Podcast: The European VC ecosystem and the opportunities that lie ahead with Yusuf Özdalga

In this episode of Fintech Thought Leaders, QED's Head of Early Stage Investments Bill Cilluffo speaks with Partner, Head of UK & Europe, Yusuf Özdalga.

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Show notes

Bios

Bill Cilluffo joined QED as a Special Advisor in the fall of 2014 and became a Partner in 2015. He is currently Head of Early Stage Investments after six years as Head of International, leading QED’s Investment teams in Latin America, Europe and Asia.

Prior to joining QED, Bill spent nearly 20 years at Capital One, spanning several roles and leading several businesses. He spent the first 6 years of his career leading Marketing, product development and credit policy for Capital One’s subprime credit card business; ultimately having overall P&L responsibility, and growing the business to become the most significant player in the market. He moved on to spend 2 years in various new business development roles, spanning the telecom, medical finance and small business finance industries. Bill spent 3 years as Deputy Chief Credit Officer for the bank, playing nearly every role there was to play in the central credit function, after helping build the department from scratch in 2002.

Bill then pivoted his career to general management, leading Capital One’s Canadian, and ultimately International businesses, over the course of 6 years. Profitability of the business grew significantly under Bill’s leadership, through new product and channel introductions, acquisitions, and significant cost take out. During Bill’s last 3 years at Capital One, he led its Co-Brand and Private Label credit card business, building the business nearly from scratch to one of the top few players in the US market, through a series of acquisitions, most notably including leading the acquisition and post-merger integration of HSBC’s US credit card business, which closed in May 2012.

Bill graduated with a BA in economics from the University of Michigan, and competed the SEP program at Stanford GSB.

Bill Cilluffo:

You're listening to the FinTech Thought Leaders podcast from QED Investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. QED is a global venture capital firm focused on investing in fintech companies all the way from pre-seed to IPO. FinTech Thought Leaders brings together the most talented entrepreneurs tackling today's biggest problems. If you're looking to learn more about what motivates our founders and team members to succeed, you're in the right place. Hello and welcome to the FinTech Thought Leaders podcast. I'm Bill Cilluffo, head of Early Stage Investments at QED Investors. Today on the podcast, I'm very excited to be joined by colleague and QED's head of Europe, Yusuf Özdalga. Yusuf, welcome to the podcast.

Yusuf Özdalga:

Thanks Bill. Thanks for having me.

Bill Cilluffo:

It's awesome to have you on. We've known each other for a very long time, going back to your college days in Virginia at UVA, but I wonder if you can share with our listeners a high-level overview of your journey on how you eventually came to QED.

Yusuf Özdalga:

A different way to say it is you were my first boss at Capital One and very instrumental in my career as I'm clearly working for the same person more than 20 years later, which is great.

Bill Cilluffo:

Don't say that, Yusuf. It makes us sound old. I'm scared.

Yusuf Özdalga:

I know. Time goes by very fast and we're still building fintech businesses, which is good. I was at UVA and I wanted to study a few different things. I was even thinking between economics and math as a double major, or finance and MIS as a double in the business school. The economics department wasn't top-notch at UVA back then, I will not comment about it today, and neither was the math, versus the business school was quite highly rated, so I joined the McIntire School of Commerce, which is just a small plug for that, and I did a finance/MIS dual degree. For me, there was a combination of money and technology combining both. My dad always likes to joke that he asked me when I was four years old what I want to be when I grow up and I said, "I don't know, but something that has to do with money," and I guess I added computers to that and did this finance/MIS thing.

Bill Cilluffo:

You were doing fintech back in college already?

Yusuf Özdalga:

Exactly. It wasn't a term, as you know, but sure enough, that dual degree put me in the gravitational pull of Capital One because I graduated in '97, again, reference to our age that goes by here, but Cap One's IPO was '94 and they were recruiting quite heavily on the UVA campus in addition to a lot of the Ivy League schools on the East Coast and West Coast. Joined in '97. I think the interview process started in '96 and I was meant to join as an intern in the summer of '96. It didn't happen, but I was fortunate enough, I'd say, to join as a full-time in '97 working with Bill Cilluffo.

Bill Cilluffo:

Excellent. You were at Capital One for a time, went to business school and had an interesting path post-business school, as well. I wonder if you can share a little bit of your career path into investing?

Yusuf Özdalga:

Absolutely. My years at Capital One were transformative. I thought about going to investment banking out of college, actually, out of UVA, but when I realized as an analyst at an investment bank there's a good amount of grunt work versus at Capital One, you get a lot of experience, get to build businesses, do real decisions and all that stuff, I chose Capital One. Turned out to be a great, great choice. We had more responsibility at that age and at that stage than I think I would ever get, or anybody else out of college should get. That was an amazing experience.

As the years went by, though, Capital One started becoming more and more like a bank. In those years, in the late '90s, it was a bit more like a scale-up startup and it started becoming more bank-like. I said, "Maybe I want to reconsider my options, do something else." Also, I wanted to be close to Europe, where my family lives. I'm Swedish/Turkish by background, so I said, "Let me do an MBA at Chicago." I actually had a non-compete with Capital One so, again, fortunate enough that my salary was paid in the second year. Enabled me to get a free business school education at the University of Chicago, or not free, but paid for by Capital One.

Then, from there, I joined JP Morgan's FIG M&A team, where Capital One actually became our first client. Those days were different days for Capital One. They actually had an MOU with the Fed, as you well remember, and they ended up agreeing to having to buy it back. We worked on that deal, which ended up becoming the Hibernia acquisition. Then, with JP Morgan, again, to get close to my family, came to London. Eventually wanted to move into a career in investing. That was something that was always fascinating for me.

I got an offer from Lehman's principal investing team to join them, so I did that. I think the year was 2006. Very interesting timing to be joining Lehman, it turns out, but those years were transformative in many ways. I was on a desk which consisted of structured loan traders and securitization people, and I was the only one who had FIG M&A and business building experience so, when they saw loan platforms, they scratched their head and said, "How do we buy these? How do we build these? How do we value these? We just care about the loans they spit out." That part was my job, to value them and help build them.

Bill Cilluffo:

That's fantastic. You've already alluded to this. You've lived in many different countries over the years: Sweden, Turkey, US, UK. I know you were in Dubai for a little while before coming back to the UK. How has all this international experience really adapted your view and helped round you as an investor today?

Yusuf Özdalga:

My mom is Swedish, my dad is Turkish. I was born in Sweden but grew up in both countries. I always joke that my mom tried to mess me up by taking me back and forth between the two countries constantly and she succeeded splendidly in creating that outcome. Joking aside, I think it's been transformative. Sweden and Turkey, I would say, are on the opposite sides of the European spectrum and being part of two very different cultures has given me a great perspective in life. Not to take anything for granted. People may have very different views across the aisle, always forces me to think that the way you do things shouldn't be taken for granted. There's a very different way to do the same thing in a different circumstance. I think it's been very beneficial.

Then, to add to all this, as I said, I came to the US for college. Very transformative. I loved American culture, had a great time there with college, business school, working at Capital One, then came to London. When you all add it up, I've now lived in six different countries and I think 11 different cities. Looking forward to settle in London now, God willing, but in the meantime, it's been a good experience.

Bill Cilluffo:

In preparing for the podcast, we had a chance to interview Portman Wills, co-founder of Wagestream. That's a company both of us spend quite a lot of time with. He says you have a very strong views on what the optimal number of passports are. I'd love to hear about this.

Yusuf Özdalga:

I think the optimum number is very difficult to answer but I think having many different ones is good. I'm very biased and me saying that probably shouldn't come as a surprise to anyone but, having looked at how the world evolves and starting a business or doing any other thing, having optionality is good and having different passports gives you optionality. I think more than one is one way to answer that question. Portman should know, he has two. He came from Silicon Valley to help set up Wagestream as a co-founder with Peter here in London and him having a UK passport helped in that process. I believe his kids had passports, as well. Having more than one is good. There's a lot of forces in the world today that are a bit more protectionist, anti-immigrant, whatever you want to call it but I think open borders, more people moving around can only be a good thing.

Bill Cilluffo:

Well, a little bit of a family story on our end. We lived in Toronto for five years and wound up becoming permanent residents of Canada back at the time. My daughter, when she was applying to college, wrote her college essay on how mad she was at us that we never were able to take that last step and get her a Canadian passport. We're stuck at one. She desperately wishes she had multiple but hopefully, it'll all work out. Yusuf, I know you have a lot of interests. We're going to spend most of today talking about investing but I think it's fair to say that you're a bit of a history buff and that you have a number of talking points around the economics of finance and business cycles. You talked about studying some finance back in college, but how did you develop this love of history, finance and the connection of the two?

Yusuf Özdalga:

I did think about studying economics and some of the good classes I took were economic history. That was actually a big part leading into it. The other thing was, believe it or not, inflation. Growing up in Sweden and Turkey, I saw a very stable country in Sweden where you would go to the same shoe store year after year and it would be the same people working in that same shoe store. Then, on the other extreme, you had Turkey, where the shoe store itself may not be there and you had inflation sometimes of 140%. That made me really think, "What are the historical circumstances that create such different outcomes in different societies? What exactly leads to inflation? Why can't they keep it stable and what prevents that?"

The historical context of that always interested me and my interest in history really comes from a very large extent from my interest in economic outcomes and wealth distribution outcomes. I went to Sweden. I was quite young when I first came to the US in '86. It was just for a summer, but I was there for four months. Seeing these vastly different economic outcomes and different societies with all their pluses and minuses in their own ways was really interesting. Trying to understand the really big, deep macro forces that drive this has been interesting.

Then, you start un-peeling that onion and you find very interesting things. You think, "Why did the First War originate in Sarajevo, in Bosnia?" You realize ... well, you look at where the Roman Empire split up, how that continued with the Byzantine Empire and then later the Ottoman Empire. How were those empires rubbing up against each other? Before the war started, you had the Austro-Hungarian Empire, the Russian and Ottoman Empires all grinding against each other there. You realize those big, historical forces have a huge impact in the lives of us average people trying to make a living, if you will.

Bill Cilluffo:

What a timely topic. We're sitting here less than a week after the latest conflict in Israel and Gaza has taken place. There's a part of the world where it goes back thousands and thousands of years, and understanding what's going on requires a tremendous amount of historical context. Ironic that you're diving into that topic as we sit here recording today. One of the things that sets QED apart is that most of our team members have been former operators, whether at Capital One, other companies or entrepreneurs. We talked a little bit about your corporate journey from Capital One to JPM to Lehman, but I know that you've also got a kind of parallel entrepreneurial journey of a number of things that you've done in the past. I wonder if you could share a little bit of that with our listeners.

Yusuf Özdalga:

The Lehman experience was formative. I was in this principal investing team that was basically investing in anything securitizable, a lot of which were mortgages. I used to joke that I had a front-row seat to the financial crisis. Now, I have modified it to say I was actually an actor on the stage, a very, very small one, and I don't want to take any blame for it. That was a tough time. When I joined that Lehman team, I think there was 150 people in the team. Their P&L of those people in terms of how much money they made was mind-staggering. I will not share it here, but the crisis started coming wave after wave in late '06 onwards. It was always one thing after the other and, by the time those two years were done, right before the bankruptcy, they were just down to 25 people in that team out of 150. Then, the collapse happened in the GFC, as we all know. We could have a whole podcast on that if you want sometime. It's a lot of learnings.

I was left with a sense of just wanting to do something more positive after that experience, which was quite taxing mentally. I said, "Whatever I'm going to do, it's not going to be fintech, finance or mortgages and it's probably not going to be in London," which is where I was with Lehman. I decided to build a business and I decided that Turkey was a good place for that. Moved back to Turkey, set up a business in the agrifood space. We did a few pivots and tried a few different things, but where we ended very fast was logistics for cold storage chains. There's some EU funds available by which you could actually build cold storage facilities very cheap and there's a huge gap in the market where the existing quality of stock was terrible. Once you build these cold storage facilities, you can rent them at a pretty high yield in the high teens with close to zero credit risk because, if somebody doesn't pay, you have the fruit as collateral.

I built that business and I was just talking about it to someone else. Actually didn't take VC money as I did that. It was me and my business partner. I set it up with the intent to be a little conservative and maybe that's not the best trait for an entrepreneur, but set it up such that, a year into it, there would be a decision point where I would either go all in, sell all my properties and put all my net worth into the business or basically find a way to exit it. Going a year into it, I realized the dynamics with my business partner ... it was very positive, but their incentives were slightly different than mine so I said, "Listen, great, this is probably a good time for me to sell you my shares," and I exited it in that way. At that point, I'd also met my wife. She's Bosnian, she was moving to Turkey and we were getting married. I thought it's a good time to actually do something non-entrepreneurial and went into private equity. The first deal I did was actually in the agrifood space in Turkey and that company recently went public. Full circle there.

That was a journey. You know the rest, Bill. I was doing private equity and then, as the political situation in Turkey started changing, the investment climate turned a bit more sour and as our kids were growing up, me and my wife decided we wanted to move back to London, where I'd lived for a long time. I gave you a call to see if there would be anything to do operationally in some of the QED portfolio companies and seemed like QED had decided to set up a London office, which turned out to be fortuitous timing.

Bill Cilluffo:

It was a very well-timed phone call, that's for sure. Glad it turned out that way. You've been with QED about six years leading our London office and our European investment business. We've built a really exciting portfolio of companies within Europe. Wonder if you could just take a minute and highlight a couple of the breakout companies that we've been fortunate enough to partner with.

Yusuf Özdalga:

Incredibly excited about the entire portfolio and we've been very fortunate to have very exciting companies before I joined, as well. Prior to me joining, we had amazing names like Klarna, we had ClearScore ... Nigel is still on the board. Zopa, where Nigel was also on the board. We've had an amazing portfolio to build on. You and I did Wagestream as my first deal, as you know, Bill. That's one where we're still both quite involved and super excited about. Then, more recently, Wayflyer in Dublin has been a really exciting one. Payhawk, based out of Sofia and the UK but covering Europe and even increasingly looking towards the US, is another exciting company in corporate and expense management space, corporate card and expense management.

Bill Cilluffo:

Probably the three largest of the investments that you've made since you've been here. I wonder if you could just maybe give a 30- or 60-second view on what each of these companies do and why you're excited, maybe starting with Wagestream.

Yusuf Özdalga:

Wagestream does earn waged access. They have a very strong number one market position in the UK. Basically, the idea is quite simple. If you work for a place like Starbucks, a coffee shop, a pub or if you're in any way an hourly worker, you have your shifts. That's one target demographic. More broadly, zooming back from those everyday workers, half the country, both in the UK and in the US, actually live paycheck to paycheck. What that means is, at the end of the month, they have less than 300 pounds or dollars in their bank accounts. Financial stress is very high for these people. If something unexpected happens, they will need to find money from their family. If they can't do that, they may have to go to a payday lender.

What earned wage access solutions like Wagestream enable is that they can actually access their earned wages as a first step before having to go to either family or any other alternative lender. That's a huge value proposition for these people. It's a unique product where it has benefit even if people don't use it. Just knowing that they have access to that extra buffer of their already earned wages in case they need money is a huge relief. Then, as we see with Wagestream, a lot of the people use it. In a nutshell, it's this earned waged access as the first product.

What makes it even more exciting is this concept of they're combining the world of work and the world of banking, basically creating what we call the workplace bank. If you go back, apropos your comment of being interested in history, when we look historically, people's bank accounts, their bank and their jobs were quite intertwined. Even today in Turkey, many times when people join a new place to work, they open up a bank account with the bank that employer works with. This is common in many places across the developing and emerging world. Now, in the western world, in the US, in the UK, that's been modified over the years. People have their bank account that's totally separate and they have their job that's totally separate. They get a paycheck into that bank account and those worlds don't communicate to each other. Wagestream actually opens up those communication lines, and that enables a whole world of innovation that can happen there. That's just a glimpse into what Wagestream can do.

Bill Cilluffo:

Wagestream's a really interesting case in that it was our first of several investments in the earned wage access space around the world, something that resonates deeply with me just in terms of building a business that can be a fantastic business but also adds so much value to consumers in terms of this almost emergency spending account, which is so critical. You mentioned Wayflyer. Can you share a bit of what Wayflyer does?

Yusuf Özdalga:

Wayflyer is revenue-based funding. They work exclusively with e-commerce merchants. For an e-commerce merchant, being e-commerce, they don't have physical stores and they're selling out there in the ... whether you call it Metaverse, the Matrix or the Internet, they sell their goods online. The challenge is either you can have a really amazing brand, which a few of them do, or you could have a very, very dominant position like an Amazon, but most of them need to acquire customers and, to do that, they end up paying either Google or Facebook, usually, but also now increasingly other players as well to acquire those customers. That marketing spend needs to be financed.

The innovation that Wayflyer had was twofold. One is we can actually finance that spend and then get paid back via merchant cash advance, effectively. As you acquire the customer and they buy the goods that you're selling, we can get paid back via deductions from your point of sale. The more, I think, exciting innovation is, because they themselves are so digital, they understand this e-commerce merchant better, both at an empathy and understanding level, but also from an ingesting their data level.

The example I always use is, if a bank goes and tries to lend to an e-commerce merchant, they'll ask for historical statements, financial statements that, by definition, are already stale by the time they get them. What Wayflyer can do is they can look at those financial statements, and by the way, they get them via open banking, so they get them much more real-time and much more fast but, more importantly, they can also look at the marketing analytics data. What they can then know is, "What is the ROI on this marketing spend?" Just to use a theoretic example, if the ROI on the marketing spend is 300% or 250%, they know that maybe the financials from six months ago don't tell the full story, but this particular merchant is selling something that is really resonating with consumers. Because the sales are going really well today, they can really make a very accurate prediction about the financial state of the company not just in real-time today but over the next two or three months, which is the cycle during which the financing will pay itself back. That insight enables them to lend to a lot of customers that others would find it hard to lend to and they can do that at a very low, I would say, loss rate and very fast in real-time.

It's one of those unique examples that's win-win-win: the merchants win, the banks that finance this operation, they win because the losses are low and the returns are attractive for the banks, and the company wins by being the one who facilitates this. In the end, also, consumers win because e-commerce merchants now have more funds, can do more marketing and can bring better and more products to the world.

Bill Cilluffo:

Lending exists in both of those places today. Consumers, if they need an emergency loan, can go to a payday lender or can go to other places. Some of these e-commerce merchants can go to the small business equivalent of those to get super high-priced loans. One of the reasons those businesses are so hard is that losses tend to be really high, and both Wagestream and Wayflyer have developed mechanisms that both use data but then also use the interception of payments as ways of running businesses, serving the same need but with loss rates that are way, way lower. Wagestream is in the single digit basis points. Wayflyer might be a little higher than that, but it's a pretty impressive use of data technology and operational process to really reinvent those businesses. You also mentioned Payhawk in the expense management space. Just maybe one minute on them and then I'd love to talk more generally about what you're seeing throughout Europe.

Yusuf Özdalga:

Payhawk also a very exciting one from the Balkans and Bulgaria. Again, going back to historical context, the Turkish side of my family's origins is from the Balkan Peninsula, as well, so it's the region that's very close to my heart. What they do is corporate cards and expense management. As you know, Bill, we have several big pieces around both expense management and corporate cards. Being QED and having so much Capital One DNA going through our veins, obviously, we like cards, so that was a big sell and that was very interesting. There's a number of interesting players in the corporate card space in the US that we thought looked interesting and we thought, "What is the translation of that into Europe?"

I think almost more importantly is this idea of back office automation and CFO tools. As we always say in our thesis-driven meetings where we bat around ideas, some of the biggest companies have come out of that space. If you can automate back office successfully, whether it's CFO tools or otherwise, expense management or otherwise, that's where you can easily build multi-billion companies. It's not one that's obvious necessarily from the get-go, but one that we feel very excited about as a big thesis.

Those two things, corporate cards and expense management, back office automation, came together in Payhawk along with a very impressive team. Hristo and Boyko were both ex-Telerik and Telerik was, I think, the biggest exit in Bulgaria. It was a $160 million exit, if I'm not mistaken, back in the days. By the standards of those days, that was a really big exit. They came from the ecosystem and they were both very strong product- and tech-driven founders, which is something we also like, as you know. When all that coalesced, we thought it was a great occasion to lead their series A, which we did.

It's been exciting so far, growing really, really fast, doing well, product is delivering really beyond our expectations. Obviously, a lot of wood to chop still, but a company we're really excited about. The other exciting thing about it is it's really pan-European and actually pan-global now. They're able to sell successfully in multiple, multiple countries. A lot of interesting insights there for other companies that are looking to go cross-border.

Bill Cilluffo:

It's interesting, you've brought up companies headquartered in London, Dublin, Bulgaria, all of which are serving multiple countries in Europe, all of which are also serving the US. It's interesting to see these business models that have proven to be able to jump geographic boundaries.

Yusuf Özdalga:

As you know, at Wagestream we used to joke that the only one that's gone to the US successfully from London has been the Beatles and everybody else is trying to match it since then. You pointed out we've been lucky that some of our companies, we've been able to help, and I think that's in large extent thanks to our strong presence in the US and in Europe, the strong communication lines we have between the teams and how we can share our insights.

Bill Cilluffo:

You sit in London. I would say historically, the bulk of our focus has been on the UK but, over the last several years, we've started to look more broadly throughout Europe. What are some of the unique opportunities and challenges that you see as you look at the landscape over the next couple of years in Europe?

Yusuf Özdalga:

I think there's a lot of challenges if we decide to think about it. I will not get into the global political macro too much. Obviously, a lot of sad developments that we're seeing and we can only hope for peace across all of Europe in the very near future. Whether it's in the Middle East or it's in Russia and Ukraine, we just hope that innocent people stop dying. I think there's no better way to say it other than that. It's super, super tragic and really depressing to see that. That macro backdrop is really worrisome and I think there's nothing worse than a war, terrorism or whatever form of conflict where innocent people die. Finding solutions to all those conflicts and all the other ones across the globe, but speaking about Europe, those two are really paramount. Fast is really the key. We can only pray for peace and do what we can. I think that's one sort of negative and worrisome trend.

There are some other worrisome trends that go along with that, and that could include the rise of very hard right politics and other things, but I think there's a lot of things to be optimistic about. I think the EU has withstood the shock of Brexit quite well and the EU is now talking about expanding again. Brexit was a bit of an unexpected event in the UK but the UK's still very vibrant and shows that it can be successful and thrive outside of EU. I think that points to different paths to success. EU can be very successful, UK can be very successful without being within the formal bloc and innovation can be strong.

I think there's a lot of regulatory innovations happening in the UK as well as Europe, especially the FCA in the UK is constantly innovating. Open banking was one of those almost a decade or if not more ago now, and that's been in some cases you would say copied but in many cases improved upon in other places in the world like Brazil and India, as we know really well from our investments in those geos. That's exciting in Europe. I think the VC ecosystem is just at day one here in Europe. It's so much more to go. It's growing very fast. There's now founders that have had multiple exits. They're setting up funds, they're setting up new companies. The ecosystem is only getting richer. Whether it's AI or all these new technologies, all that is really transforming the system here across Europe. I think those are the things to be excited about.

I think there's a few things as an investor we've got to be mindful of, and that is basically thinking about the right horse for the right course, if you will. A company coming out of Bulgaria or Ireland is very different from a company coming out of Germany or the UK. I think there's all these different filters we put, one of which is, "Is the domestic market really big?" That's interesting because, if your domestic market is small, it's going to force you to be more export-minded and globally oriented in your vision. If you're in a bigger market like France, UK, Germany, et cetera, there's a temptation to stay local. That could be fine, but then you have to assess, is that market big enough? In many cases, certainly by far it is. These are some of the biggest economies in the world. Those are some of the things to keep in mind. Some things to worry about, many things to be excited about and then just a lot of learnings we've gathered here over the, I think, 15+ years we've been investing in Europe.

Bill Cilluffo:

Obviously one part of this is the macro, which countries and how's their outlook. Another is just what industry are folks in. Are there a couple industry verticals that you're particularly interested in right now, or you're seeing a particular amount of activity as you and the team are out hunting?

Yusuf Özdalga:

I think international payments and FX-related plays is very interesting, to pick one. London from a capital markets point of view is a FX, foreign exchange, clearing hub, and we do think that very exciting companies will come out of that in the future from London. Obviously, it's a huge market, there's some very big players and, depending, on where you play in the market, there could be a lot of competition from the incumbents, but then there's a lot of interesting gaps. I think if you look at ... even from an enterprise company all the way down to an SME, how companies solve their FX problems is far from optimal. I can just give you QED as one example, Bill, where you think about how much foreign investing we do and how much FX exposure we have, and then how much we think about hedging that, on the other hand. We've had a lot of internal conversations about it, obviously. So that's just one example where I think there's a big space for somebody to come and basically innovate on how companies consume hedging and FX solutions. That's one interesting area.

Embedded fintech is one we talk about a lot, as you know, and I think that, we're just starting the journey on, embedded fintech. The example we always use is Uber with their drivers really transformed mobility, but a big part of the transformation is you could just close the door gently, not slam it, leave the car and the payment just happened in an embedded, invisible manner. That revolution is just starting, whether you think about travel payments, insurance payments, how those payments become smarter, how that gets orchestrated and feels like invisible and magical to the consumer, a lot of companies will be created there.

Bill Cilluffo:

Great example and, again, as we're covering the whole landscape of a continent, obviously, we talk to companies in just about every sector within fintech but, at any given time, I know there's always a couple that stand out in terms of having lots of activity. Clearly, as we're making investments, a big part of the decision is based on what is the business and what are they building, what's the space they're in, but the founder and founding team are also very central in that effort. I wonder if you can describe what you look for in a founder, how you think about the founder versus the business model and evaluate both of those.

Yusuf Özdalga:

Starting with the latter question first, I think this idea of the right horse for the right course is super important. As we said, we apply that to ourselves. As investors, we try to invest in areas where we're the right investor for that, meaning we know the space. Can we help the founder? I think the same applies to founders. Is this the right founder for this idea? The big challenge may be go-to market. Then, you may think about how the sales team and the sales function is built up differently. The other one may be very engineering and product-driven, and then you think about how the founders stack up in those areas and if they have the right skillset across the leadership team to tackle that. Some businesses that need to be built will have some temptations to spend a lot but actually, the right answer is to be very scrappy. Then, you look at the founder and think, "Is this person going to be very scrappy and not get tempted by capital that may get thrown at them from other investors?" I think doing that fit is very, very important.

Going to your first question, I think building any business is incredibly difficult and the odds are always stacked against you. Perseverance and speed are probably two things that we look at quite a lot. Speed is a very important one. To paraphrase Portman ... I think I'm going to steal that quote from him: "As long as I'm the fastest, I just have to be correct 50.1% of the time," and I think that's something that really resonates with me. Again, speed is not always the right answer. Sometimes, you need to be deliberate and make sure that the solution is 100% accurate. Then, again, going back to this right founder for the right challenge, knowing the difference between those is crucial, but speed is almost always one that is paramount in the startup world, and being able to execute fast is one we look for. We have a very long list. I'll just name one more, which is I think also the intellectual chops and intellectual honesty: to be able to look at a situation, assess it intellectually, honestly, openly but very discerningly.

Bill Cilluffo:

That's great. I've heard you say something that's probably a little bit contrarian to what many people are thinking, the comment that, whether it's five years, 10 years, 20 years, people will be tired of carrying a phone in their pocket and that there'll be technology ... that voice becomes the largest channel to deliver financial services for. Can you talk about that long-ranging vision that you have?

Yusuf Özdalga:

I think part of that is just looking into the trends and part of that is also wishful thinking, where I'm getting very tired of putting my [inaudible]. London is real estate-constrained, so dinner tables tend to be quite small, and I'm always looking for a place to put my iPhone 13 Max Pro or whatever it is. It never fits anywhere. Then, I put it in my pocket, it falls out and it pokes me in unexpected places as I try to sit. I'm hoping peak mobile engagement. Especially with AI and all these other things, I think it's just going to turn to a much more conversational note.

I think there's possibilities that it goes a bit more like Google Glass augmented reality. I find that slightly harder. I do think this conversational piece may trump it. Very hard to predict, but I do think there will be a trend towards just more talking to computers and, instead of looking at the screen, you can just say, "What was the growth rate of this business over the last three years?" instead of squinting at a chart that's showing the same insight. That's one thing.

What the implication for VC is, is that the channels may change. I think everybody remembers how challenging it was for Facebook to grasp the oncoming mobile revolution and they effectively fell a year behind but then, they quickly caught up and now, a lot of things are mainly consumed on the mobile instead of the desktop. I think there will be a channel shift at some point and certainly, mobile will not be forever. I think it'll be maybe an ear set combined with a watch, you just talking to your ear set and hear back, or maybe it's a glass, but that's the thought that I have.

Bill Cilluffo:

Well, that's one thing fun about the business we're in is some of these trends are really hard to predict and depending on which way it goes ... again, we're not investing at the primary technology there but depending on which way the world goes has a big impact on what types of financial services businesses will be built. For our closing segment, I'd just love to move into talking about you as an investor. How would you describe your biggest superpower?

Yusuf Özdalga:

For me, I think it's all around people. At Capital One, I think you probably remember this quote, I think Nigel used to say it: that, "We're not in the consumer finance business, we're in the people recruiting business." To some extent, even a factory with machines and robots is still a people business, but I think ... yes, every business is a people business, but none more so than VC, where it is just all about the people, whether it's the investment team, the people that work with us at QED, the founders or the people that the founders recruit, everything just starts and ends with how good those people are, how good they are at their job and how good of a fit that person is in what they're doing. That really appeals to me.

I don't know if I would call it a superpower, but I really find people very interesting. I find founders very interesting. I was a part of an angel club in the early days at QED and I would spend all day at work listening to pitches and ideas. At night, after 9:00 PM, I sat down with this angel club and we went through eight more pitches until 11:00 PM. I thought, "If I can do it until 11:00 PM like this and still find it interesting, I'm probably doing the right thing." I find the people element super interesting and energizing. I just can't hear enough of different ideas and different people. I find meeting different people and getting into their thought processes super interesting. If I can understand how someone thinks, that is one of the most fascinating things for me. I don't want to call it getting inside people's heads because that sounds very creepy, but understanding how they think and how they react to circumstances is fascinating and, as a result, I spend a lot of time thinking about how people react and how they will react in the future.

Bill Cilluffo:

What's one thing that you wish you were better at or actively working on improving?

Yusuf Özdalga:

For me, it's around switching gears to being more slow and deliberate. I think everybody's strength can also be their weakness. One of my strengths is being able to move quite fast. The flip side of it is ... and also, as we said, people, the flip side of it is sometimes, you need to just take a step back, go very slow, be very deliberate and spend time just thinking deeply, which is something very important and making the time for that is very important. That's something I strive to do more of and try to create a lot of spaces in my calendar to do it, but it feels like those spaces have a way of filling up and I have a way of gravitating towards people, things to do, fires to fight and not enough time to do deep, reflective thinking as much as I'd like to.

Bill Cilluffo:

Funny you talk about going fast. Portman told us we had to ask you a question here. Apparently, you have a test. You watch how slowly or quickly someone eats a meal, thinking that that says something deep about their personality. Let's ask for an analysis of that.

Yusuf Özdalga:

This goes back to my business partner when I started my business. They had a big construction business, as well, and his grandfather would have lunch with people. In that lunch, he would see how fast they eat and he would only hire the fastest eaters. I know they built their buildings and their construction sites very fast. You also want to make sure that the buildings stood the test of time and didn't crumble. I think looking at how someone eats is one out of many ways to understand their personality and how they approach things. In my experience, at least, people who eat fast will be very fast-moving people and that's important in the startup world. Please don't take this as a criteria. Eating slower is definitely healthier and I try to eat slow myself, but the way you eat it can give away a lot about you. Keep that in mind.

Bill Cilluffo:

Well, I'm probably way on the edges of eating quickly. I live the downside of being a bit overweight every day. I think the slow plan has good long-term health benefits and I need to learn how to be better at that. What's one thing that you feel like over your six years of investing that maybe you got wrong or underestimated, a big learning that now, you take a different approach to investing?

Yusuf Özdalga:

Being able to say no under any circumstance and not getting wedded to either a founder or a thesis. There's been cases where I really liked an idea, a thesis, then that turned into this work and I ended up doing a lot of work on the space, thinking about the space. Then, that turned into, "Well, you've done all this work, so we should make an investment." I think that's not a good thing, necessarily. I think my learning from that is that, even if we've done months of work, it's probably better not to invest if we're not at full conviction because, once we make the investment, we're committed, and the QED brand is all about playing the full 90 minutes, things may not go well and we're still going to be there. When we do investments, and many of them, obviously, do not turn out exactly as planned, we end up spending all that time, so it's better to be even more deliberate before plunging in. Just because we've done a year's worth of work in a space doesn't mean that we should invest in it and we should just keep our bar very high.

Bill Cilluffo:

Well, Yusuf, it's been awesome having you today. Great to explore your background. We almost always end these interviews with the same question to everyone. Hopefully, we have a number of young prospective entrepreneurs listening to this podcast. What's one tip you would share with a young entrepreneur?

Yusuf Özdalga:

I think surround yourself with good people. It sounds like a cliche, but I think just find those people that can help you in all these circumstances. I think the key to doing that is knowing what kind of people you should surround yourself with. It's not about just finding successful people and surrounding yourselves with them, it's more about knowing your own weaknesses, knowing yourself, knowing where you need complementing and finding those people that complement you. They could be a co-founder, they could be your chief of staff, they can be your COO or they can be your investor, it doesn't matter, but find people that complement your strengths and weaknesses. The key to doing it is obviously reaching out to them but also understanding yourself. That would be the number one thing in my mind.

Bill Cilluffo:

Nobody's able to build a great company on their own. Such great advice. Anyone who's listening that would like to pitch you, what should they keep in mind and how do they get in contact?

Yusuf Özdalga:

It's Yusuf@QEDInvestors.com. Please reach out. We are always happy to talk to founders working in fintech. To keep in mind: be open and share as much as you can. Share your deck, share your idea very clearly. We will then get back to you as fast as possible. The more specific you are in your ask, your idea, what you're trying to do, the more specific and quick we can be in reverting to you.

Bill Cilluffo:

That's great. Well, Yusuf, it's been awesome having you here today, reliving your journey. We talk multiple times a week but it's great to take this chance to have a bit of a retrospective. Appreciate you joining and to all of our listeners, take care and thanks for listening.

Yusuf Özdalga:

Thank you. Thanks, Bill.

Bill Cilluffo:

This has been the FinTech Thought Leaders podcast, your window into the world of venture capital and financial services with today's digital disruptors. QED is proud to provide the best fintech advice you can get. To learn more or to read the full show notes from today's episode, check out QEDInvestors.com and be sure to also follow QED on Twitter and LinkedIn at QED Investors. Thanks for listening.