In this installment of the Challengers series, Aadit Gandhi spoke with Chad Fox, the Founder and Managing Partner of Fox Ventures, an early stage FinTech investor rolling fund. Chad and Aadit discussed about Fox Ventures, the key trends of the FinTech ecosystem and the future of Open Banking.
Chad, tell us who you are and what led you into the world of FinTech from being a lawyer?
My name is Chad Fox, and I’m the Managing Partner of Fox Ventures, an early-stage FinTech Venture Capital firm. Accredited investors can invest alongside me in my Rolling Fund here.
I, first of all, consider myself an advisor of the founders that I invest in. Since the legal world is becoming a commodity, it was a natural progression from the lawyer in the VC space to the investor. I’ve built Fox Ventures to be founder first, so I am generally a minority investor in the company’s early rounds and invest alongside larger VCs who lead the deal. This founder-friendly approach, where I don’t lead, allows me to be highly supportive to the companies in my portfolio.
What do you think a FinTech investor has to keep in mind vs the broader VC ecosystem?
FinTech has become an extremely broad sector, so we see specialist VCs within the FinTech space. I think it’s challenging to be a generalist VC these days, and I prefer my sector-focus approach.
The one main thing that FinTech VCs have to consider more than other sectors is that we are investing and building companies in a regulated environment, which adds an added layer of complexity. This is extremely important and even more so in emerging markets. We see many VCs venture outside of their traditional geographical locations looking for “alpha” and willing to be the first investors in the next big winners. Many emerging markets are considered “emerging” because the market hasn’t evolved yet, and therefore there are fewer regulations. This is because regulators in most of these markets tend to be slower to adopt new technologies as they are learning on the fly.
So to me, this is one of the most significant risks that isn’t taken into account. We see this in several geographies worldwide, where VCs are pouring money into jurisdictions that don’t have established regulatory regimes.
What are some of the key trends you have seen over the past few years in FinTech?
At Fox Ventures, I’m working on a few key trends at the moment, the evolution of public and private markets and the development of alternative finance and embedded finance.
Regarding the evolution of private and public Markets, we are seeing companies stay private longer, raise more private capital before a major shift in the process of becoming a public company with IPOs, direct listings and SPACs. I’m interested in tools that make the private markets more accessible and more professional. We’ve seen many crossover funds enter this space recently and with them comes knowledge around different pricing mechanisms and derivative tools that may not have been previously available. In particular, I’m tracking a few companies building derivative products on private securities, and I think this is a fascinating evolution for the private markets.
In the alternative lending space, I’m exploring underserved niche verticals and have taken a keen interest in revenue-based models. Companies are starting to understand the actual cost of capital, and I think this provides several vital areas that can be developed. The fastest-growing FinTech ever is in this space, so I’d be foolish not to be paying attention.
Lastly, one of the biggest trends that have emerged over the past few years is embedded finance. Every company can be a FinTech company and offer financial services to their customers/users thanks to the tools that are now available to them. As a result, there is no longer an excuse not to own the entire customer journey. In this stance, I’m focused on the infrastructure that allows companies with large customer networks to provide financial services.
Are there any investment theses that you are very passionate about? Would you care to elaborate on why?
At Fox Ventures, I’ve taken a relatively broad view of the entire FinTech sector. One of the trends I am working on a lot is the disruption of private market securities. Companies are staying private longer, there is a lack of disruption in the IPO process, and various factors are disrupting the public markets. I’m really excited to see many new tools being built in this particular sector of FinTech.
What do you think is the biggest threat to the FinTech ecosystem, and how do you plan to defend against it if you can?
I don’t think there are any real threats to FinTech as a whole. However, over-regulation, the slow adaptation of regulatory laws and lack of understanding of new technology by regulators are probably the leading headaches the FinTech sector has to deal with regularly.
I mentioned this before, but regulators are traditionalists and will always move slower than the companies building product. We see this in almost every vertical within fintech in every jurisdiction. So even those jurisdictions which have traditionally been great regulators need to spend more time on innovation.
Companies need to engage with regulators early and be true leaders in their respective fields. Education is super important, and the best companies have always had strong relationships with regulators. Unfortunately, those that run into issues are generally the companies that don’t engage properly with their regulators.
Which geographies are you most positive about for FinTech growth and why?
Emerging market FinTech is extremely exciting at the moment, and we’ve seen much action in LatAm, India, Africa and South-East Asia. I believe this trend will continue. Currently, I’m actively investing in the Middle East, North Africa and Pakistan.
Nevertheless, the US market is incredible, and there is much capital being put to work by outstanding entrepreneurs to evolve this market. I have never been more excited about US FinTech.
One interesting trend I’m working on is connecting emerging markets to traditional markets such as the US. Whether that is an investing app in the Middle East allowing investors to trade US stocks or a super API company that provides emerging market FinTechs access to tools only available in the US, these are things that have been lacking in emerging markets.
What do you think of Open Banking, and where it is going into the future? Are you positive/negative?
I’m optimistic about the future of open banking. Once regulations are in place globally, which can vary a lot between countries, and overall it’s taking longer than most would like, I think it’s a net positive. As I’ve mentioned, every company with a customer base can be a FinTech, and open banking is a significant part of this. So I think we will see even more interesting use cases.
I’m starting to work a lot on super APIs that connect various jurisdictions. This is something that I think will benefit everyone focused on open banking as it will truly provide global access to financial services. Many big businesses will continue to be built as they won’t need to spend as much time and money on international expansion.
However, the negative side to this is that user information will be available globally, and major data protection implications from the cross border flow will inevitably happen. Therefore, I expect the regulations in this space to slow open banking down to a certain extent, but only time will tell.
What advice do you have for any emerging entrepreneur looking to take the FinTech world by storm?
It’s the same advice I give any entrepreneur, focusing on the customer and building the product they want to use. The rest generally works itself out.
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