20VC Why The Unbundling of Fintech Will Continue, How VCs Are Propping Up The NeoBanking Industry & Why We Need A New Framework To Value Businesses Today with Clay Wilkes, Founder & CEO @ Galileo

In an insightful conversation on "The 20 Minute VC," host Harry Stebbings interviews Clay Wilkes, the founder and CEO of Galileo, a leading API standard for card issuing and digital banking. Wilkes discusses Galileo's journey, emphasizing the strategic decision to bootstrap the company, focusing on slow growth and profitability, which allowed them to navigate economic downturns independently. He shares his thoughts on the fintech landscape, predicting continued growth and innovation, particularly in digital banking. Wilkes also touches on his philanthropic efforts through the Galileo Foundation and his perspective on money and happiness. Despite the acquisition by SoFi, he assures that Galileo will remain an independent infrastructure provider to its clients, likening their model to Amazon and AWS. Wilkes believes that the future of fintech will see further verticalization, consolidation, and integration of financial services into big tech, with startups continuing to drive innovation.

• Clay Wilkes is the founder and CEO of Galileo, an API standard for card issuing and digital banking.
• Galileo powers prominent fintech players like Chime, Transferwise, and Monzo.
• The company was acquired by SoFi for a reported $1.2 billion.
• Clay Wilkes has a background in operating systems, communications, and authored a patent for voice over IP.
• He founded Galileo with the thesis that payments needed transformation, which he began working on 20 years ago.
• Clay also has a strong interest in philanthropy and established the Galileo foundation with his wife in 2005.

"Prior to their reported $1.2 billion acquisition by SoFi, Clay raised just $86 million in funding with Galileo from the likes of Accel and Ryan Smith at Qualtrics, having run the company as a profitable company before that for over 15 years."

This quote emphasizes Clay Wilkes' successful approach to building and funding Galileo, highlighting the company's profitability and the significant acquisition by SoFi.

• Clay Wilkes' experience with previous economic booms and busts influenced his decision to bootstrap Galileo.
• The company was intentionally grown slowly to ensure solid unit economics and cash flow, which Clay believes is crucial for controlling one's destiny, especially during economic downturns.
• This approach contrasted with the prevalent growth-at-all-costs model and proved beneficial during tough economic times.

"We knew we wanted to be bootstrapped... We weren't intending on taking money or significant amounts of money, which meant we were going to go slow... cash is king and we can control our own destiny."

Clay Wilkes explains the foundational strategy of Galileo to prioritize financial independence and sustainable growth over rapid scaling, which helped the company navigate economic fluctuations.

• Clay Wilkes does not view money as the primary objective and leads a modest lifestyle.
• He finds motivation in philanthropy, with the Galileo foundation playing a significant role in his and the company's activities.

"Money doesn't buy you happiness... We're very driven and committed to philanthropic activities. We've had the Galileo foundation for twelve years."

Clay Wilkes shares his perspective on wealth, indicating that happiness and fulfillment come from pursuits like philanthropy rather than financial gain alone.

• Clay Wilkes is overwhelmingly positive about the future of fintech.
• He believes the economy is resilient and will recover from the public health issues currently faced.
• The pandemic has accelerated the transformation towards digital banking, a trend that Wilkes expects to continue post-pandemic.

"Overwhelmingly positive... I believe the economy is resilient and will return quickly to a more normal work environment... fintech plays an important role in all of that."

Clay Wilkes expresses a positive outlook on the fintech industry's future, highlighting its resilience and importance in the broader economic recovery and transformation.

• Clay Wilkes is excited by enabling technologies that allow challenger banks and fintechs to create comprehensive consumer experiences.
• He finds the variety of enabling technologies appealing as they contribute to true and revolutionary change in the market.

"Building these enabling technologies so that challenger banks, other fintechs can come about and finish the consumer experience and take a great product to market is what excites me."

This quote captures Clay Wilkes' passion for foundational technologies that empower new financial services to innovate and deliver exceptional products to consumers.

• The fintech industry has seen a phase of unbundling services, but there is a concern about the re-bundling of services by neo banks.
• Leaders in the space have grown larger and may be re-integrating specialized services, which could impact the investability of ancillary spaces.

"We've definitely been going through a phase where we have seen the unbundling, the specialty services dedicated and specialized and reoptimized. But as leaders have gotten larger..."

Clay Wilkes acknowledges the trend of unbundling in fintech, suggesting a shift might be occurring as successful companies grow and potentially re-bundle services.## Evolution of Banking Services

• Traditional banking services are expanding to include additional, consumer-focused services.
• A shift towards a more integrated and frictionless consumer experience is expected.

"So to the extent that they can bring in additional services, we're going to see a rebundling or reimagining of that experience, eliminating friction."

This quote emphasizes the trend towards incorporating more services into traditional banking to enhance the consumer experience by reducing friction.

• Verticalization refers to creating banking services tailored to specific professions or demographics.
• The trend is seen as part of the broader integration of financial services into various sectors.

"How do you feel about the verticalization of neo banking?"

The question addresses the trend of creating specialized banking services for niche markets, which is a component of the broader evolution in financial services.

• Anticipation of consolidation in the financial services industry, alongside the emergence of new market entrants.
• The belief that the fintech sector is still in its early stages, with significant developments expected in the future.

"I certainly do. I believe that we'll see consolidation."

Clay Wilkes predicts that the financial services industry will undergo consolidation, with new players entering the market and existing entities merging or being acquired.

• Big tech companies like Apple, Google, and Amazon are expected to integrate financial services into their offerings.
• The incumbent banks will need to respond to this integration by big tech.

"Big tech is going to play an important role here."

Clay Wilkes acknowledges the significant impact that large technology companies will have on the financial technology sector by adding financial services to their platforms.

• Startups will continue to innovate outside of big tech companies.
• Successful startups may become acquisition targets for big tech.

"I believe that startup innovation will continue and this innovation will occur outside of those big tech companies."

Clay Wilkes asserts that innovation in fintech will persist independently of big tech, with startups playing a crucial role in the industry's evolution.

• Neo banks need to prove their business models and continue scaling to become significant players.
• It is challenging to envision neo banks replacing traditional banking giants, but they will have their own significant impact.

"They've got to continue to scale, they've got to add additional services."

Clay Wilkes outlines the necessities for neo banks like Chime and Robinhood to grow and succeed in the financial sector.

• Challenger banks must ensure their unit economics work before adding more profitable services.
• This approach is not unique to challenger banks and mirrors the growth strategy of companies like Google.

"You do need to begin to add in more profitable services."

Clay Wilkes discusses the importance of challenger banks developing sustainable business models by eventually incorporating profitable services.

• Venture capital (VC) investment can lead to overvaluation in the neo banking sector.
• Despite potential issues, VC funding is considered important for the growth of the industry.

"Yes, absolutely. I think the vcs are anxious to jump in and to participate and that drives a bit of overvaluation."

Clay Wilkes acknowledges the role of venture capital in potentially inflating the value of companies within the neo banking space.

• The underlying technology infrastructure for fintech can be overwhelming for new companies.
• Entrepreneurs are advised to have tenacity and staying power to overcome challenges.

"Underlying tech is overwhelming and it can be overwhelming as these companies come into existence with a single thought or idea."

Clay Wilkes highlights the complexities of fintech infrastructure and the need for perseverance among entrepreneurs in the sector.

• Galileo's acquisition by SoFi is seen as a strategic move to combine strengths in banking payments and lending.
• The merger is expected to provide a competitive advantage and distribution benefits.

"The sale to sofa makes a lot of sense to me."

Clay Wilkes explains the rationale behind Galileo's decision to sell to SoFi, emphasizing the complementary nature of their services and the expected benefits.

• There is a question of how the relationship between SoFi and its clients may be affected by competitive overlaps.
• SoFi's continued growth is anticipated despite potential competitive tensions.

"SoFi itself will continue"

The quote is incomplete and does not provide full context or insight into the discussion about potential competitive tensions between SoFi and its clients.## Consumer Experience and Fintech Competition

• Galileo aims to focus on consumer experience similar to other fintechs.
• It targets a specific demographic and operates independently, with policies to protect consumer information.
• Galileo is seen as an infrastructure provider to the broader ecosystem, maintaining its established role despite competitive dynamics.

"to be a business focused on the consumer experience, very much like any of the other fintechs that are out there."

This quote emphasizes Galileo's commitment to prioritizing consumer experience, aligning with industry standards set by other fintech businesses.

"Galileo will continue to be an independent business."

Galileo's independence is highlighted, ensuring its ability to operate without external influences that could compromise its business model or consumer trust.

"We are putting in place policies and ring fencing of strategies, consumer information, et cetera, and contracting around that."

The implementation of policies and strategies to protect consumer information is underlined, showcasing Galileo's dedication to consumer privacy and data security.

"So think about Galileo as an infrastructure provider out to the broader ecosystem."

Galileo's role as an infrastructure provider is defined, indicating its function within the fintech ecosystem to support other entities.

"And on the competitive note, there is several successful role models here."

The competitive aspect is addressed, suggesting that Galileo can look to successful companies like Amazon and AWS for inspiration on how to navigate competition.

"If you look at Amazon, a great consumer business. AWS is an incredible infrastructure provider, very much like Galileo."

Amazon and its subsidiary AWS are cited as role models for balancing consumer business with infrastructure provision, drawing a parallel to Galileo's objectives.

"And yet one of AWS's largest clients is a company called Netflix, which by all accounts is one of Amazon's largest competitors."

The relationship between AWS and Netflix is used to illustrate how infrastructure providers can successfully serve competitors, which is relevant to Galileo's strategy.

• Bootstrapping forces founders to be efficient and make strategic decisions.
• It instills a culture of focusing on both top-line growth and bottom-line profitability.
• Bootstrapping can provide resilience during economic downturns and allows for control over the company's destiny.
• There are successful bootstrapped companies, like Qualtrics, which achieved significant exits.

"It forces the founder to be efficient and the business to be efficient, to make decisions differently."

Bootstrapping is shown to encourage efficiency and careful decision-making, which are essential for sustainable business growth.

"Getting back to making sure that the unit economics are right, you just fundamentally run the business in a very different way."

The focus on unit economics is highlighted, which is crucial for a business's financial health, especially when not relying on external funding.

"So when a 2008 rolls through, can you respond? And do you have enough reserve in the tank to get through that type of a challenge?"

Bootstrapping is associated with building resilience to withstand economic crises, emphasizing the importance of having sufficient reserves.

"It isn't necessarily a guarantee for success. What it is is an ability to control your own destination."

While bootstrapping doesn't guarantee success, it offers more control over the company's direction, which is a significant advantage for founders.

"But there are trade offs that are made, and hopefully we'll get to that here in a few minutes."

Acknowledging that bootstrapping involves trade-offs, which can impact the pace and scale of growth compared to companies that raise external capital.

"This cultural kind of focus on top line growth coupled with bottom line profitability is rare and unique in fintech and it's even unique in tech."

The cultural emphasis on both revenue growth and profitability is noted as uncommon in the fintech and broader tech industry, where many companies prioritize growth over profits.

"And so we saw this with a company in Utah here, Waltrics $8 billion exit to SAP."

The success story of Qualtrics is mentioned to illustrate the potential outcomes of a bootstrapped business model.

• CEOs must excel in resource allocation, especially in bootstrapped companies.
• Raising capital can increase visibility and open doors that are otherwise difficult to access.
• The decision to raise funds should be strategic, considering the right timing and partners.

"Also an incredible amount of emphasis also just on efficient resource allocation for the leadership team."

The importance of efficient resource allocation for leadership is emphasized, especially in the context of limited capital.

"I always say the best ceos are the best resource allocators."

This quote supports the idea that a CEO's ability to allocate resources effectively is a key indicator of their competence.

"Would you agree with that? And how do you think your mindset changed in terms of resource allocation when you did then raise?"

The question probes into how the approach to resource allocation shifts when a company transitions from bootstrapping to raising capital.

"No, 100% agree. That's the absolute essence of what I was trying to communicate there."

The agreement on the significance of resource allocation confirms its role as a fundamental aspect of business management.

"When we did make a decision to raise, we were profitable and had been profitable for quite some time."

The timing of raising funds is linked to the company's profitability, suggesting a strategic approach to seeking external investment.

"It was hard to get analysts and press to pay attention to you or to consider you as an alternative."

The challenge of gaining attention from analysts and the press for a bootstrapped company is acknowledged, highlighting one of the reasons for eventually deciding to raise capital.

"It changes that dynamic a bit. And I'm not naive to that."

The dynamic change brought about by raising capital, in terms of visibility and opportunities, is recognized.

"Excel is an incredible company, John Locke's incredible partner."

The value of choosing the right investment partner is underscored, with a positive reference to the venture capital firm Excel and partner John Locke.

• Entrepreneurs should demonstrate tenacity and make strategic decisions about when to take on capital partners.
• Being located outside of Silicon Valley can present challenges but also opportunities, such as access to talent and competitive pricing.
• Establishing relationships and getting noticed by VCs and analysts is crucial for companies outside major tech hubs.

"So hopefully, for any vcs that are listening, there needs to be a modified or a different way of appraising the value or importance of a business."

The need for VCs to adopt new methods for evaluating the value of businesses, especially those that are not widely covered by industry reports, is highlighted.

"Back to your question and kind of flipping it around. I would just say to me, it's tenacity for the entrepreneur."

The trait of tenacity is emphasized as critical for entrepreneurs, especially when navigating growth and considering raising capital.

"It's staying after it and then making that decision at the right time to take on a capital partner."

The importance of timing in the decision to take on a capital partner is underlined, suggesting that patience and strategic planning are key.

"Do you think being outside of the valley negatively impacted visibility and attention for you?"

The potential impact of geographic location on a company's visibility and the attention it receives is questioned, acknowledging the influence of Silicon Valley.

"I think the opportunity for companies in the valley is more natural and there's a piece of machinery that works there that you don't have access to."

The advantages of being in Silicon Valley are acknowledged, referring to the established "machinery" that supports companies in the tech hub.

"On the other hand, though, if you're going to go outside that piece of machinery, the VC machinery, there are advantages to being in Utah as compared to being, for example, in the bay."

The advantages of operating outside of Silicon Valley, such as in Utah, are discussed, including access to talent and competitive business costs.

"Establishing these relationships are important and that can be accomplished through a variety of means, conferences, industry conferences, et cetera."

The significance of establishing relationships through various means, such as conferences, is stressed, which is crucial for companies outside of major tech hubs.

"But I think the opportunity is there. I go back to how are you going to get the message out, and how are you going to establish the opportunity to foam in a conversation?"

The potential for companies outside Silicon Valley to succeed is affirmed, with a focus on effective marketing and communication strategies to establish opportunities and conversations.## Board Management and Membership

• Challenge management and their assumptions.
• Offer diverse insights and perspectives, even if they differ from industry norms.
• Fresh perspectives are vital in board conversations.
• Excel's experience in successful stories makes their contributions significant.

The first thing I would do and say is challenge management, challenge their assumptions, be very conversant, offer your insights and your perspectives, even if they're different from the traditional sort of mindset of whatever industry you're operating in.

This quote emphasizes the importance of questioning and providing alternative viewpoints to management, which can be crucial in steering a company in the right direction.

• Clay Wilkes reads extensively, focusing on books by Nobel Prize winners.
• Mentions several influential books, including "Thinking, Fast and Slow" by Daniel Kahneman.
• Reading choices are diverse, spanning topics from economics to AI and corporate innovation.

I made a decision about a year ago. On that year I was only going to read Nobel Prize winners and I think she'll be one. Singularity is near by Ray Kurzwald. But to answer your question, going back to Nobel Prize winners, Kahneman's thinking fast and slow.

The quote reflects Clay's deliberate choice to read books by Nobel laureates, highlighting the value he places on high-caliber, impactful literature.

• Vision is considered Clay's greatest strength.
• Organization and operational aspects are his weaknesses.
• Emphasizes the importance of compensating for weaknesses.

I think vision on strength. I think having ability to have vision around what we're currently doing and what's coming. Biggest weakness is just organization and operational.

Clay identifies his ability to envision the future as his primary strength, while acknowledging his need for improvement in organization and operations.

• Clay believes that leaders should focus on compensating for their weaknesses.

I think focusing on the weaknesses, compensating for the weaknesses is really important as a leader.

This quote suggests that leaders should work on their areas of weakness to become more well-rounded and effective.

• Clay teases employees jokingly to lighten the mood.
• Does not have a specific motto but believes employees might have perceptions of his sayings.

I tease employees a lot. If I see them walking out at five know, thanks for working this long or something like that, but I don't know that I've got a payment.

This quote reveals Clay's humorous approach to engaging with employees, although he doesn't identify with a particular motto.

• Clay is generally optimistic about the future and human potential.
• Believes that humanity has incredible potential.

Well, what I believe many others may also believe, but I'm generally optimistic and believe that we're, as a human race just an incredible amount of potential and the future to me is very bright.

Clay expresses his optimistic outlook on humanity's capabilities and the future.

• Tenacity is crucial through the scaling process.
• Entrepreneurs should persevere through crises and successes.
• Staying focused on the mission is vital.

My number one message to an entrepreneur is, stay with it. Whether it's a crisis or it's an amazing day, stick with it. Stay focused on your mission.

This quote imparts the message of persistence and dedication to entrepreneurs, emphasizing the importance of tenacity in business.

• It's essential to adapt to challenges and industry changes.
• The innovator's dilemma is about adapting good companies or ideas to new circumstances.
• Microsoft's shift to cloud services is an example of successful adaptation.

It's the innovator's dilemma. It's back to can tech run a good company or a good idea? And the answer is yes. So it's those companies that are able to adapt.

The quote discusses the concept of the innovator's dilemma and the importance of a company's ability to evolve and adapt to maintain success.

• Personal accountability for unexecuted good ideas can be a powerful motivator.
• Clay was inspired to start Galileo by his wife's challenge to act on his ideas.

My wife made the comment to me, you're going to be held accountable for all the good ideas that you had that you didn't execute on.

This quote highlights a personal moment that propelled Clay to take action and start his company, demonstrating the influence of personal relationships on professional decisions.

• Clay plans to continue the current trajectory, enjoying the excitement and interest in Galileo.
• Aims to maintain the fun and momentum in the business.

I want to continue doing what we've been doing. I'm having a lot of fun right now, and it's never been more exciting.

Clay expresses his intention to sustain the enjoyable and successful path that Galileo is on, looking forward to more of the same growth and excitement.

• Harry Stebbings acknowledges the impressive progress of Galileo.
• Expresses gratitude for Clay's participation in the show.

Some very exciting times ahead for Galileo and I did just love having clay on the show there.

Harry reflects on the positive outlook for Galileo and appreciates Clay's contribution to the podcast discussion.