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Joshua: Hi everybody and welcome to another episode of the Payments Strategy Show. I’m Joshua Silver, founder and CEO of Rainforest. Rainforest helps software platforms embed payment processing so they can improve profitability and increase customer retention. I’m here today with Matt Brown from Matrix. Matt is very interesting from a background perspective because he’s been both a founder and now an investor so he brings a truly unique perspective to the dialogue. Thanks for joining us, Matt.
Matt: Happy to be here.
Joshua: So to get us started, tell us a little bit about your journey into SaaS and FinTech and then eventually to the other side becoming a VC.
Matt: Yeah, absolutely. Well, thanks again for having me. Obviously, a big fan of Rainforest and as we’ll get into having spent a lot of time in SaaS and payments, I think what Rainforest is doing is a big breath of fresh air for the industry. So rewinding a bit. As you mentioned, started my career as a founder in SaaS back in the early SaaS days when people were still writing blogs and figuring out what CAC and LTV was and started a series of companies in the space. But my vertical SaaS journey started around 2015 where we built a vertical software business for professional service firms called Bonsai. Started with freelancers and eventually moved up to law, accounting, and various other professional service firms. It was a SaaS business to start because that was my background. That’s what we knew very well and we had built an invoicing product and plugged in Stripe because that’s what you did at the time and fell into the payments component where we realized, hey, we have this invoicing product, now we’re processing payments even though we don’t really know payments that made it pretty straightforward to do, but we’re actually generating revenue. What are all the different levers that we can pull and knobs we can turn to increase adoption and monetization? So went down that whole path and ended up adding other financial products and building out a pretty robust software and kind of FinTech suite of products there. We eventually joined another business called Afterpay, which was a buy now pay later out of Australia that was eventually acquired and then I joined Matrix as an investor about three years ago. Matrix briefly, early stage venture firm. We are based in San Francisco, but we have offices in Boston and New York focused on early stage venture, Seed and series A, across the range of industries, a lot of FinTech and BB software, but healthcare, frontier technology, and semiconductors as well.
Joshua: Very good. Tell us a little bit about how’s your perspective changed when you transitioned from being an operator to an investor and how so?
Matt: I think every investor who’s been a founder will have a slightly different answer, at least the way that we operate at Matrix it’s been pretty similar where we invest very early on, we don’t do later stage investing. In Seed and Series A, we do a small number of investments, so we’re not spending time with 20 companies per year. In a lot of ways, it’s very similar to being on the founding team or early employee of a company where you see all the daily, weekly existential crises that companies go through.
I think having seen a number of early stage companies now as an investor, I think a lot about how founder psychology matters and managing your own psychology. There’s always a fire, there’s always something going on, there’s an expression in long distance running, something like “It never gets easier, you just get faster.” I think there’s a lot of that in company building where you think the problems that you’re facing as a 10-person company will magically go away when you’re 100 or 1000. They’re just different permutations of the same problems. It’s been interesting to see both starting as a founder having gone through those and now seeing those at different scales as an investor.
Joshua: What advice would you give specifically to founders who might be struggling to manage all the fires? How do you keep that psychology and check any tips that you’ve seen that work particularly well?
Matt: I think founders having a group of friends or people that you know that you can have a human conversation with, not networking in this or that, but folks that are maybe a few stages ahead of you or maybe a few stages behind you.
You’d be surprised, maybe not surprised, but you get a few founders together and have a few beers and you start talking. It’s not talking about product strategy, you’re not talking about these grand sweeping things, but it’s a lot of the psychology of, “Oh, we have this executive and there’s this problem where I have to fly out and take a red-eye tomorrow to talk to our largest customer because there’s this going on.” Just having a support group that knows what you’re going through more than employees, more than even other executives, but folks who are in that founder’s seat is really helpful.
Joshua: I think that’s definitely true as a founder myself, multiple times surrounding yourselves with other founders who really understand what you’re going through. I often met periodically once a quarter with a cohort, if you will, of other SaaS companies that were in the same rough growth path as we were. That continued on for probably a decade and I’m still really great friends with many of them today. So I think that’s really sage advice.
Matt, you’ve looked at lots and lots of vertical SaaS companies. You’ve run some. What would you say separates market leaders from the rest? Which of those variables that really make a difference? Because there’s so many data points today, especially with AI and the plethora of data. We can crunch things in so many different ways that maybe 10 or 20 years ago we couldn’t, but do you have any insights on what really makes a difference? What are those market leader characteristics that you look for?
Matt: Yeah. There are a few things here.
One is when people use the phrase vertical SaaS a lot, there’s vertical point solutions which are often categorized in vertical SaaS and true vertical SaaS where this is what I define as vertical SaaS where you’re attempting to build the system of record in a way for that vertical.
You’re owning some portion of the workflow, but you’re also owning the customer record. You’re owning the payment or the flow of funds. You’re owning some concept of the expenses for that vertical. It’s this very expansive view or expansive vision of what you want to be in that vertical. So I think that is the first thing. Even if you’re starting with a point solution, having a pretty clear step-by-step plan of how to own more and more of the workflows of that vertical. That’s the beauty of vertical software is if you get that wedge product right, if you have a good relationship with your customers, they will want to eventually offload more and more of their workflows to you. They want fewer logins, fewer fragmented systems, fewer bills. They’re happy to put more and more of their business onto one platform that’s built for them. I think that expansive vision is one that you see pretty commonly amongst the winners.
Two is, and this is obvious, or I say this is common across startups in general, but just a deep understanding of an empathy for the customer. It doesn’t mean that if you’re building in a vertical, you’re building in the roofing vertical, you need to have spent 10 years as a roofer, but some kind of on the ground knowledge of who you’re building for and appreciation for the workflows that they go through. Whether it’s diligenceing the vertical before you spend time in it, or again, just choosing vertical, having some aspect of firsthand knowledge of what your customers are going through that informs that big vision.
Then relevant to Rainforest and this whole podcast, and relevant to this expansive vision is it’s not just software. Small businesses, if you come at it from a SaaS perspective, a lot of things are software, but from a small business owner’s perspective, software is one aspect of how they get things done, but there’s a lot of money movement in small businesses where they’re getting paid by their customers, they’re having to pay out their employees, their vendors, and not just having a well-designed software product that maps all these different workflows, but having a well-designed software product that maps to the financial flows through a business. Again, every vertical is different. Some may have more fragmented customers. Some may have a very fragmented set of vendors on one side or the other, but this very thoughtful combination of expansive software that’s then mapped to financial flows in and out of a business are what you see the leaders most commonly working their way towards.
Joshua: Makes total sense.
As we dive a little bit more into the focus in terms of embedded financial products, what advice specifically around folks who are adding their first embedded financial product would you give to vertical SaaS leaders?
Any thoughts, especially on how that can tie to driving revenue, increasing enterprise value, really those top line objectives?
Matt: Yes, a few things here.
One is it’s always important to work backwards from the problems of your industry rather than try to apply some playbook that works in some other vertical. May work in restaurants, but doesn’t work in legal. May work in waste hauling, but doesn’t work in construction, whatever it is.
That all being said, I’ve done some research I think last year where we looked at a couple hundred vertical software companies and what financial products they had adopted and in what order they had adopted the financial products.
The clear winner as far as what embedded financial product did they adopt and which one did they adopt first, payments was number one in both categories. I think something like 80% of vertical companies have integrated payments in one way or another and then it drops off very, very steeply from there.
The opportunity for embedded products is massive. I think we’re very early there because when you look at the flip side of it, even though say one vertical has embedded payments, but not embedded banking, whatever it is, 100% of those end businesses have a bank account. They likely have some loan or credit product. They likely have some small business card. The opportunity there is pretty significant, but a lot of them are starting with payments. I think the reason for that is pretty obvious. If you don’t get paid, you don’t have a business. At the end of the day, you’re a small business.
If you’re not receiving funds from your customers and if you’re not making it easy for them to pay you, then you don’t have a business. If you look at it from the vertical software perspective, there’s just a lot of value-add things aside from making it easier to get paid and get paid faster and more convenient for their customers.
Whether it’s reconciliation, whether it’s understanding your cashflow, whether it’s buying invoicing and resource management and employee utilization, there’s a lot of interesting workflow and data problems that come before and come after payments that make it a pretty obvious place to start. It’s a place where folks like Rainforest have made it pretty easy and straightforward and powerful and not just a check the box feature, but a real revenue driver for a lot of these vertical software companies that help them get their training wheels off and do embedded finance FinTech products very well and then start to add those second, third, or fourth products.
Joshua: Yeah, we see at Rainforest, obviously, huge success when software platforms are adding payments and because it turns that software business, the value proposition that they deliver to a merchant from, “We’re here, software, to help you run your business. We’re putting dollars into your bank account every single day,” and that’s really the lifeblood of any small business, is cashflow.
I think that’s really part and parcel to a whole concept of embedded finance and the total is greater than the sum of the parts. I think that really applies when you add SaaS and embedded finance together.
Matt: I’ll just add as an example of that is you think about another common embedded product that a lot of companies talk about is banking. Let’s add embedded banking to our vertical software. Well, a big challenge with embedded banking is how do we get you to set up this account? How can we switch over our payments? Do we connect our payroll? Even once you’ve gone through the challenging work of getting your small businesses to set up this embedded bank account, you have to fund it. You want funds constantly going in there. If you don’t have embedded payments set up, it’s going to make the success of your embedded banking product even more difficult to achieve or let’s say embedded lending. If you didn’t already have embedded payments set up, it may make underwriting lending to those small businesses on your platform even more difficult or repayments or managing risk because you’re not sitting in their flow of funds.
All these other products, even if they’re theoretically upstream of payments, really rely on the software platform having a strong reason to own and provide payments to their end customers. That is in many ways the necessary condition for success for a lot of these other embedded products.
Joshua: Makes sense. Looking towards the future, and you talked a little bit about this in your recent blog post about invisible asymptotes in vertical SaaS, talk to us a little bit about what you see as the next frontier. Go hop forward a generation or two. What is next, do you think?
Matt: There are a couple of things that are emerging there. The idea behind that post was that a lot of vertical software today is about taking these disparate workflows and disparate problems.
It’s very valuable to do this, combining them into a single tool that’s purpose built for this vertical. You’re not stitching together a bunch of different tools. It’s one login, one subscription, one value prop and multiple boxes checked there.
It’s effectively making your existing small business more efficient. It’s improving what’s there. A lot of where we see the market leading vertical software companies going is how do you help grow those small businesses on your platform? Maybe it’s embedded marketing tools. Maybe it’s some kind of marketplace component where you can drive leads or drive businesses to the small businesses on your platform. Maybe it’s a brand that the platform itself has a brand and they’re driving folks there.
Maybe it’s a relationship with vendors or suppliers where you can do some component of group buying if you’re a vertical software for coffee shops. Can you make it easier for that coffee shop to buy milk and other supplies in bulk cheaper than they would otherwise be able to do as a small independent shop, but through this group buying, you can meaningfully improve their economics?
There are a lot of things around that we group these businesses on your platform together. Obviously, AI is a big trend right now where if you’re a small business, what are the roles you would love to fill if you could, but maybe it’s too expensive or maybe you wouldn’t have full utilization of somebody to pick up the phone and qualify customers 24-7 or to do better scheduling or things like that. I think there are a few emerging models there, but again, it really depends on the vertical and what the main constraints they’re facing are.
Joshua: To summarize, it’s really expanding beyond the core traditional embedded finance that one might think of, issuing lending, banking, payments, really to see how you can help them grow their business either through cost takeout, better marketing, growing a customer base. It’s really expanding the entire business, not just helping it run more efficiently from a financial services perspective. Is that a fair synopsis?
Matt: Yeah, I think that’s very eloquently put. I think the benefit of that is all of this flows back to the core value prop of the vertical software business, which is you’re helping them run their business more efficiently and taking a tax, if you will, in a positive sense on their success. If you’re a vertical software company and you embed marketing features, let’s say you have embedded payments already, but you then embed marketing features, all these new customers that you’re getting paid to drive to your end customers, they’re eventually checking out, they’re eventually buying, and that’s additional payments revenue that goes to you, the platform, or those are additional leads that fill up the CRM that potentially you’re charging for. Again, the beauty of vertical software is the platforms grow as their small businesses grow. The more you can, as a platform, enable your small businesses to become successful, you benefit as well.
Joshua: Yeah, and we see that ourselves at Rainforest as the vertical SaaS platform grows. We grow because we’re consumption-based. They grow as their end small business or merchant grows. It’s a very virtuous cycle for sure.
We’ve talked a lot about a pretty rosy future, all these things, adding revenue, adding margin, adding resilience.
Nothing comes without challenges. What do you think are some of the challenges that we may face in the embedded financial space going forward in the next coming years? What do you think FinTechs and SaaS companies both can do to prepare to neutralize any of those challenges or to overcome them?
Matt: There are a few things there. I think one is, as much as we’ve talked about this ambitious vision and being very multi-product, and we’re talking about multiple software suites and multiple financial products, it’s very easy to build those out to go a mile wide and an inch deep. Even though you are serving a particular vertical, the products aren’t connected well together, or just because you offer embedded payments on your platform, it doesn’t work really well with the invoicing product or expense, whatever it is that you have.
It can be tempting to say, to throw a bunch of stuff together and not connect it very well to think about the success of one product spilling over to others. I think payments is the perfect example of this, where we did this with my first company back in 2015, where we said, “We’re hearing that Toast is doing a great job with payments. Let’s just embed payments and then we can move on. We’re going to make so much money from it.” The devil really is in the details with payments in particular, where it’s how do you price it? What effect does pricing have on adoption? Do you allow the payment fees to be passed on to customers? Do you offer embedded, instant or faster payouts? How do you balance risk of this with your economics and premium features and what’s the relationship between payments pricing? You can go on and on and on, but there are so many of these details that are not obvious and you don’t really even understand that there are choices to be made there unless you go down that rabbit hole of what’s possible with payments.
I think taking the time to get the pillars of your strategy right, it sounds like a lot of founders know what those pillars are with software, but with embedded FinTech and payments in particular. The devil is just in the details. I think just checking the box and moving on is often a recipe for disaster for a lot of wasted time and effort.
Joshua: Sage words.
As we come to closing, if you could give just one piece of advice to SaaS leaders who wanted to recognize the full potential of embedded finance, what would you tell them? We’ve talked about a lot of it already today on the podcast, but if you had a distiller just down in the one focus area, what would it be?
Matt: I would say listen to your customers. Your customers, almost regardless of the vertical, are going to tell you that payments, again, are the lifeblood of their business. They’re very important.
Try to understand how do they think about the cost of payments today? Do they care about faster flow of funds? Do they care about reliability of payments? Understand what is unique about payments in their vertical? Again, I’m such a fan of rainforest. Merge that with the expertise that rainforest has and payments itself as well as how payments differs across these verticals. I’ve seen very different payment strategies in the same vertical, but SMB, I’ll take an anonymized example here, but SMB professional services firms versus mid-market professional services versus enterprise professional, all effectively the same vertical, but very different payments and embedded financial product strategies that are necessary there. Even though those businesses look the same on the outside, just the size has different implications for the ideal payments and financial product strategy there. Talk to your customers, understand what’s unique about that industry, and then work with folks who not just know vertical software and payments, but have seen that applied across different industries.
Joshua: I love that advice about talking to customers. That’s my number one piece of advice that I give to founders is in any vertical, in any industry, in any type of business, when you think you’ve talked to enough customers, you still need to talk to two or three times more because you’re always going to be learning. The market is always evolving. There’s always unique insights, and so super critical to get out there and talk with customers.
With that, we’ve wrapped up our time here, but Matt, thanks so much for joining us on the podcast. Really appreciated hearing your journey from founder through acquisition, now a VC.
Your work certainly is relied upon by many as they look for data about the vertical SaaS markets and where it’s going.
Thanks for all of your contributions towards helping to grow the embedded finance ecosystem. With that, I’m Joshua Silver with the Payments Strategy podcast. Matt, what’s the best way, if our viewers want to reach out to you, what’s the best way to contact you?
Matt: I’m on Twitter, Matt with 3Ts, Matt Brown, and also a website, mtb.xyz.
Joshua: Amazing. Thanks for the time, Matt. We appreciate it. Thank you.
