A Vertically Integrated Approach to Fintech Investing with Justin Smith of Recharge Capital

Our Guest: Justin Smith Simplifying Fintech Investment Strategies

Justin Smith, the dynamic Managing Partner at Recharge Capital, brings a wealth of experience and expertise to the fintech investment landscape. With a career that commenced in finance, Justin’s journey took a pivotal turn in 2013 when he joined forces with his partner, Lorin, to embark on an angel investing venture. Over the last decade, the duo has been at the forefront of fintech investments, spanning both consumer and enterprise software solutions within the financial domain. Justin’s initial foray into the finance space, coupled with his strategic insights, laid the foundation for Recharge Capital’s thematic first investing platform, designed to power the trends of the future.

A visionary in the fintech sector, Justin is passionate about closing the value chain loop and integrating investment platforms across asset classes and geographies. This integrated approach aims to foster financial inclusion technologies in emerging markets, aligning with Recharge Capital’s twofold mission. Justin’s leadership and commitment to building an interconnected ecosystem have positioned Recharge Capital as a key player in the fintech investment landscape. His focus extends beyond traditional investment models, adopting a thematic-first strategy that encompasses various stages, from seed to private equity. Justin’s expertise lies in identifying key technology enablers, such as AI, blockchain, and mobile applications, which form the backbone of Recharge Capital’s forward-thinking investment approach.

Beyond the boardroom, Justin Smith is a hands-on leader actively involved in shaping the fintech narrative. With a preference for first and second-time founders deeply immersed in their chosen verticals, Justin emphasizes the importance of founder-market fit. His commitment to humility, combined with a relentless drive and a chip on the shoulder mentality, characterizes the entrepreneurs Justin chooses to work with. As Recharge Capital continues to make waves in fintech investing, Justin Smith’s strategic vision and hands-on approach define him as a key influencer in the evolving landscape of financial technology.

Episode Transcript

Jacob Hollabaugh: Hello, everyone. Welcome to PayPod. I’m your host, Jacob Hollabaugh. Today on the show, we’ll be putting on our investor caps once again and taking a look at the fintech landscape through the lens of someone who’s trying to find aid and grow those next great companies, products, and people working within the fintech industry. I’m pleased to be joined for this conversation by someone who does just that on a daily basis. I’ve got with me Justin Smith, managing partner at Recharge Capital, the thematic investing platform powering the trends of the future. Justin, welcome to the show. Thank you so much for joining me today.

Justin Smith: Great. Thanks for having me, Jacob.

Jacob Hollabaugh: Yes, the pleasure is mine. Let’s start first with a little bit of background on you, yourself, and Recharge Capital. Where did your desire to operate in the fintech space or in the investment space come from originally? And then can you tell me a bit about who Recharge Capital is and kind of the goals and mission behind the firm?

Justin Smith: Yeah, sure. So I got my career started completely in the finance space. First working in accounting, I met my partner Lorin back in 2013 when we started Angel investing together, and we’ve done a lot of fintech investments over the last decade both on the consumer side as well as the enterprise software side for various softwares used within financial institutions. And our goal is we kind of started the Recharge Capital platform a few years ago was really kind of twofold. One was to build out an integrated investment platform that sort of transcended both asset classes and geographies and to bring financial inclusion technologies into emerging markets. So the way that we are structured today is that we have set up holding companies which are completely vertically integrated through both various risk asset classes as well as geographies in order to capture the entire value along a particular value chain. And we call it closing the value chain loop. So within fintech, we do a lot of investing within the mortgage markets. And then we also have a healthcare wing that invests primarily across women’s healthcare with a big particular focus on IVF.

Jacob Hollabaugh: Wonderful. And I want to come back to the kind of idea of closing the loop in that vertical integration here in a little bit. Let’s take one step back from that first and kind of step by step here through somewhat of your process. I know you list the idea of thematic first investing is kind of one of the core principles behind what you’re doing. And that idea may some listeners may be like, I don’t know what that means. I don’t know the difference when you say thematic first investing versus some other kind of investing. So could you kind of define what that means and then how it differs from the like quote-unquote traditional investment model folks might be most familiar with of just someone comes, likes your idea, gives you money, and you’re on your way?

Justin Smith: Yeah, sure. I think that the way that a lot of portfolio management works today is, is very much investing along particular types of asset classes or particular types of geographies or even particular types of themes. So when I say thematic investing almost a better word to use for it would be like integrated investing. And so the three different ways, if I want to do invest in credit versus equity or invest in Latam vs US, or just picking a particular vertical like fintech and investing specifically in fintech, most of the time when you see a fintech strategy, it’s going to be focused on a particular stage like Seed or Series A. In our case, when we do an integrated strategy, it’s broadly across all those different stages. It can be series, early-stage stuff, growth equity, private equity. And so what we’ve done with thematic is enclosing that value chain loop. As we’re trying to create distribution channels. We think that’s a more efficient way of investing dollars, especially at the earliest stage. And so we combine both private equity credit and venture into one particular integrated platform that can feed off of itself. And so, for instance, within fintech, one of the things that we’re very focused on is within the mortgage industry.

And the reason we’re focused on the mortgage industry is because of all the consumer fintech investing that we’ve been doing over the last decade, one of the biggest issues we have found is issues around distribution. There’s lots of point solutions, some very similar issue you find in healthcare. You get all these point solutions that come out, they get venture subsidized to go out and build a customer base. And a lot of times those customer base are not high LTV customers. They’re actually relatively high churning customers which means you have to reach a certain level of revenue threshold and hope that you can go raise a series A or series B, follow on round to keep the party going, even though you have a business model that’s technically underwater. And so we sort of took a different approach to it. Instead, what we did is we’ve started raising money in different types of vehicles and companies that allow us to build out built-in distribution. And in the case of fintech, what we’ve done is started to purchase that mortgage sub-servicers and mortgage servicing rights, which gives us anywhere from five to 10 to 15-year direct relationship with US homeowners. And so what we can do with that then, is create fintech products and sell those fintech products into the US homeowners. And it gives us built-in distribution from day one. And so I can go and create a credit card company or an insurance company that I can raise a few million bucks, do it at a six, seven, eight, nine, $10 million pre-seed valuation and then get it to 2 to 3 to $4 million of are relatively quickly, and then put it on a pedestal to basically go out and raise that next round of funds or funding. So our idea is that we’re de-risking ourselves and then also feeding into this ecosystem with our venture companies.

Jacob Hollabaugh: Fascinating. Yeah. And that, I mean, that makes a lot of sense when you lay it out like that to kind of get the one, the main company first, that has that long run rate and then be able to build other things for those people, I would imagine with that kind of closing-the-loop strategy that sounds like it would be advantageous across any industry. But the financial world especially stands out to me like this was maybe the best place to incorporate something like that, or the most advantageous industry to be working within or adding in elements of. Because so many of the conversations we have with startups on this show, it always seems to come down to like those first couple partnerships or integrations or customer base that really matter in the world of finance, where you have all these little startups coming and trying to do something unique and interesting, but needing the one partner of the big behemoth company or the one integration like this doesn’t work. If we can’t get company X or product X to integrate with us. My kind of experience from all the conversations I’ve had on this show would need to think what you’re doing advantageous anywhere. Yes, but in the financial world, may be most advantageous of all, would you kind of agree with that?

Justin Smith: No, I would definitely agree. I mean, I think one thing that gets kind of like the time commitment and effort gets very underestimated, especially on the enterprise software side is within the financial institutions like the banks and the carriers, all of them, for the last decade-plus, have been trying to digitize different parts of their workflows. The problem is like as a startup when you’re going out and you’ve identified what you believe is a problem, because either you used to work in corporate and you’ve come out and you’ve raised money and you’re going to try and solve that problem. They all come out with the same pitch that, like their particular solution, is mission-critical to that workflow. And a lot of times what you find is, is it actually isn’t and you might be able to get like 5 or 6 pilots and you’re able to raise capital on top of that. But then the scalability of what you’re doing is just not there because it’s not mission-critical to everybody. And so what we really try to do is like, I mean, at recharge, we are very focused. We’re not focused on everything by any means.

We’re focused on mortgages, we’re focused on fertility clinics, and we’ll continue to build on that. But one particular thing that we do is we’re very focused on the internal workflow of whatever that value chain is. And so we map out that whole value chain and really try to understand where those pressure points are. And then we will invest in technology along those pressure points. So we know because we run these businesses on the other end as well, that is the particular pressure point. We can solve that with our technology. We can sell into this business that we control on the other end, and then we know that that’s a repeatable and scalable model we can apply to other businesses that are outside of our ecosystem. but that’s been a big issue, and it’s a big issue across a lot of companies, even like in the AI space. I mean, there’s so many great AI applications within financial institutions. But which one of those are like really, really mission-critical for particular workflows within those institutions? And it’s different for banks and carriers and the type of insurance carrier you might be and the type of banking products you have. but I think that’s a really difficult thing to underwrite on the venture side, if you’re underwriting it broadly, I think you have to have really specific knowledge of these workflows to properly underwrite technology into these workflows.

Jacob Hollabaugh: So that leads me to ask, then, what’s the kind of initial contact process look like? Or are you going out and finding these companies on your own? Are you taking kind of inbound pitches and applications and things? What is kind of the research and strategy? What’s that part of the process look like for you guys with such a specific, “We’re working along this vertically integrated value chain.” I would guess that means it’s more so not taking pictures and things, but you going out and finding them yourself. But what’s that process look like for you?

Justin Smith: Yeah. I mean, I think there’s a few different sources and I think if you’re running a more generalist strategy, it’s got to be very difficult to figure out what you spend your time on every day as it relates to what we’re working on, because we’ve mapped out these workflows, and we know specifically what types of technologies we’re going after. We can spend time doing outbound two particular companies that we know are building in the space, or we can incubate. We’re doing that in our offices in New York City right now. We’ve done some incubations in the past that have been very successful, but also as we create these value chain flywheels, the entrepreneur community takes note of this. And if they’re already building in the space, they want to get access to these particular ecosystems to sell into them. And so naturally, we get more and more inbound for the particular places that we’re building in. So really, I could say it’s a combination of inbound. There’s outbound. And then there’s also our own incubation.

Jacob Hollabaugh: Makes sense. We’ve had a few and it’s weird that I’m still not used to saying we’re in 2024 now. So I was about to say this year. But last year now we had quite a few different fintech investors on the show with a lot of different perspectives. And one of the kind of questions or topics I got the most mixed opinions on is this next question that I think based on everything you’ve told me so far, I kind of know which side you’re going to maybe lean on, but still interested to find out. So when you’re considering a specific investment, it sounds a little bit more like you’re pretty considered thinking the product and the idea itself and how it fits into your ecosystem, whereas we’ve had some others before that are only kind of solely focused on the founder and the people as much as the product or the idea itself. So when thinking about a specific investment, where do you kind of fall on that spectrum of really focused on? Does the founder Someone I can trust and believe in and work with? Vs is the just the product and the idea exactly what we think the market needs and what we’re looking for. Where do you kind of fall on that spectrum?

Justin Smith: Yeah, I mean, I look at it, it’s not really a spectrum. You need both. my partner Lorin and I, we’ve been doing this for a long time, especially on the angel front. And we’ve invested in all different types of founders. And like, the trust you developed with those founders up front is just so, so important. And everybody’s keyed this term with founder Market Fit. It’s nothing you guys haven’t heard of before. But it’s so important I mean you need people that understand the workflows that they’re trying to improve. Because that’ll help them understand their go-to-market strategy, who their customer is, how to iterate on that product, and also where to spend their time. and so we really take the account that probably actually the founder, especially if you’re doing pre-seed and seed stage investing is hands down more important than the actual product. But we’re trying to de-risk ourselves on that product side because we already have a really good understanding of what that product needs to do from a really foundational level. And then in the case of the Incubations, we go out and find the right entrepreneurs to lead that. But hands down, if I’m going and investing in the preceding seed stage, yeah, you want to put capital with people that you trust and frankly, have a chip on their shoulder, and we’ll stop it at almost nothing to win and get it done. And you really need that type of personality to build from 0 to 1, I think.

Jacob Hollabaugh: Are there any key characteristics or personality traits that stand out to you right away when you are looking like trying to build that trust or determine if you can have that trust if this person is the type of founder that can take the idea you believe in or the product you know, you need to add into your and get it across the finish line or the first couple of finish lines? There’s never an ultimate really finish line with any of these companies. But are there any characteristics that stick out that if you see right away those first few conversations, you’re like, “Hey, my probability of success, probability of believing in this person increase exponentially? Any standout characteristics or traits you’re looking for?

Justin Smith: Yeah. To me there is. And I’m not saying that these characteristics in particular are always going to be the winner. There’s definitely cases where you can find instances where that’s not the case, or there’s other characteristics opposite of what I’m going to say that actually did end up winning. But what I mentioned is chip on shoulder. I think it’s really important to have that because there has to be like an internal motivation for why somebody is even doing what they’re doing and why they’re deciding to spend the time on this first doing something else. but then other the other part that I think might be a little bit controversial is really a certain level of humility. And when I say humility, I mean it in a sense that I find people are much more effective when they know what they don’t know, and they’re always trying to improve upon that. and I have found that type of person is also much easier to work with and builds better teams around them and ultimately leads to, I think, better near to medium-term successes and gives them a better chance at really hitting the home run. And so those are kind of the things that we look for in the founding groups that we put together, but then also just down to the particular skill sets, having a particular skill set in where you’re building, I think is crucial. we generally don’t invest in serial entrepreneurs here. We like to invest in first and second-time founders that have a huge passion about the particular area they’re building in, have great networks built out in those areas, and have just gone very deep there. And so that’s what we prefer, as opposed to somebody who’s done it 8 or 9 times and has showed the ability to exit. That’s great, but that’s just not what we’re doing here at recharge.

Jacob Hollabaugh: Yeah. Love that. Another one of the kind of steps listed in your overall approach is the idea of key technology enablers. And it lists on your site things like mobile applications, AI, blockchain, a few of the different technologies you’ve referenced in the conversation already. Can you explain the idea first of key tech enablers and why That is kind of one of the specific steps or specific things you are looking for, or lenses you’re kind of going through in your process?

Justin Smith: Yeah. So the way we look at it is when we develop these integrated ecosystems, and then we invest in technology that gets applied to different parts of those workflows. Those are technology enablers. So things like AI can be applied to different parts of the workflow. IoT devices can be applied to different parts of the workflow, especially in the healthcare space. Blockchain is another one. I mean, blockchain obviously went through a massive run of all of this investment. And here we’re starting to see a revival of it. But it still begs the question on what are some practical applications we’re going to use blockchain for. One of the ones that we’re using it for now is essentially putting together a liquid wrapper for real-world assets. One of those is mortgage servicing rights. If I could tell that you that you could invest in a particular type of token that’s actually backed by real-world assets such as US treasuries or mortgage servicing rights. I think that brings a lot more confidence than investing in a particular token that has no real backing at all except whatever that community is producing. And that’s been a really difficult thing to define for a long time. So I look at blockchain as really an enabling technology for enabling liquidity in illiquid asset classes. And so it’s been tried a few times like within real estate and has it like with cadre and just hasn’t really succeeded the way we want it to, but we still believe that there’s a real application for there. And so we continue to build in that area.

Jacob Hollabaugh: Yeah. Where do you think the kind of financial world as a whole is at in? I’m glad you kind of highlighted blockchain because that’s the one, that’s the most interesting to me. Where do you think the financial world is at in kind of realizing the different potential, and then also actually putting it into use? Because you didn’t use the word crypto. But I will hear of it did blockchain kind of had its first mainstream moment alongside of cryptocurrency as the way it was being enabled. And so as the idea of crypto got tarnished to some degree or just faded from relevancy here recently, it feels like blockchain kind of went with it. And it’s like, no, no, no, that that was one use case for it. That’s where you maybe heard the word idea first or anything, but there’s so much more that it could do. And I’m a big kind of believer in that as well. So where do you feel like with blockchain or in AI all the new kind of advanced technologies that are going to change so much of what we do? Where do you see the financial industry at as a whole in that adoption curve of realizing the power of it and actually starting to apply some of the power and find those use cases for it?

Justin Smith: Yeah. I mean, I think it’s different across the globe in different areas. I mean, here in the US, there’s obviously been a lot of regulation around utilization of stablecoins, lending against crypto. You know, we saw what happened with BlockFi. But if you go over into Southeast Asia and parts of Africa, stablecoins are a big deal. I mean, this is the way a lot of people are conducting commerce now, which to me was one of the original US cases that makes a lot of sense. but the key innovation with these stablecoins like circle, which was a company that I saw many years ago when I was working at Tusk that has done really well, is they created Usdc, and then they collateralized it on the back end with actual real-world assets, whether it’s gold or US currency or some other type of fiat currency. And what that did, regardless of how much it’s collateralized is, it puts instills faith into that particular currency and allows people to actually start to transact on it. I’m a believer, even though we’ve had the scandals with FTX and Terra and all this, that we are still moving in a direction of being able to leverage blockchain technology more to help facilitate transaction volume both cross borders and in between banks and financial institutions to trade with each other. All else being equal, you want the level of trade to continue to increase, and we’re going to continue to use technologies to help do that.

We had certain technologies, like securitizations come out that have helped us to take illiquid objects and make them more liquid and allow them to be tradable. And blockchain is doing the same thing through its tokenization structures. It’s really just another way of securitization. and then the other thing that we’re going to have on the back end is the creation of new marketplaces that allow people to trade these assets. It’s not a noble idea on my part whatsoever. It’s been around for a while, but nobody has truly been able to execute on it. And it’s going to go into things like what figure is working on right now with trying to create marketplaces for secondary shares, for illiquid LP stakes or illiquid private debt or illiquid private equity transactions. Everything that’s illiquid now eventually will become more liquid because that only enhances the value of it.

Jacob Hollabaugh: Yeah. Fascinating to think about. Well, the final question I have for you then, and you kind of started to allude to it there at the end of that answer. But I do want to ask, is there any kind of one person or company in the fintech space that you think is doing something really fascinating or interesting right now? We’ve talked so much about the types of companies you look to invest in. It only feels right to maybe highlight 1 or 2 of the ones that you have been working with, or have hopes to work with. Any recent standouts that you’re really excited about, either bringing to market or kind of growing throughout the year of 2024?

Justin Smith: Yeah, absolutely. I think, for us, one of our biggest portfolio companies and initiatives in terms of working with them is Valiant Technologies, based out of New York City. They are in a super boring industry of servicing mortgages.

Jacob Hollabaugh: It’s one of the best industries to be in.

Justin Smith: Yeah, one of the best. We’ve spent some years, we’ve invested with them very early. And what they’ve done is created an amazing software to help automate many of the workflows within servicing. And so you can think of servicers as almost a collection agency for particular mortgages. But then even more than that, like, they can do an upsell of all different types of fintech products. And so there’s been a real missed opportunity which is now an opportunity for us to go in and take this servicing workflow and actually develop a close relationship with the end homeowner and be able to take data that we have on them and understandings about their family dynamics and where they live and where they are in their mortgage payments to upsell them, other relevant products. And so what we’ve been really focused on is building out an integrated ecosystem around Valon now, and that includes the purchase of other services so we can get access to their books of business and send that revenue opportunity to our portfolio company, and then also setting up our own hedge fund that we’re doing now that’s actually purchasing MSR assets themselves. And so those MSRs not only are best-in-class returns because we’re leveraging Valon software to do it, but we’re also in turn driving revenue to Valon by virtue of giving contracts to service these particular loans. And so that is one company that we’re super, super excited about. And we think we can build that into a true financial platform over time.

Jacob Hollabaugh: Yeah. Love it. Sounds like a lot of exciting stuff moving forward. And Justin, this has been a real pleasure of a conversation. For those listening who either may want to follow you or learn more about Recharge, keep up with everything you and the company and those you’re investing in have going on. Where would be the best place for them to go to do so?

Justin Smith: Yeah. No, I’m very easily reachable by email. We have a website www.rechargecapital.com, and I don’t have much of a Twitter presence. I wish I had more, but it’s, you can only do so much in life. but I’m available on LinkedIn. I am very responsive. I’m an inbox-zero guy pretty much every day. So if you reach out to me, chances are I’ll try to respond to it if I can.

Jacob Hollabaugh: Impressive. That’s as also someone who attempts to be inbox-zero every day. I know the struggle, but also the joy when you actually accomplish that every single day. So wonderful. We’ll link to those in more in the show notes below. Justin, thank you so much for your time and knowledge today. I’ve greatly enjoyed it and hope to speak again sometime soon.

Justin Smith: Thank you very much, Jacob. Appreciate it.

Jacob Hollabaugh: If you enjoyed this episode and want to hear more, head on over to soarpay.com/podcast to subscribe on your podcast listening platform of choice. That’s soarpay.com/podcast.