would now have a boss and the boss was going to be my lps and that this was no longer a hobby and a folly. This was now a business."

The quote reflects the moment of commitment and the realization that scaling QED would mean greater accountability and a shift from a personal project to a professional enterprise.

• Nigel Morris is passionate about mental health and addiction, influenced by personal experiences with his brother's struggles.
• He advocates for openness and de-stigmatization of mental health issues in the workplace.
• Morris emphasizes the importance of discussing mental health openly to create supportive environments.
• He is involved with Shatterproof, an organization focused on addressing addiction and its stigma.

"I want to just bring it out into the open. We've been working with an entity called Shatterproof, and Shatterproof is Gary Mendlen. He lost his son with alcoholism and drug addiction."

The quote highlights Morris's commitment to mental health advocacy and his involvement with Shatterproof to combat the stigma of addiction.

• Nigel Morris discusses how he handles insecurities and self-doubt, despite his accomplishments.
• He acknowledges the challenges of managing a venture fund and the complexities compared to running a public company.
• Morris credits his success to surrounding himself with talented individuals and building strong relationships.

"But every day I get up and say what I'm trying to do here with QED and having the responsibility of managing now over a billion dollars under management is not easy."

The quote reveals Morris's humility and recognition of the challenges he faces, highlighting that success does not eliminate insecurities.## Venture Capital Challenges

• Running a large company is easier than running a smaller one due to the availability of more data to predict revenue.
• Venture capital is challenging due to the need to extract significant insights from minimal data.
• Evaluating an entrepreneur and their idea at an early stage is difficult due to the numerous potential issues that must align, making predictions uncertain.
• The "zero nine to the power six problem" refers to the compounding of conditional probabilities when considering all the things that can go wrong in a startup.
• The stress of the job comes from making decisions with very little data.
• The COVID-19 pandemic has reduced the quality of signals investors receive, making it harder to evaluate entrepreneurs and their ideas.

"Running a large company is much easier than running a smaller one. Private equity is much easier than venture."

This quote explains the comparative ease of managing larger companies and dealing with private equity versus the complexities of venture capital investment.

"Venture is about extracting enormous signal out of very little data."

This quote highlights the core challenge of venture capital, which is making informed decisions based on limited information.

"It's what I call the zero nine to the power six problem."

This quote introduces the concept of the "zero nine to the power six problem," which illustrates the compounded uncertainty faced by venture capitalists.

• The support and trust from colleagues like Frank Rotman and Bill Salufo provide strength and confidence in decision-making.
• Having a team to rely on makes the venture capital process less daunting.
• Insecurities persist regardless of success or wealth, and one must learn to navigate these in high-risk fields like venture capital.

"A great deal of the strength that I get and the confidence I get is being around people that I love dearly and I trust implicitly."

This quote emphasizes the importance of having a supportive and trustworthy team in the venture capital industry.

• The speaker's relationship with money has evolved from basic needs to reaching a point where additional wealth does not impact their life significantly.
• The focus has shifted from accumulating wealth to building relationships, coaching, and supporting others.
• The speaker acknowledges their fortunate position and the ability to prioritize higher-level needs in Maslow's hierarchy.

"I've been incredibly lucky in that I've been able to create escape velocity economically for myself and my family."

This quote reflects on the speaker's journey from a working-class background to achieving financial independence.

"I get my nourishment from palpable, genuine relationships that I build en route."

The speaker values relationships and the ability to mentor others over monetary gains.

• Building relationships and trust in the venture capital industry is crucial for successful investments.
• Asking meaningful, non-adversarial questions helps in understanding the entrepreneur's motivation and challenges.
• Superior listening involves engaging in conversations that provide nuanced insights rather than focusing on numerical predictions.

"It's not about just reading numbers off a page, because early stage companies have no idea what they're going to do, and therefore it's a futile waste of time."

This quote underscores the importance of qualitative assessment over quantitative analysis in early-stage venture capital.

• Building trust with entrepreneurs involves a mutual exchange of openness and vulnerability.
• The speaker references humanist psychologist Sidney Gerard's concept of reciprocity in disclosure as a means to build trust.
• Successful partnerships in venture capital require a willingness to engage in deep, supportive relationships throughout the company's growth.

"You build relationships by a stairstepping of incremental disclosure about each other and build rapport and relationship and trust around that."

This quote explains the process of building trust through gradual mutual disclosure.

• The speaker admits to being very involved and committed to their investments, sometimes to the point of difficulty in knowing when to cut losses.
• Being an operator in the past influences the speaker's approach to supporting ventures that are struggling.
• The value added by venture capitalists often occurs outside of formal board meetings, through continuous engagement and support.

"I am absolutely, maniacally tenacious. And if I buy into something I hate to lose."

This quote reveals the speaker's highly committed and competitive nature in their investment approach.

• The speaker and their team acknowledge the importance of balance and perspective during periods of success.
• It's crucial to appreciate the current position and not just focus on climbing higher.
• There's an understanding that situations are never as extreme as they may seem, whether good or bad.

"It's never as good as you think it is, and it's never as bad as you think it is in the worst times."

This quote advises maintaining balance and perspective during the highs and lows of venture capital investing.## Fintech Momentum and Market Conditions

• Fintech sector is experiencing significant growth and digitalization is rapidly advancing.
• QED is receiving positive deal flow and achieving success in the current market environment.
• There is an awareness that the favorable conditions may not be permanent and that it's important to appreciate success when it happens.

"Fintech is winning. Digitalization is coming at us like a train. We as QED have positive selection, and deals are coming our way and things are working out."

This quote emphasizes the current success and momentum within the fintech sector, highlighting QED's strong position in the market.

• Concerns are raised about the future of venture capital (VC) returns possibly declining to private equity (PE) style returns due to market saturation and competition.
• The current influx of capital into the market is likened to the hyperinflation of the Weimar Republic, with money being less discerning and valuations increasing.
• Despite challenges, there is belief in continued opportunities for fintech due to banks' difficulties in adapting to digitalization.

"I've equated what's going on now in some ways to the Weimar Republic of Germany in the 20s, in that you've got people running around with wheelbarrows full of money trying to buy a loaf of bread."

This metaphor highlights the current state of the venture capital market, where there is an abundance of capital that may not be judiciously invested, leading to inflated valuations.

• Unit economics are a fundamental aspect of business analysis, especially for early-stage investing.
• Data on customer acquisition cost (CAC), lifetime value (LTV), and payback periods are critical to understanding a business's financial health.
• A focus on unit economics from the outset is crucial for building a sustainable business and investment strategy.

"The ultimate litmus test, the decision making algorithm was all around unit economics."

This statement underscores the centrality of unit economics in evaluating the potential success of an investment, particularly in the context of QED's experience with Capital One.

• Early-stage customer acquisition costs (CACs) may be at their lowest due to initial customer alignment and can change over time.
• Unit economics is a complex, dynamic process that requires continuous management and evaluation by skilled business personnel.
• Founders must be strategic and thoughtful about customer-level dynamics to maintain a competitive edge.

"This is a complex dynamic of managing unit economics. And it's not done in your finance department. It's done by your best business people who speak the language of horizontal economics."

This quote emphasizes the complexity of managing unit economics and the need for strategic business acumen beyond just financial analysis.

• Founders must navigate a market where competitors may have substantial funding, which could disrupt unit economics and market dynamics.
• It is advised to focus on building a business with strong unit economics, regardless of competitors' funding, and to find ways to outperform them by understanding and targeting the most valuable customers.

"In the end, unit economics drive pnls. And if your business is built on a house of cards and your unit economics don't make any sense, in the end your business will not succeed."

This quote highlights the fundamental belief that sound unit economics are essential for long-term business success, regardless of short-term market pressures or competitor actions.

• Exit timing is influenced by a company's performance, market conditions, and the desires of the founding team.
• Various exit options, such as selling to private equity, going public, or being acquired by a bank, have different implications for the company's future.
• Banks may struggle to engage with fintechs due to cultural and technological differences, and few have the capability to effectively monitor and invest in the fintech ecosystem.

"There's never an easy time for a bank to invest in fintechs unless they have their finger on the pulse and are monitoring the ecosystem really, really carefully."

This quote reflects the challenges banks face when considering investments in fintech companies and the importance of staying closely connected to the evolving market.

• Banks are increasingly recognizing the importance of digital transformation and the competitive threat posed by fintech companies.
• Building a venture platform within a bank requires clear objectives, whether for learning, making money, or leveraging fintech innovation.
• Banks must be forward-thinking and progressive to successfully integrate fintech advancements into their operations.

"It's very challenging building of a venture platform, which they can easily do in many ways."

The quote discusses the difficulties banks face in creating their own venture arms and the need for a clear strategy and commitment to innovation.## Big Banks and Fintech Adaptation

• Big banks need to learn and adapt to the emerging fintech universe.
• They should leverage their assets such as low funding base, profits, footprint, brand, and unique proprietary data.
• Banks aim to be friendly and adaptable to deal with fintech creatively.

It's a lot of kind of can kicking that goes on. But look, if I'm running a big bank, I'm saying, look, this is something I have to learn. How to do well. And I have to be able to use in the jujitsu of it again my assets, my assets of low funding base, lots of profits, footprint, brand unique proprietary data.

This quote emphasizes the need for traditional banks to evolve and integrate fintech into their operations effectively, utilizing their existing strengths.

• Concerns exist about the bundling of financial products by new fintech entities.
• Products like student loans, mortgages, and credits are potential targets for bundling.
• The challenge is to create offerings that are meaningful and resistant to bundling.

I mean, I totally agree with you there, and especially on the can kicking side, final one before we move into the quickfire. And it's just like when we look at someone like Newbank, a big concern that I have today with a lot of the offerings that we see is that we're essentially just going to see the bundling.

Harry Stebbings expresses concern regarding the potential for new fintech companies to bundle various financial products, which could impact the market's dynamics.

• The null hypothesis is that bundling (cross-selling) is ineffective and doesn't pay off.
• Exceptions to this rule include USAA's successful cross-selling to its unique customer base and Newbank's gap exploitation in Brazil.
• Cross-selling requires the right product, timing, and frictionless delivery.
• It's challenging to develop cross-selling strategies that are effective and meet customer needs.

A null hypothesis here, Harry, is that bundling doesn't work. It's a canard, it's a ruse, it's a justification to buy things that doesn't pay off.

Nigel Morris challenges the assumption that cross-selling is inherently successful, suggesting that it often fails to deliver the expected value.

• Challenger banks are progressing towards offering a full range of consumer products.
• Starting with a wedge product that gains traction is crucial for challenger banks.
• The transition from a single product to a diverse portfolio is difficult and requires patience and understanding from investors.
• Challenger banks have a competitive edge due to high net promoter scores and customer-centric approaches.

So many of the challenger banks are en route to having to offer a full vista of consumer products.

Nigel Morris discusses the trajectory of challenger banks as they expand their product offerings to become more comprehensive financial service providers.

• The venture capital industry can benefit from more diverse, quirky, and stimulating thinkers.
• There is a significant opportunity to increase diversity in venture capital, particularly concerning gender and people of color.
• Learning from experienced board members and peers is valuable.

There's a lot of really boring people in it, Harry. I want people. Quirky, funny, orthogonal, stimulating thinking people.

Nigel Morris expresses a desire for more diversity and unique personalities within the venture capital industry to drive innovative thinking.

• Maintaining a rigorous exercise routine is crucial for stress relief and overall health.
• Tracking fitness progress analytically can be beneficial.
• Engaging in challenging physical activities, such as cycling up the Stelvio Pass, is rewarding.

Ever since I was a kid, I've been a fanatical exerciser.

Nigel Morris shares his personal commitment to fitness and its importance in his life, highlighting the positive impact on his well-being.

• Recent investments include Bitso, a crypto platform, and Fontes, an accelerator in Mexico.
• The decision to invest in Bitso was based on the recognition that crypto is a significant asset class that people desire to use and trade.
• Fontes aims to support the growth of startups in Mexico, recognizing the talent in the region.

One is investment in bitso, which we announced a few days ago. I've been a crypto denier. I don't get it. I can't predict if it's going to go up or down. But what I do know is crypto is a thing and people want it.

Nigel Morris talks about his recent investment in Bitso, acknowledging the importance of crypto despite his previous skepticism.

• There is value in having transparent and insightful conversations that matter to listeners.
• The exchange of ideas in such discussions can be beneficial for both participants and the audience.

What I've really enjoyed here is that we have a kind of sharing conversation about stuff that really matters and if it's of use to your listenership in any way, hey, I'm delighted.

Nigel Morris appreciates the depth and usefulness of the conversation, hoping it provides value to the audience.