Growth Equity Strategy with Portage’s Daniel Ballen

Episode Overview

Daniel Ballen is a distinguished figure in the fintech investment landscape, currently serving as Co-Head and Partner at Portage Capital Solutions. In this role, he co-leads growth equity, structured equity, and special situations investments in financial technology and services companies on a global scale, while also driving the fund’s overall strategy.

Based in New York, Daniel brings nearly two decades of experience in private equity and structured investments, with a focus on the financial services, fintech, and real estate technology sectors. Before joining Portage, Daniel was a Senior Portfolio Manager at PIMCO, where he led a team dedicated to private equity and structured equity investments for the firm’s alternatives franchise across the U.S. and Europe.

His career also includes significant roles at Bain Capital and Pine Brook Partners, where he partnered with growing companies across various sectors. Throughout his career, Daniel has served as a board member for a diverse range of public and private companies in the U.S. and Europe, contributing his expertise to their strategic growth and development.

Daniel’s professional achievements have been recognized through his inclusion in M&A Advisor’s “Emerging Leaders” list and Growth Cap’s “40 Under 40” list of growth equity investors. He graduated Summa Cum Laude from Emory University, reflecting his strong academic foundation.

At Portage, Daniel continues to leverage his extensive experience and deep industry knowledge to identify and support innovative fintech companies, playing a pivotal role in shaping the future of financial technology investments.​

Episode Transcript

Daniel Ballen : I would say both of those qualities are necessary, but not sufficient. You could have an incredible team managing a mediocre product and a mediocre small shrinking market, which is a scenario that I’ve seen. There are some shrinking markets out there. Great.

Kevin Rosenquist: Hey, welcome to Paypod, where we bring you conversations with the trailblazers shaping the future of payments and fintech. My name is Kevin Rosenquist, and thanks for listening. Daniel Ballen is co-head and partner of Portage Capital Solutions. Dan is responsible for co-leading growth, equity, structured equity and special situations investments in financial, technology and financial services companies globally. He spent his entire career in fintech and got his start just before the 2008 financial crisis, so he’s seen a lot. He has great insight on where fintech is heading, the factors one must look at when investing, and the pitfalls companies need to avoid when looking for funding. Please welcome Daniel Balan. It’s an exciting time for fintech companies. There’s a lot of demand for innovation, AI, Web3, open banking, embedded finance, lots and lots of opportunities for growth. How are you seeing these trends play out for more mature companies that you invest in?

Daniel Ballen : Sure. It’s so first of all, Kevin, thank you for having me on the podcast. Very excited to be a part of the conversation. It depends on the particular theme. Ai is as clearly had an outsized impact across every stage of maturity of business, from startup to scale 100,000,000,000 trillion plus public company. But they apply just as much as they would to the startup world. These are themes that affect every facet of kind of mid stage and later stage fintech businesses. So it’s something that we’re focused on as investors and one that we,  depending on the theme,  can be quite excited about. And we’ll put capital behind.

Kevin Rosenquist: What gets you most jazzed up about where fintech is heading? As we sit here toward the end of 2024. Yeah.

Daniel Ballen : I’ve spent my career in fintech and have a clear bias. I just think that in financial services, relative to other areas of the economy, there’s still a dominant legacy, culture, attitude and approach to delivering financial products to both consumers and businesses that is quite antiquated and is still ripe for disruption. That applies across payments, wealth management, insurance, lending, banking. It’s an area that technology and technology trends, like, I think we just discussed can be transformative in how useful these can be to people and businesses. And I’m quite excited about the future. It’s also quite a large part of the economy, you know, across all developed countries. Financial services is roughly 1,520% of total GDP. So it’s a massive addressable market and one that can be transformed and will be transformed over the long term.

Kevin Rosenquist: It almost seems like there’s more and more happening, like in the last few years and then in the next five years,  then we’ve seen in a long time, like in such a short amount of time, there’s been so many changes. And I feel like you could say that about a lot of different industries. And that’s certainly not just fintech, because technology, particularly AI, has kind of blown things up. But, you know, you’ve said you’ve been in this way your whole career. Is this sort of like the biggest sort of tipping point you’ve seen thus far?

Daniel Ballen : It’s a great point. I would agree that technological development is not linear. And it generally goes in waves. And you have these spurts that are driven by particular discoveries. Clearly people can identify the internet age. People can identify more recently. Kind of the eye. The eye has been something that’s been in development for decades. And I think sometimes there becomes this kind of  catalytic event here. I think it was probably the wider distribution of, of Open Eye and their, their latest products that really got people excited. But I think it does feel like the velocity of development is faster now, driven by AI as well as a few other kind of themes that have come to light more recently.

Kevin Rosenquist: And also, I think the race. Right, the arms race, if you will, in AI, probably has a lot to do with that too. And then all the fintech companies, whether it’s startups or not, trying to kind of build on top of that and keep that momentum going.

Daniel Ballen : Yeah, it’s totally self-fulfilling. Right. You have something that’s exciting, sexy. It attracts really smart people. It attracts a lot of capital within and of itself pushes that momentum faster. And why you have these spikes in development and technological evolution, which I don’t know if we’re in the second inning of A’s spike or if we’re in the eighth inning, I think you can probably argue different, different,  different points. But I think we’re definitely in the middle of it.

Kevin Rosenquist: Yeah. Yeah, it definitely feels that way. It feels that way. I saw I was looking at your current portfolio for Portage and it’s pretty vast. I saw a handful of companies in the crypto and blockchain space. Are you optimistic about the future of decentralized finance?

Daniel Ballen :  at a high level, we are,  I think all the benefits of a decentralized,  infrastructure apply across different sub sub verticals of financial services. I can’t say what that means for the value of a particular cryptocurrency, for example. But I think the the tenets and the infrastructure around blockchain certainly have benefits.  we’re seeing that become more and more Exciting in capital markets, for example, and in how securitizations work and how risk is distributed and assurance. They’re really kind of novel ways that blockchain is being utilized. We have a thesis around blockchain and crypto. It’s one of many areas that we invest behind, but we certainly have our exposures there as a firm.

Kevin Rosenquist: Yeah. Do you see it as the huge disruptor to traditional banking that some people feel it will be, or are you less less bullish on that.

Daniel Ballen : In the near medium term? It’s really hard to disrupt this kind of current I guess mode and of how the banking world works. If we’re talking about kind of one subsector long term, I think it does. It does have a lot of viability.  and if you think about things like insurance, the insurance industry used to be decentralized. It was a lot of kind of business owners trying to mitigate their own risk. If you think about the modern insurance world in kind of shipping routes, right where you can share the risk of storms and other things that could affect the profitability of shipping and trading routes. So I think that it could go back to that in some form and take a lot of the economics and fees that are currently being sucked out by a lot of large insurance entities and banking entities in, in those ecosystems. But in the near medium term, it’s going to take a lot to, to get there.

Kevin Rosenquist: Yeah. That’s kind of like it seems like there’s just such a, I don’t know, to disrupt something that large. Seems like you’d need time. You need time. Yeah. So you’ve worked for some pretty, pretty big companies and pretty big, big financial institutions. What about Portage? Kind of drew you in?

Daniel Ballen : Sure. I’ve been a fintech financial services investor for my career. As I mentioned, Portage has been one of the most successful.

Kevin Rosenquist: Oh my gosh, I’ve been saying it wrong. I should have asked, I just assumed.

Daniel Ballen : Yeah. No worries. It’s, uh. I’ve done it. I have butchered it many times already.

Kevin Rosenquist: Portage, people. Portage rolls off the tongue. Right. That’s it. It really does. It’s really. It sounds fancy.

Daniel Ballen : Yeah. What it literally means is, is,  taking a canoe, lifting it over a traverse of water, which I’m sure has some symbolic meaning that’s beyond me. But,  it is.

Kevin Rosenquist: That, like, where you the people are like. It’s like on their heads, like. And they’re walking across the water. Is that exactly? Yeah, yeah, I’ve definitely seen that in probably movies or something, I would assume. Yeah.

Daniel Ballen : There actually are a few other I think there’s a Portage Partners. I think if you try to start an investment firm, you then realize every name and every iteration of every name has been taken already. So,  there are other portages, but,  Portage Ventures,  we’ve been a long time fintech investor in Marquette. And really, as I was thinking about kind of next stage of my career, really enjoying fintech investing had a little bit more of a bend towards the growth area of the investing world. And within fintech, which is where kind of my experience and skill set lied. And I got connected to the leadership of Portage and Cigar generally, which is the parent asset manager and really had a good meeting of the minds of what’s exciting within fintech. How do we build out a successful later stage investment strategy? And I had the real benefit of being able to leverage what is a fantastic team of fintech experts, a very large portfolio, great brand that already existed in place for the kind of early stage investment arm. So it’s been a great experience.

Kevin Rosenquist: When you’re considering investing in a fintech company, are there general criteria you look for or is every situation unique?

Daniel Ballen : The answer is yes to both. There are general criteria. There are certainly KPIs and and growth benchmarks that we look for. People talk about rule of 40. There are different versions of that that get to the same answer in terms of getting the right mix of growth and profitability. There’s also the right stage. I think there are a number of risks that you can take investing in a business, does the product work? Do people care that the product works? Can you sell it profitably? And can you take selling that product profitably into a scaled profitable business, which is different than making money on just the initial sale? So I don’t really take the product risk. I like investing in companies that unit economics are proven and it’s just an issue of sales execution, execution and go to market strategy and so forth. But all of the things that you would that are intuitive to people, if things we look for great management, growth, exciting product, disruptive, real kind of differentiation and a moat importantly around the business and products such that that success can be sustained over the long term.

Kevin Rosenquist: And that’s a good, good segue. I was curious how you weigh the importance of the product itself versus the strength of the leadership team. Does that, does that and does that balance shift as the company grows? Does that change from an early stage company to a more established company?

Daniel Ballen : So I would say both of those qualities are necessary but not sufficient. You could have an incredible team managing a mediocre product and a mediocre small shrinking market, which is a scenario that I’ve seen. There are some shrinking markets out there with great operators. And then you could also, conversely, have a fantastic product with a team that doesn’t know how to execute or sell it. That doesn’t do you much good either. So I think both of those are qualities that are important. We are quite selective, as are many venture and growth firms. We generally look at 100 opportunities for every one that we make an investment in. So I think that will give you a sense of, you know, it’s really just checking every single box for us to really get over the line and want to make a commitment. So we are quite selective, as are others. And then, you know, growth. It is a little bit different skill set. You’ll see a not uncommon circumstance where a founder, really visionary product type archetype will build the product successfully, build the IP, get, develop an initial go to market strategy, prove that it works and people really like it, and then hand the reins over to someone that is a bit more experienced in in scaling a business, which is a little bit of a different skill set experience than, than the kind of visionary product side. But in many cases, we’ve we have companies that we’ve backed where the founder continues to run, run the business successfully today. They have tremendous domain expertise. They know the product intimately and bring on people around themselves in the C-suite that have that skill. And we’ve seen this successful models in both scenarios.

Kevin Rosenquist: I was actually just reading, I think, yesterday about founder mode versus manager mode and, and about how some people, some founders think that, you know, founder mode is the better way to go where they’re basically, you know, in every aspect of everything that they do versus the manager mode where you hire people to handle things. Do you have a lean on that, or is it just kind of depend on the founder or like because it seems like manager mode is more the taught thing, but you know, and the founder mode can probably be frustrating for the other people. It’s a little bit micromanaging, but,  you know, do you have a lean on that?

Daniel Ballen : I probably am in the camp of, I guess, manager mode, where you hire excellent people who are deferential to their expertise. But I think as part of that, being a successful CEO, it does mean you’re in the weeds and in everything anyway. But you still have that difference. You’re pushing your lieutenants on their decisions and constantly calibrating to make sure that you have the right people in place. I think the the thing that everyone learns as an investor is you would have thought, hey, you have the best product in the market. It’ll figure itself out. But the team is critical and it’s not just the CEO. As you get larger and you can’t be involved in everything day to day, it’s really hiring and retention of talent, which is in and of itself a unique skill set that is absolutely critical and one that we evaluate in how we look at businesses that we want to invest.

Kevin Rosenquist: Yeah. It’s tough. I mean, I’ve been hired before not for C-suite stuff, but I’ve hired before and it’s you win some, you lose some, and the ones you lose can be bad. Yeah, it can be bad.

Daniel Ballen : Turnover can be disastrous. Even if you get on the right people. Retention I think is critical. I think there’s more of a movement now to understand how important retention is. Usually it was, can they get someone to sign the dotted line to join your business? But if they’re unhappy and you’re not doing the right things to have them be the best performer they can be, it’s,  It’s all for naught.

Kevin Rosenquist: Yeah. And then you don’t want someone who just bounces around trying to climb the corporate ladder inch by inch, either.

Kevin Rosenquist: Startup failures. Failure rates are discussed often, but we don’t hear as much about challenges faced by companies that have already scaled to a significant size. What are some of the common pitfalls or reasons that companies at this stage fail to grow further?

Daniel Ballen : Yeah. It’s so clearly idiosyncratic to do business. I think the most important thing is to understand. And one thing that I always tell people, I started my career before the global financial crisis. My first job out of college, incidentally, was at Bear Stearns. So I learned way more living through 2007 through 2011. Than I’ve ever done in some, you know, generally upward  moving year in my career since. And really, the one thing that you focus on as a, as a driver of failure is, is liquidity. Liquidity and cash flow management is the number one,  cause of failure among startups.  it’s something that some people are good at. Some people are not. But making sure that you have the capital, you need to execute on the strategy that you have a cushion for,  instances and events that you were not prepared for.  that’s that’s the number one thing that I think people should, should be focused on and one that we’re focused on, which means,  consequently, and this is a message we give to our 80 plus portfolio companies, you do not go out to raise your next round of capital when you have 4 or 5 months of runway, right? You do it a year in advance. Something could go wrong. You need to if you need to reset a process, you’re there. If something happens with the business, you have built in enough time because some of these high profile bankruptcies, some of these businesses were raising capital at one, two, three, $4 billion, 5 billion plus that go to zero. It’s it’s because of they just they they mismanaged liquidity and entered into a just a downward spiral. And it’s rarely because they wanted growth to be 30%. And it was 20%. That’s not that’s not how these businesses go under. It’s it’s just running out of cash. That’s the that that’s really the thing that we focus on.

Kevin Rosenquist: Is that more in your experience? Is it more just not being able to forecast or is it paying themselves too much? Is it a little bit of both, like what happens in that scenario. How can they how can they have planned it poorly where they have that kind of money up front and then they just run out?

Daniel Ballen : It could be a number of different drivers. I mean, the things that are outside of your control. Customer concentration. We see a lot of businesses that launched with a really big partner. We are talking to one now where they kind of built a product with a very large financial institution. As a result, that financial institution is 50% of their revenue. Over years, maybe the point person at that large company who been managing that relationship has left. Maybe another competitor comes in the market and persuades them to utilize their technology. Suddenly you lose 50% of your business, and corporate budgeting and planning goes out the window. So that’s a big cause. The other could be around the, I would say, fumbling the capital raise process. We see this all the time and it’s unfortunate people go out. They want to raise capital. They have a certain valuation in mind. Markets are tougher today for sure. Or maybe they’re anchored to a valuation from 2021 or prior and they don’t get what they want. So they maybe raise a little bit of money from insiders. Maybe they try to raise a little bit of venture debt. Maybe they decide to not raise at all and go back out in six months because they think things will improve.  so I don’t I don’t want to call it stubbornness, but I think it’s maybe optimizing in a way that puts liquidity at risk more so than they should be from a risk management perspective.

Kevin Rosenquist: I’ve heard that maybe there’s a little less funding going out to some of these startups lately. Do you, do you think that’ll change once we hope the interest rates will go down and, and and things kind of level off.

Daniel Ballen : Yeah. It’s a great question. It’s one that we debate all the time. I think people should understand 2020 and 2021 was a massive aberration. There’s not. I think now we’re much more,  in line with a normalized quote unquote normalized environment than we’ve been historically. We’re probably never going to get back to the 2021 environment, where we saw a tremendous amount of supply, of capital, chasing growth opportunities, people not really doing comprehensive diligence on these, on these companies doing a deal in a week or two. And then the valuations at levels that don’t make sense and valuation frameworks that don’t make sense. As an example, I’ve looked at some lending businesses that were trading off of loan origination volume, which, as you can imagine, no lending business in the history of the world outside of that one year period was, should, should have ever been or has ever been valued off of origination volume. Because you can lend out as much as you want. I can lend out $1 million or $1 billion tomorrow. It’s the trick is getting it back and getting it back profitably, or being traded, or trading off of the amount of insurance premium 

Daniel Ballen : I could write as much insurance as I want. The question is like, am I doing it in an appropriate manner that’s profitable at the end of the day? So I think that it is tougher.  so today there is a little bit of a supply demand imbalance as as people pull back from the growth market, people have difficulty raising new funds. A lot of quote, like tourists either out of corporate VC arms or family offices or people who had gone to direct investing more recently and got burned, have pulled back. And then the IPO market and Spac market, which were a respite for these later stage companies to raise capital in a nice home. Those markets have been shut recently. So I think it’s still a good investing environment. There is still capital for great businesses for sure, and you can see the headlines every day on people that are raising money. But I think terms have normalized in, in a, in a way that’s healthy for the overall market.

Kevin Rosenquist: And if you felt like for a while there, I mean, between the pandemic and the shift that we had there and then also with, again, I, I felt like people were really chasing the next, trying to chase the next, the next big player.

Kevin Rosenquist: For founders or CEOs of companies that are generating significant revenue but need funding to scale even further. What advice would you give them.

Daniel Ballen : It’s um so this is advice that I give to our portfolio companies. Be prudent and thoughtful and I think highlight risk management on the liquidity side.  start conversations early. Even if you’re not launching a formal process or hiring an investment bank to help you with a capital raise. Meet with investors constantly. Have your pulse on the market and make sure that you are, you know, putting things like, you know, ego aside last Valuation. If you need the capital to grow at the end of the day, raising a minority amount of capital, it’s not a lot of dilution. It’s not your big exit event. But if it allows you to really continue to execute and continue fighting and you really believe in the business, that’s the best thing to do to really push for that larger exit as a either an IPO or a large sale. And that’s really what you’re playing for.

Kevin Rosenquist: Is there any one thing that you see that is often overlooked at this stage by companies where they ‘re just like, oh, man, I wish people would see this a little more in advance.

Daniel Ballen :  I found that a lot of companies that we look at are regulated, and I think there’s an election coming up I’ve been surprised by.

Kevin Rosenquist: I didn’t realize.

Daniel Ballen : Has it been on the news 24 hours?

Kevin Rosenquist: No, no, no, I haven’t heard.

Daniel Ballen : But,  I’ve been surprised by the lack of thoughtfulness around how does the election affects your business, right? There’s clearly a dichotomy in approach between the major candidates. There will create second order effects on how the CFPB, banking regulators, and the overall regulatory regime approaches the market taxes. I mean, all these things that could affect various sub sectors of the fintech world. I think that that’s one area that I think people need a crisper answer around, especially if you’re raising in the next few months, which many are. .

Kevin Rosenquist: Well, Daniel.

Kevin Rosenquist: Ballen with Portage. Thanks so much for being here. I appreciate your help.

Kevin Rosenquist: Time. Really appreciate it.

Daniel Ballen : Kevin. Really enjoyed it. Thanks again.