Fintech One-On-One Podcast: Peter Renton Interviews Arjuna Costa

"It is the big challenge for fintech: making the financial lives better for the those who are underserved," said Peter Renton, founder and producer of Fintech One-on-One, the sector's oldest podcast founded in 2013. "We have come a long way in the past decade but there is still so much more that has to be done. And one of the people who has been at the center of this fintech transformation is Arjuna Costa, Managing Partner at Flourish Ventures. He is someone I have wanted to get on the show for many years, so I am fortunate that the stars aligned and we were able to sit down for the engaging discussion."

In this podcast you will learn:

• The journey Arjuna took from microfinance to venture capital.
• The early days of the Omidyar Network and how they thought about financial inclusion.
• How Flourish Ventures grew out of the Omidyar Network.
• The five principles they believe that underlie a fair financial system.
• The advantages of having a single funding source.
• How Flourish measures success.
• What is different today from investing 10 years ago.
• The change in quality of entrepreneurs and business models.
• How much better financially people are doing today in emerging markets.
• What else needs to happen to really make a difference.
• How Flourish is helping to address the challenges of the mental health of fintech founders.
• The state of fintech venture capital in 2024.

PODCAST TRANSCRIPT

Peter Renton  00:01

Welcome to the Fintech One-on-One Podcast. This is Peter Renton, Co-Founder of Fintech Nexus and now the CEO of the fintech consulting company, Renton and Co. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you so much for joining me on this journey. Now, let’s get on with the show.

Peter Renton  00:32

Today on the show, I am delighted to welcome Arjuna Costa, he is one of the Co-Founders and Managing Partners at Flourish Ventures. Now Flourish is a really interesting company. They are a unique venture capital firm. They come out of the Omidyar Network with eBay Founder, Pierre Omidyar. So they are a single LP venture capital firm, doing really important work. They operate globally, and they invest in early stage companies around the world. And they’ve got deep experience. Arjuna has deep experience in this space, he’s been doing this for quite a long time. In fact, he’s spent his entire career thinking about this, this challenge of financial health and financial inclusion, and we get into that in some depth. We also cover quite a bit of territory here. We talk about what he’s learned over the last 10 years, what’s different today than investing 10 years ago. We also talk about the mental health of entrepreneurs, which is something I don’t very often cover, and much more. It was a fascinating discussion. Hope you enjoy the show.

Peter Renton  01:49

Welcome to the podcast, Arjuna.

Arjuna Costa  01:51

Thank you, Peter. It’s a pleasure and an honor to be here.

Peter Renton  01:54

The honor is all mine. Okay, let’s get started. I know you’ve been doing this job a while with Flourish, and then obviously a Omidyar Network. But why don’t you tell us some of the highlights of your career going back to the very start?

Arjuna Costa  02:11

Thank you, Peter. I call myself an accidental venture capitalist. I started out as an investment banker in the early 90s. And at one point really got interested in this idea of the unequal access to capital across the globe. And I quit Wall Street and I started working for the US government, really, at the last mile. So microfinance for farmer groups in rural Africa, trying to fund small businesses across the frontier markets. Did that for a while, figured that I wanted to try and elevate my impact a little bit. So moved to restructuring and privatizing failed banks, generally, under the guise of structural adjustment programs that the World Bank and the IMF were running. So working for ministers of finance and central bankers across the globe, fixing their banks, and trying to stabilize financial systems. That led to a bank turnaround fund that we raised to actually try and buy these banks and go down market. So I’ve always been interested in how we can use the financial system to allow for more democratized access to capital and financial services. And in the course of that work, in early 2009, I started to see the green shoots of what mobile money, you know, the Telco Mobile Wallet could do in terms of broadening access. And all of a sudden, technology, mobile first, but then everything that came from there, became a medium to solve the problems that I’d been working on for the previous 15 years. And we all owe so much to good fortune, I’ve met the folks at Omidyar Network, who were building what in my mind was the ideal platform to try and tackle some of these problems and invest in some of these nascent ideas before fintech was a word. This was back in 2010.

Peter Renton  04:18

Interesting, interesting, so we started there. I mean, imagine Omidyar wasn’t very old when you joined, right? That was from Pierre Omidyar, right from the eBay days?

Arjuna Costa  04:30

Yes.

Peter Renton  04:31

How old was it when you joined?

Arjuna Costa  04:33

Omidyar had been on a journey from when eBay went public in the late 90s to when I joined in 2010, Peter. The organization started out firstly as a family foundation, because that was back then the way one thought about impact. What’s fascinating is to see the parallel of the journey of eBay, as eBay scaled post IPO over the next decade.The thinking evolved with that to say, listen, we could invest in exceptional entrepreneurs that could build businesses at scale, that could have tremendous impact, because eBay created this new category of the seller. And it created a million jobs for people who were sellers online. Right. So a small investment in an innovative idea could lead to tremendous impact. So the foundation evolved into what became the Omidyar Network. And the idea was simple, yet so elegant, and so empowering, Peter. The network essentially controlled or advised two entities: One, a traditional 501(c)(3) foundation structure in the US, and the other was a Delaware LLC. And the mandate was very empowering. Think about the problems you’re trying to solve, you have all the flexibility of the types of capital you can deploy against it. So be very problem first, rather than structure first, which is what foundations and funds tend to get pigeonholed into. So I was early in that evolution. And when I joined, I was tasked with trying to figure out what this tech for financial inclusion idea could become, and to explore the potential that it had, and this was in 2010. I know you and I have been talking for over a decade now about these ideas. But fintech was not a word when this started out. In my world, it was very much this idea of mobile money, mobile financial services, how to solve that inclusion gap, by empowering people with a simple Nokia feature phone to send money and store money safely, cheaply, more conveniently than they had ever been able to do before.

Peter Renton  07:03

Okay, so let’s fast forward then. Was it 2019? The move from Omidyar to Flourish? What was the thinking there? And how did that come about?

Arjuna Costa  07:16

So we spent the better part of the 2010s, over that decade, building a platform for what’s now become Flourish. As that initial financial inclusion team evolved our own thinking and started framing the problem as one of financial health and less about just inclusion, which is binary, right? You’re either included or you’re not. But the problem is deeper. Do you have access to a suite of financial tools that allows you to manage and have a healthy financial life? As we build that out, we realized that we’d built something of a brand for ourselves, like people understood, oh, okay, you’re the financial inclusion, financial health team from Omidyar Network. We know what you stand for. We’d built a team, along with leadership. We had a pretty defined strategy in place. And we had a global portfolio that people recognized and it stood for something. And over that period of time, as leadership, we built a trusted relationship with the Omidyar family and their advisors. And the thinking was, this came from Pierre Omidyar himself, was smaller, nimbler teams will move quicker, take more risk, and ultimately have more impact. So we had all the building blocks in place. We had this as an underlying philosophy, if you will. So the thinking in 2018, 2019 was, why don’t we give this Flourish team their own platform to go out and focus very single mindedly on this idea of financial health? And we can get into how we define that as we go.

Peter Renton  09:03

Let’s do that, because I’d sort of like to tease out the investment thesis today. And maybe you can, as you answer that, you can sort of talk about your approach to financial health.

Arjuna Costa  09:16

So, Peter, our approach starts with this belief that we term Fair Finance for All. This provides us with a framework within which to view our work. And we’ve actually laid out a set of five principles that we believe underlie a fair financial system. And those principles touch the consumer, the service provider, the regulator, the infrastructure and the data, which we think together, if done right, can create a platform for everybody to be served fairly. That underlies all of our work, but against that we’re constantly evolving the set of themes that we’re investing in at any point in time to push the frontier. While we have a top down view of a preferred end state, we know that we learn the most, from the creativity and the innovation that comes from the entrepreneurs we talked to every day. And that really allows us to constantly evolve as this global fintech, venture capital firm with a purpose. We’re really thinking about, how do you disrupt legacy structures? How do you shape the system for the better? And how do you help customers and consumers who might be individuals, households or small businesses achieve this idea of financial health and prosperity? We also engage with the broader ecosystem through different types of investments that bring together policymakers, industry thought leaders, regulators, researchers, and media entrepreneurs, to really think holistically about what the set of innovations are that might be feasible and how do we further that? Underlying our work, there’s this idea of systemic change. We have the privilege of having a permanent and flexible capital base. So we can really become partners with our founders and these other people that we engage with in the ecosystem to eventually build towards a better financial system.

Peter Renton  11:35

Right, right. So just to be clear then, you don’t have any outside LPs. It’s really just Omidyar is almost like a family office, is it? Or how are you funded?

Arjuna Costa  11:46

We’re funded entirely by the family, the Omidyar family, Peter, that’s right. So there is, of course, a family office that’s managing, as a true asset allocator would, the wealth that Pierre and Pam Omidyar have created through starting eBay. Then since then, with acquisitions like PayPal and the like, we get capital from them through a vehicle that we can then manage against the sets of objectives and goals that we have. And we have not today to take in third party capital. It’s been very important for us to be so closely aligned with the source of capital. We have incredible freedom in, you know, one day working to support a podcast thinking about financial well-being, and the next day, invest in a seed deal in a fintech startup in Brazil or Indonesia. Right? That breadth of work, which we think is critical to improving the system, requires a lot of flexibility that we found comes from having a single funder.

Peter Renton  13:03

For sure. So then how do you measure success, then? I presume it’s not just financial metrics. Right? What else are you looking at, as far as Flourish invests across the world? What’s the measure of success?

Arjuna Costa  13:21

Let me start with this underlying principle, If you cannot operate profitably at scale, that you’re not going to have lasting impact. Right? So the fundamental measure of financial returns is critical to all our work, because that’s the measure that says, we’re building companies and organizations that will demonstrate it. Against that we think about systemic impact very carefully and think about investing in companies that, through their success will demonstrate new possibilities to the market. Right? So this demonstration effect of backing an entrepreneur and a new innovation is very powerful. It leads to replication, competition in the local market, replication in new markets, it leads to response from the incumbents, and over time, shifts the overall market for the better. And that really, fundamentally drives our work. But that’s not enough. And I said, as I said earlier, we have the luxury of the flexibility to engage across the ecosystem. So we work closely with policymakers, regulators, and researchers to think about regulatory change. We work with media and media entrepreneurs to drive narrative change, as part of driving the narrative change, we hope we’re shifting people’s attitudes to money to be more healthy. So all of that taken together, and we go pretty systematically to measure each of these lines of work. Hopefully all of that taken together drives what we would call a systemic impact.

Peter Renton  15:22

Interesting. Okay, so then you’ve been doing this for quite some time as we’ve already mentioned. I’m curious to see what’s different today? Obviously, the technology is very different. It’s not just about feature phones, doing mobile wallets. But I’m curious about what you see from your perch that’s fundamentally different investing today than it was investing say, 10 years ago.

Arjuna Costa  15:50

As Flourish, we invest in the US, and we invest across the big markets in the global south. So we’re active in Latin America, Southeast Asia, India and the Indian subcontinent, and in Africa. My particular lens, and my remit is working across the emerging markets. So let me let me answer this from an emerging markets perspective, if that’s okay. A few things have really shifted over the last decade. The speed at which innovation spreads is remarkable, the replication of ideas, the localization of ideas, has really shown a dramatic improvement. The second thing I will say is, the ease with which you could build a business today in the emerging markets is vastly different from 10 years ago. There are more pieces of a plug-and-play infrastructure today, that you could be a part of, that allows you to get to market with a robust enough product and start to work with customers. That time has shrunk drastically, right? And it’s a global infrastructure, something like Amazon Web Services. It’s the underlying pieces that allow you to leverage the reach of Google and Facebook and Meta through ads. It’s the analytics capability that allows you to plug in and we are, I would argue, the early stages of leveraging the true power of generative AI. So that infrastructure layer has shifted dramatically. The third thing I would say, again, with an emerging markets lens, is the sophistication of entrepreneurs. You know, a decade or more ago, you had second time entrepreneurs, and third time entrepreneurs. But a bulk of those were in Silicon Valley or in New York. I am delighted to say that now we have second time fintech entrepreneurs in our portfolio in markets like Brazil and Indonesia. And you can see the sophistication they bring to the second and third time around the startup world. Right? So all of those things, I think are tremendously exciting. I think you alluded to the access that we have to technology in the palm of our hands is is radically different as well. I think people’s comfort with using technology has shifted. And I’d say we’ve got a ways to go. But the comfort with trusting the technology and your money at the same time is just that next hurdle that we’ve got to figure out.

Peter Renton  18:40

Right, right. So then would you say, given those things that you mentioned, and it really seems like you said starting a business is easy, or easier, I shouldn’t say easy. It’s never easy.

Arjuna Costa  18:55

Never easy.

Peter Renton  18:57

It’s easier than it was. And you’ve got the infrastructure now in place so you don’t have to keep reinventing the wheel. So are you finding that the quality of companies that are crossing your desk in these emerging markets, is that better now than it’s ever been? Or, what’s that like?

Arjuna Costa  19:17

Absolutely. The quality of entrepreneurs, the quality of business ideas, and the innovations around business models, the understanding of monetization and unit economics earlier, the life cycle of a company has gone up in leaps and bounds. So I feel very privileged to be learning from my US colleagues but able to interact across the emerging markets, and in some ways, cross-fertilize ideas, right? Because we’re learning in the US from innovation in the emerging market.

Arjuna Costa  19:53

And vice versa. And I think that makes it an exciting time to be working against this global remit. And I would say that we’ve also found that founders are finding a peer network much quicker. And that’s accelerating the learning cycle. So as an investor, I can bring ideas back and forth. But what’s exciting is to see this happen more organically where a founder tackling, let’s pick a simple theme that people can relate to, a buy now pay later, or an earned wage access idea in Brazil, is connecting to a peer who’s building something similar in India, and they’re cross-fertilizing ideas and learnings. And so as a result, the entire ecosystem is speeding up, right? And the idea that some countries are playing catch up, each successive country that’s embracing this technology and using fintech to build a more fair system, that speed at which they’re catching up to the countries ahead of them, is increasing. And the gaps are narrowing.

Peter Renton  19:53

Sure.

Peter Renton  21:07

So then I’d love to take a step back and think about the financial health of the regions that you’re working in, and obviously, we’ve seen the explosion in technology like PIX in Brazil and UPI in India and the others across the world. But those are the two that have had the most impact, it seems. When you’re looking at these emerging markets, are you seeing that the financial technology that has really been developed in the last decade, and it seems to me, I’m not as deep in the markets as you are, but it seems to me that it is making a difference on the ground in the average person’s life, and I’d love to get your perspective. Do you think we’re doing well when it comes to financial, or doing much better than we’ve ever done before?

Arjuna Costa  22:00

I might have to answer that with yes, and or yes, but.

Peter Renton  22:04

Okay.

Arjuna Costa  22:06

So maybe we can start and ground this in the US because we probably have the most robust data in the US. A good reference point for us is something called the Financial Health Network Pulse. And the most recent Pulse survey, dates back to September 2023. The Financial Health Network is the leading voice on this idea of financial health in the US. And they documented that 17% of Americans were financially vulnerable in September 2023. And those were levels that we hadn’t seen since before the pandemic. So I think the pandemic and the stimulus showed a little bounce in the improvement of financial health, but it’s, it’s starting to tick up again. We saw 2% increase from 2020 to 2023. More worryingly, perhaps, black, Latinx and younger Americans were disproportionately affected by this increase in financial vulnerability. And then, following from that, unbanked households are more likely to be financially vulnerable. People working for small businesses versus larger, more established companies, again, more likely to be financially vulnerable. So I think that points to an underlying weakness in the system, right? That we still, even in the US, have this pretty substantial core of households that are struggling. Access in the US isn’t so much of an issue. Everybody, for the most part has access to, digital or otherwise, formal financial services. If we switch to the emerging markets, I think what we found is over the last decade that we’ve been talking about, we’ve made tremendous strides in access. And one of our fair financial, fair finance principles, which is this idea of an open and low cost infrastructure, upon which innovation can be built, is a key underpinning of a good system. Brazil and India are great proof points of that. PIX and UPI have made it frictionless and relatively cost-free to store and move money to anybody in the country at any point in time. What we think deeply about is, how do you build on that infrastructure to truly allow any household or small business to have access to a holistic suite of products and services at the right price point when you needed to solve a very specific pain point. And I think we’ve still got a ways to go on that. We’re making tremendous strides. I think the technology that we have in our hands, and the infrastructure that companies have at their disposal to build, is coming together in a very positive way. I think, a decade and more of research into truly understanding customer pain points, the creativity of design teams and design thinking to build products and services against those pain points, all of that is coming together. So I’m hopeful that we are at a great point, but also want to recognize that there’s work to be done.

Peter Renton  25:39

Right.

Arjuna Costa  25:39

And that’s what keeps us occupied on a day-to-day basis to be excited for, you know, the next creative idea that I hope comes across my desk.

Peter Renton  25:48

Right, right. Well, yes, if it was all solved, we wouldn’t have much to do, would we? But it’s never going to be a completely solved puzzle, it doesn’t seem like. But I want to switch gears a little bit and talk about something that I’ve never really talked about much on the show. But I I noticed you guys are talking about it. And that is the fintech founders’ mental health and well-being, like you’ve talked about the decline in the mental health of fintech founders. I’m just curious about how you’re addressing this, or what you’re doing to help founders maybe get more balance in their life.

Arjuna Costa  25:48

I’m glad you’ve made space for us to talk about this, because I think this is a really important topic. In the best of times, entrepreneurship is incredibly challenging.

Peter Renton  26:42

Right.

Arjuna Costa  26:43

And things like the pullback and funding that we’ve documented, and I know your research is bringing so much light to the changes of the fintech landscape from a funder perspective, adds to the complexity. I think the dislocations in the macro economic picture, in many markets makes it even more difficult. I think the pandemic and the remote work, the struggle, the comeback to some new normal of in-person time and in-person connectivity. All of these have compounded the challenges. And there’s one thing that, at least I feel, gets overlooked a little bit. You know, five years ago, 10 years ago, we worried the most about the founders whose companies were struggling. In the run up in the market, when large amounts of money was flowing to the companies that were thriving, the pressure on the founders of the successful companies also multiplied. So you almost got into a ‘damned if you do, damned if you don’t’ situation from a well-being and stress perspective, right? And we take the perspective that these are entrepreneurial journeys. And we’re not just with these founders for this company, but for every successive company we hope they create, because these are creative problem solvers, who are mission driven, and believe, like we do in this idea of a fair financial system and are building against that. So the stress is higher, the need to think long-term is even more salient now than ever before. As we’ve shifted from these boom times to the more challenging environments, it’s important for us, as an investor to understand the correlation between founder well-being and business success. And we like to think that strong, resilient, healthy founders build better companies in the medium- to long-term. So prioritizing founders thinking about their resilience and empowering them to have balanced lives is important. We start with working hard to build trusting relationships, but then we layer on top of that, I’d say three different categories of support, broadly. The first is very directly focusing on that founder well-being. So we support them with things like resilience training, peer circles, where we facilitate with professional moderators their ability to connect with other founder peers across the globe. Since it’s all part of the Flourish portfolio they start with a level of trust that allows them to build these deep networks. We do annual leadership CEO retreats, CXO retreats, we have tailored coaching for all of them. So this is very direct support to founders and their executive teams. The second thing we focus on is founder-founder relationships and building a stronger base for those relationships. And this exists, and this starts before we make the investment. It carries through the investment phase, it carries itself out in one-on-one engagements in boardrooms, through difficult conversations, through complex conversations of exits, both good and bad. So that relationship, and its evolution over time is important to us. And we try to start with, as I said, a position of trust. We demonstrate empathy, we validate that it’s difficult. And we try to be there, in the good times and the bad times. The third piece is around making sure that the entrepreneurs are building companies that are grounded in their values, they have the right system, the right training in place to allow for the next generation of leadership to come up. Because that, we’ve found, allows for a founder to think about their companies very differently. Once they have built strong leadership teams, and company cultures and values-driven workplaces, that allows for them to, you know, step into this position of being comfortable with the challenges of the journey.

Peter Renton  31:21

Now, we’re recording this in the middle of 2024. We’ve come through a very interesting last five years, shall we say, when it comes to venture capital and fintech. So I’d love to get your take on where we are actually today, and what do you see in the next 12 months? Are we going back to pre-pandemic type levels of venture capital funding? Where do you think we’re going to be in the next 12 months.

Arjuna Costa  31:55

Peter, if I had that crystal ball, I’d probably go and start a hedge fund with a little money. But, 2024 we’re seeing continued innovation, but we’re also seeing consolidation. So I think you will see, the next 12 months will bring a mixture of the two. New founders, experienced founders continuing to push the innovation envelope. And companies who were fundamentally not based on sound unit economics, either consolidating or finding a home. I think the energy around generative AI is slowly starting to trickle into more specific financial sector oriented problems. Right now we’re seeing things like fraud detection, automated accounting solutions, start to leverage new tech. We’re still seeing innovation in things like cross border payments and real time payment systems again, to pick back up on your point around the innovations of PIX and UPI. So I don’t see a sector standing still. I see a marked drop in funding levels, but from the highs of 2021. I think if we smooth out the line of funding from the 10-year period, it looks you know, we still look very healthy. Right? I do worry about the short term from an emerging markets perspective because of macro dislocation, right? Which is out of the control of any of the entrepreneurs and business builders that we’re backing. So you will see potentially a slightly higher failure rate thanks to macro dislocations, you’ll probably see a flight to quality that fewer better entrepreneurs get funded. But I think as we talked a couple of questions ago, the bigger question around financial health, there’s problems to be solved. And I said before, I take more joy and heart from the creativity of the resilience of the entrepreneurs out there who, you know, persist despite the headwinds. I’m guardedly optimistic that 12 to 24 months from now, the funding environment is going to look much healthier than it is. And I think the next 12 months will be challenging, but I think we will see good companies get funded and great companies get built.

Arjuna Costa  32:47

Well, that’s that’s a great place to leave it there. Well, Arjuna really great to chat with you. Thank you so much for coming on the show. Really some very interesting discussion points there. I think the audience will very much enjoy this. So thanks again.

Arjuna Costa  34:48

Peter, as always, it’s a treat to get to talk to you, you know so much about this space, and it’s an honor to be on the podcast.

Peter Renton  34:56

Thanks. Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.