Flourish Ventures on repeat founders, emerging markets, and when not to hop on the AI bandwagon

In today’s episode of Equity Podcast, Mary Ann Azevedo talked to Flourish Ventures co-founders Tilman Ehrbeck, Emmalyn Shaw and Arjuna Costa about a variety of topics, including how their investment themes have evolved in the past 5 years and what trends they’re most excited about today. We also got their opinion on M&A deals in fintech, AI and founder wellness, among other things. The trio founded Flourish Ventures in 2019 and now the evergreen firm has $850 million under management, last raising a $350 million fund in October of 2023. Flourish invests all over the world, backing fintech startups in the U. S., and across Africa, Asia and Latin America. Notable investments include digital bank Chime, Brazilian neobank Neon, which was last priced at $1.6 billion; embedded finance startup Unit, and African payments infrastructure company Flutterwave. Equity is TechCrunch’s flagship podcast, produced by Theresa Loconsolo, and posts every Wednesday and Friday. Subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts. You also can follow Equity on X and Threads, at @EquityPod. For the full episode transcript, for those who prefer reading over listening, check out our full archive of episodes over at Simplecast. Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products. Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:11Speaker 00

  Hello and welcome back to Equity TechCrunch's flagship podcast about the business of startups. I'm Maryann Acevedo and this is our Wednesday episode where we hone in on a trend in the startup world and dive deep. Today, we're talking to Flourish Ventures co-founders Tilman Urbek, Emmeline Shaw, and Arjuna Kostat. We're going to be talking about how the firm's investment themes have evolved in the past five years, what trends they're most excited about today, and I'd also like to get their opinion on some of the current events and M&A deals in fintech. Thank you all so much for being here. It's great to see you and talk to you again.

• 0:46Speaker 01

  Thanks so much for having us.

• 0:47Speaker 02

  It's a pleasure.

• 0:48Speaker 00

  Yeah. So, the three of you founded Flourish Ventures in 2019, and now you have, as a firm, $850 million under management. You invest all over the world, and do you back fintech startups exclusively? Is that correct?

• 1:03Speaker 01

  That is correct.

• 1:04Speaker 00

  Yes, alright. So, you invest in the US, across Africa, Asia, and Latin America. Also, you're an evergreen firm, so that means your investing is open-ended.

• 1:15Speaker 02

  That's also true, yep.

• 1:16Speaker 00

  Yeah, that's right. Last time we talked, Tilman, you were telling me that you felt like that gives you a little bit less pressure as a firm compared to some of the other outfits.

• 1:25Speaker 02

  Yeah, yeah. We do believe that. We are not driven by the artificial time constraint that a typical 10-year fund structure would have. We don't have to deploy, and we don't have to exit just based on those timelines. We can do what's right for the founders that we support and invest behind.

• 1:43Speaker 00

  Well, over the years, you have invested in a number of companies, I think over 70, including Digital Bank Chime, Brazilian neo-bank Neon, Embedded Finance Startup Unit, and African payments infrastructure company Flutterwave. And I last caught up with you...

• 1:59Speaker 00

  Last fall, when you announced a new $350 million fund. So what have been some of your notable investments since then? And can you also talk to me about some of your higher profile exits overall as a firm?

• 2:11Speaker 01

  Maybe I'll touch upon some of the more recent investments we've made. We've really, first of all, just been so impressed with the speed and the ongoing innovation in fintech. I know that the markets don't always dictate whether innovation is happening. I think as a long time fintech fund, very committed to this sector and its opportunity for transformation. We continue to be really excited about some of the entrepreneurs that are coming to market and the types of technology that continues to surface. One thing we spoke with you early on was around trying to look at different intersections. So the intersection of climate and fintech, the intersection of healthcare and fintech. We also continue to double down and look at areas in infrastructure, which we're very deep in already, whether that's in payments, insurance, banking, data.

• 2:56Speaker 01

  Some of the companies that we've invested in that have been announced at least, one of which is in the fraud space, an area that we know quite well in compliance, like we're in Alloy and Hummingbird and TrueBiz and others. But a company we invested in was a company called Spade. They're doing a lot on the preauthorization, credit card authorization fraud. Been a really incredible team, but it kind of dovetails very nicely in the preexisting sector that we've looked at. We have not announced, but we've closed some deals in the intersection, as I mentioned, of climate and fintech as well as healthcare from a vertical SaaS embedding fintech services, among others. But those have been a couple. We've also done some in the compliance area around automating the licenses

• 3:39Speaker 01

  that are required by financial services and using AI workflow to help really streamline and automate that process more holistically. Another company we have not announced yet, but I have invested in. So a couple of them, certainly in the US, that we're quite excited about.

• 3:53Speaker 02

  You know, in terms of exits, Mary Ann, we are a bit too young as a firm to have many of those. But we did exit two companies that were notable. So in the US, we had made an early investment in the wealth management space, sort of our version of the robo-advisor. And the insight there was that the first generation of robo-advisors focused on the young, who are digitally savvy, but they don't have any assets. Whereas the assets are really with the fifty five and older crowd in the US, eighty percent they own. And when you reach that age, you have an interesting decumulation problem, right? You need to plan for retirement. When do you draw down your 401K? Should you wait? When to start drawing down social security?

• 4:36Speaker 02

  You might have still some defined benefit from an early employment in your career. So there was a company we had invested in, United Income, that would take all this information and optimize for the retiree or soon to retired person. And that company was acquired by Capital One. So there was an early exit we had, frankly, a little earlier than we had hoped. But we were, of course, still happy.

• 5:00Speaker 00

  Yes, of course.

• 5:01Speaker 02

  Another one would have been Grab Financial. So that was in Southeast Asia, Grab, you know, the ride hailing and food delivery company. They had a very interesting embedded finance play to provide working capital to their drivers, insurance, to also their drivers, but also to the ride hailers. And so we had invested in the financial services subsidiary because we strongly felt that that was an interesting play. And then, as you followed, probably, they filed for SPAC and re-merged the financial services subsidiary withholding company. And so we swapped shares and then we exited via the SPAC. So those were two of our early notable exits.

• 5:45Speaker 02

  We have quite a few companies that are gearing up and will be ready when the IPO window reopens. So as a fund, we are pretty excited about that outlook.

• 5:55Speaker 00

  Exciting, yeah. We'll look forward to hearing more about that when the time comes.

• 6:04Speaker 00

  Well, obviously, fintech is a sector that, as we all know, has had its ups and downs over the past few years. After the pandemic, things were booming, twenty twenty, twenty twenty one. Investors couldn't get enough, right? Fundraise after fundraise in the fintech space. I believe it was twenty twenty one where fintech made up one-fifth of all venture capital investments, which is nuts. Then there was a slowdown in the venture world. World as a whole. And as part of that, of course, fintech has seen a decline in funding, just as many other major sectors. How has your investment thesis evolved since your early days and considering this investment slowdown? And also, what role is AI playing now when you're evaluating new investments?

• 6:46Speaker 01

  You know, I think the benefit of being a pure fintech focused fund is you're really building deep conviction and much longer term horizons. And having been an investor for over 23 years, you know, I've just learned that these cycles extend well beyond the market cycles. And so really thinking through from a, you know, thesis driven, which is very much the way our fund operates. What do we think it needs to be transformed? What are transformational opportunities in financial services? And how can pull those building blocks together early and start making bets? And I think a number of our theses have played out over time, and that's really been our approach to taking those investment risks. But I don't think it's shifted materially how we've approached the market. I think we've leaned in. In fact, if anything, some of the tourist investors have left. And I think quite frankly, it brings a breadth of opportunity.

• 7:31Speaker 01

  I think it level sets and aligns incentives for entrepreneurs to be able to build the business the speed with which it makes sense and to raise capital at the speed with which it's appropriate. And I think we've been real beneficiaries of that and taking that approach. But in terms of our thesis or shift, if anything, I think one thing that's probably noteworthy is certainly we started early on in challenger banks and digital banks. We have nine globally, right? So we've taken that learning in the US and been able, starting with Chime, and been able to really extend that learning on a more global basis. There are many themes for which that applies in our fund, and that's the beauty of being a global fund. And we certainly do amass a main expertise in the direct to consumer models along that dimension. But we've also gone very deep, as you can imagine, beginning with Flutterwave in Africa, but all the way through the US, looking at the infrastructure, the underlying infrastructure

• 8:15Speaker 01

  that needs to be modernized as well, and how embedded finance takes a huge role, which is why that's been an area that across the regions we've developed. And I think that we've had the benefit of really understanding both dimensions quite well, both direct to consumer opportunities as well as the infrastructure side.

• 8:29Speaker 00

  Yeah, infrastructure has proven to be pretty resilient, I think, throughout all of this.

• 8:33Speaker 02

  Yeah, maybe two quick reactions, and then I would be curious to how Arjun feels about this. So I would first say, we don't feel like we are down from 2021. We are saying 2021, that was just very, very unusual. We are actually back to very sane levels.

• 8:50Speaker 00

  Yeah, thankfully.

• 8:52Speaker 02

  And during 2021, it was tough to resist. We two might have fallen victim to FOMO once or twice. But by and large, we tried to stay really, really disciplined because we knew that 2122 was in the first half of 22 was the exception for fintech, not the rule.

• 9:11Speaker 00

  Right.

• 9:11Speaker 02

  That's maybe one sort of framing point. And then in terms of thesis development, you know, we came to the space from first principles. Arguably, as we started before we got together and launched Flourish, we came to this before the term fintech was even coined from first principles. We knew that there was so much opportunity with tech-led innovation to both dramatically improve the functioning of the financial system and to serve people much, much, much better. And that conviction has remained. And of course, what is feasible and what is super exciting changes over time. So the first couple of years was very much this digitization of financial silos, like challenger banks, digital credit, insuretech, wealth tech, et cetera.

• 9:56Speaker 02

  And it really evolved into embedded finance with two components. On one hand, platforms or vertical SaaS players who reach their customers deeply embedded in their activity and therefore have low customer acquisition, non-financial players and therefore have high customer engagement, low customer acquisition costs, generate data that has predictive power. So that was one bundle of investments we made. And they need to connect with the financial system and regulated balance sheets. So we realized we need really an API-based, cloud-based, very modern B2B fintech infrastructure. And we have invested quite a bit in that as well across the US and in the emerging markets.

• 10:40Speaker 00

  Yeah, speaking of emerging markets, I've been watching LatAm closely for a while. I know Africa has seen a bump in interest in recent years. What would you say are some of the hotter markets for you all now and why?

• 10:53Speaker 03

  So maybe I'll jump in here, Mary Anne. We've really found a lot of great businesses coming out of Latin America. If you look at Mexico and Brazil in particular, over the last couple of years, we've seen both. A higher caliber entrepreneur as well as real strength in the macroeconomic conditions. Mexico has benefited from a lot of the nearshoring. So you're seeing really robust small business growth, high employment levels, increasing consumption power, and that's leading to just nice tailwinds in the market, Brazil as well. And one of the things we're seeing that's really heartening is we're backing entrepreneurs for the second time within our own portfolio. So you've seen company founders go through that cycle, exit and start again.

• 11:39Speaker 00

  Oh, wow. Even within just five years? That's impressive.

• 11:42Speaker 03

  Yes. So that maturity of founders and the level of thought diligence they bring to the second time around journey is really impressive to see. You know, we've expected that in Silicon Valley and New York for a long time. To start to see that happen in markets like Indonesia, India, Brazil and Mexico is very heartening because it tells us that we've done something right, that we're getting these repeat entrepreneurs coming back to us.

• 12:08Speaker 00

  That's interesting.

• 12:09Speaker 03

  To be honest, if I were to just address some of the other regions, Africa's been a little challenging for the last couple of years, just from a macro perspective. Some of the bigger markets like Nigeria and Egypt have just been struggling with internal macroeconomic challenges, high inflation, increase in food costs, currencies losing value. So given we have this global purview, we're very thesis driven and we can be very disciplined because there's no pressure to deploy. We're constantly calibrating where we lean in in particular markets and then where we can take a little bit of a wait and see approach or look for investment themes that are less direct to consumer, country specific investments, but regional and global investments being built out of these markets.

• 12:54Speaker 00

  Yeah, that's actually fascinating. I mean, I guess every market's going to have its own set of challenges, right? Based on the economic environment, just the different unique needs of the populations when it comes to financial services. But I would agree that I have seen an increase in investments in Mexico for sure. It's definitely growing a lot there. I mean, Brazil has long since been kind of the powerhouse in Latin America, but seeing more and more interesting startups and more money flowing into Mexico for sure. One of the things that I asked about earlier, but I want to touch back on, just curious about, of course, AI. I mean, I'll be honest with you, I'm a little tired of hearing AI all the time. And, you know, people can say what they want to say, but it's just become

• 13:36Speaker 00

  a little too much in my opinion, like everything, AI, AI, AI. Okay. So do you feel like when you're getting pitched from startups, are you seeing more AI in their pitch decks or in their pitches? And how much of a role is that playing in your consideration? Because it feels like a lot of startups, they believe they have to incorporate AI or say that they're incorporating AI somehow in order to be relevant or investment worthy.

• 14:02Speaker 02

  Like they used to have to say they were blockchain or crypto.

• 14:05Speaker 00

  Right, right. And I'm not, I'm not trying to say that AI is not worth funding, or there aren't very legitimate companies out there that are using AI in really great use cases or great ways. But just wondering how much of it is playing into your consideration when you're reviewing potential investments? And just what you think of it overall?

• 14:24Speaker 02

  You know, I can start us off real quick to say first, AI in the broader sense, machine learning, we have invested against for a long, long time. In the entire data-driven, alternative data-driven credit space, for example, in parametric insurance, there's a lot of areas where traditional AI machine learning was very prevalent already. Gen AI is a new phenomenon, obviously, as we all know. It seems to be a great productivity tool that we should all be using. It's probably not precise enough for compliance and other purposes, because by design, it's sort of only 97% accurate. There's a random dimension to it, which is

• 15:05Speaker 02

  why we get different answers when we type in the same question. So as a productivity tool grade, Standalone in financial services, we honestly haven't seen so much yet. And for the US, Argenafor emerging markets, what's your sense?

• 15:21Speaker 01

  Yeah, I would say that it's an important technology. All of our companies are using it, all the large incumbents that we remiss in not integrating that. And that's going to be an incredible backbone for how financial services operates going forward, both at the infrastructure level as well as the direct to consumer opportunities. I would be surprised if we would bet and pick and seek a company that's specific AI fintech on its own accord as a standalone opportunity. It would be something they'd embed in as a core part of their offering to help streamline certain processes. In fact, the more it's relying on AI, the more you'd have to ask yourself, what's your defensibility then? Because anyone can access those technologies. So what is the underlying data set that is unique and defensible that allows you to be successful, right?

• 16:02Speaker 01

  Which is why verticalized plays are probably getting more success in how they're using AI within the financial services ecosystem. But again, I would say that until we can figure out ways where real technology like PII level data can be safely used with some of these algorithms in a way that doesn't promote or potentially react or respond with fraud or otherwise, it's going to be very difficult to see a true pure play on its own. But we will very much expect to see that and we will demand and partner deeply with our companies to see how they're integrating them in their core workflow functionality, whether that's front end, consumer services, whether that's more on the automation and report side, workflow automation, which is where we're already starting to see that in spades.

• 16:44Speaker 00

  Interesting. Well, I can't talk about a specific deal right now, but I am writing today about a pretty good size M and A transaction in the fintech space. And the week before last, I covered Stripe acquiring a rival startup, Lemon Squeezy. So just wondering, has M and A activity lived up to your expectations? I mean, what are your thoughts on the acquisition route versus pushing for an IPO? I could just say on my end, I think we all were expecting a little bit more M and A last year and this year, but it does feel like it's picking up a little bit.

• 17:16Speaker 01

  These past few months. Maybe I'll jump in for the US, obviously taking into account the Discover Cap one, which has truly skewed the numbers, disapparently. And this is the most successful and largest quarter we've ever seen in years in terms of that magnitude. But even taking that out, still over the last four or five quarters, it's still pretty considerable in terms of M and A activity on a volume basis. That being said, a lot of them are larger, you're right, they're all kind of strategic and they're not the type of tuck ins and Stripe-esque and even with Chime and Salt Labs, you're not seeing enough of the smaller strategic activity that we would have expected. I think you're going to see more of the tuck ins than nice to haves, which extends either geographical reach and/or additional functionality that's already on the roadmap, has already begun to kind of be tested out.

• 17:59Speaker 01

  When we think about the investments we're making, you know, we always think of both outcomes. And I think that the expectation is as this activity continues, we're going to start to see a lot more of that M and A activity in conjunction with what we hope to be IPO window opening for fintech as well. Yeah. We are starting to see a lot more strategic thinking around how do we start to put the pieces together? Where are there really great companies that we can materially shift our market position, our reach, our roadmap? And we're starting to hear that more so certainly going into the year.

• 18:26Speaker 03

  And maybe a quick emerging markets perspective, we don't have quite the depth in terms of the pool of buyers, right? So when we are building these companies, time to exit tends to be longer.

• 18:39Speaker 01

  Right.

• 18:39Speaker 03

  What we are seeing from an M and A perspective is some of our portfolio companies starting to become aggregators, getting much more active as acquirers as they build broader horizontal platforms. And once they reach a particular scale, the expectation or the hope is even if the IPO route is a little ways away, they become very attractive to bigger dominant international players looking to get a foothold in particular markets. So you are starting to see greater activity. May not be exactly the type that you started to ask us about.

• 19:12Speaker 00

  Right.

• 19:12Speaker 03

  Right. So the markets are active. It's we're finding ourselves on the acquirer side as we build out these platforms.

• 19:18Speaker 00

  So you're saying like in the emerging markets, you're seeing more of the companies doing the acquiring of like smaller. Are they generally Aqua hires or just

• 19:27Speaker 03

  Uh.

• 19:28Speaker 00

  The smaller acquisitions?

• 19:30Speaker 03

  Smaller acquisitions accelerating product roadmaps through acquisitions.

• 19:35Speaker 00

  Mm hmm.

• 19:36Speaker 03

  Trying to become more vertically integrated as service providers. So beyond the Aqua hire, which tends to happen less, it's very much around a

• 19:45Speaker 00

  Product.

• 19:45Speaker 03

  Vision for a more robust product. Exactly.

• 19:48Speaker 00

  Yeah. Well, the M and A deal that I'm writing about, which I again can't say much more about at the moment, does involve an Asian company that is being acquired by a US based one. So to that point, that's very interesting.

• 20:01Speaker 01

  Yeah. Market expansion. The other thing really quickly, Mary Ann, is that we are seeing a big activity around the financial buyers. So the US, the largest M and A that's been happening, probably the top 10 or 12 have been all by financial buyers. So they're still PE is still quite active.

• 20:15Speaker 00

  Yeah.

• 20:16Speaker 01

  And I think that will continue to be a really active fruitful opportunity for exits as well.

• 20:20Speaker 00

  That's true. That is true. I want to shift gears just briefly on the topic of founders. I know that you all have made some observations around fintech founder wellbeing. In general, I think there's been discussion about founder wellbeing and how difficult, how challenging and taxing it can be, especially in the environment that we're in to be a founder. I've heard of some horror stories about, and not you all, but I'm saying other firms who like pull term sheets at the last minute, you know, things like that where companies have had to shut down because they were relying on a raise that didn't materialize, things like that. So what are your thoughts on this topic? What are you all doing as a firm to make wellness of founders a priority?

• 20:58Speaker 03

  Ben, we recognize this early on that. We want to back founders on their entrepreneurial journeys, not just this particular investment. Because founders bring something unique. We work with a researcher who's come up with this term called creative capital. That entrepreneurs bring something unique that adds to society. And recognizing the challenges that they've been facing, we've really made founder wellbeing a priority at the firm. What we found in the pandemic was that not just the companies that were struggling were under a lot of pressure, given the large amounts of capital that was flowing to these companies with, one might say, outsized expectations of growth. Even the successful company founders were under a tremendous amount of strain.

• 21:43Speaker 03

  And so we really sort of started thinking more broadly about how we can elevate this as part of the broader conversation when talking about startups. We've started doing a lot for our own portfolio companies, as well as starting to think about how we will engage with the broader ecosystem of other investors to make supporting the founder throughout the journey a part of how we engage as investors.

• 22:07Speaker 00

  What do you mean by support?

• 22:09Speaker 03

  Our support takes a variety of forms. All right. So, for example, every year and multiple times a year, we bring our founders together and focus on the leadership journey. These are not conferences in the traditional sense. These are very much focused on thinking about the founder as an individual and a leader and what their own growth looks like and investing in that. And expanding that from just focusing on the founder to thinking about the entire executive team, how they work together, how they find balance, how they work on themselves as leaders, as well as on, you know, the KPIs that the company needs to deliver. Beyond that, we have a number of things like founder circles where we facilitate.

• 22:53Speaker 03

  Groups of peers who work with each other and talk to each other and rely on each other to work through tough challenges. We bring external support around coaches and executive facilitation. So we've got a number of these types of initiatives in place for our portfolio companies and are now looking to broaden the conversation and see how we can influence other investors to take a similar lens to working with their portfolio companies.

• 23:22Speaker 00

  Well, I'd like to look ahead now. What's next in fintech over the next year or year and a half or so? What do you see playing out in this space?

• 23:32Speaker 01

  So we had mentioned a couple of sectors that we continue to be quite excited by. And I think that we're also really on the first or second iteration of infrastructure. There's still so much, whether that's the core banking infrastructure, insurance as we know it today, data, payments, that still needs to be reimagined. I think you're starting to see particularly on a global basis, not just in the U.S. So we're still very much making bets and are very excited about what some of that next generation of technology looks like. We're also looking very much, as we mentioned before, fraud and compliance. And interestingly, where does Gen AI and where do some of these other technologies help facilitate? But where are there continued opportunities, particularly in a world where we have real-time payments? As we think about some of our other geographies with PICS and other infrastructure and open

• 24:15Speaker 01

  banking, where we might again see opportunities for compliance and fraud and technology being a critical piece to that. Vertical SaaS is one area that we continue to innovate on and we've made a number of bets, some in a variety of sectors and waste management and healthcare, variety of different parts of healthcare. We see that opportunity continue in various verticals, particularly serving SMBs and the like. We've mentioned climate and healthcare and housing. I think that's not just in the U.S., but globally, we see a huge opportunity there where those, where the points of convergence afford. And I think we're very much on the cutting edge and that's still very early. There's a lot more we can do there, particularly across all our markets as an investor group, around really making bets, supposition, the advancement of climate and where financial services can play a role.

• 24:59Speaker 01

  Similarly, the advancement of housing and where financial services play a role and healthcare. As importantly. So those are just some areas that I think we continue to get, you know, very excited about. On the broader basis, this idea around financial wellness and mental founder wellbeing is actually really important to us. I think we're starting to see a whole generation of entrepreneurs coming in, having, again, having been investing a long time. Many of these entrepreneurs have never gone through a cycle, run a company through a cycle, seen a correction. And we think this is a real opportunity as investors and as partners to really be leaders in defining how that relationship should unfold. And so that's another area that as a firm, we're very excited about and spent a lot of time personally learning about how to be better board members to help facilitate that success long term.

• 25:44Speaker 00

  Okay, well, we are just about out of time, but I want to give our listeners an opportunity to connect with you online. Where can they find you?

• 25:52Speaker 01

  blorashventures.com and then we're on LinkedIn and please follow us. And we look forward to very much staying in touch and keeping the dialogue open and partnering with you.

• 26:01Speaker 00

  Awesome. Well, thank you all so much again for joining us on the show. And to our listeners, you can find me on X at Bay Area Writer and Equity on X and Threads at EquityPod. Talk to you on Friday. Thanks again.

• 26:15Speaker 00

  Equity is produced by Teresa Loconsolo with editing by Kell. Bryce Durbin is our illustrator. And we'd like to give a big thanks to our audience development team and Henry Pickavet, who manages TechCrunch Audio Products. Thanks so much for listening and we'll talk to you next time.