This is the second half of a two-part interview with Capital One founder and Forbes's Midas List Venture Capitalist Nigel Morris.
Learn more about his journey to VC—along with tips for dealmakers just starting out—in the first half of the interview.
(This interview has been edited and condensed for clarity.)
Affinity: What are the go-to metrics you use to evaluate things like the strength of a deal, the return of a deal, your own firm’s performance …
Morris: One of the things I've said is that I'd prefer to get a 4x return on my money and be really beloved, and seen as a primary support and mover in the success of a company, than get 5x and be seen as rapacious or non-supportive or [a] non-value add.
Because I'm in this for the long run. I mean, I'm building this. This is a franchise. This is a brand. This is about being able to play a unique role in a unique space. I've said that, before I hang my spurs up, I want for QED to have been involved in touching the lives of a billion people on this planet.
Now, we've [invested in] ClearScore, Credit Karma, NuBank, Klarna. If you add them up and you add up the portfolio companies [we’ve invested in], I think we get to nigh on 300 million [people]. But the billion number is a beacon for me in Africa and in Southeast Asia, where the tools that we have and the experiences we have in other geographies [give us] the ability to galvanize capital. I think we are often seen as a litmus test, as a Pied Piper in terms of catalyzing other capital. If QED says it's good and they're leaning in, hey, that's an important signal.
Those are metrics that I think about. Are we really improving lives? Are we solving a problem that's not being solved? Now, in the end, the ultimate arbiter has to be at least in part economic returns, because if you don't have valuable economic returns to your LPs (limited partners), they're not going to give you any money. And if you don't have any supply, it doesn't matter. It doesn't matter how much demand there is—you don't have a business. That is sine qua non.
It's quite hard to metric. [We look at things like] a Net Promoter Score on your own venture firm, number of Xs [returned on a deal], IRRs (internal rates of return), benchmarking them against the competition. I really want QED to be a top decile returning company, because I think it can be. But to me, it's something much, much more than that. If I felt like we were just another run-of-the-mill Venture Capital firm, generalizing their way in the space, making bets and then being really passive about adding value—life's too short. I'll go do something else.
Affinity: There’s plenty of talk lately about this idea of dry powder in venture capital. Do you agree with the principle that venture capital is in some kind of holding pattern, and what does that mean for the near future of investing?
Morris: There's a lot of nervousness out there. The champagne days of 18 months ago—with ARRs (accounting rates of return) ballooning all over the place, tourist-like investors piling money into companies to grow faster than they should have done, to hire faster than they should have done—has led to, in a sense, an overreaction to the downside on the hangover, where VCs are looking at this saying, "I don't know what the future looks like. There's too much uncertainty. What's Putin going to do? When's the Fed going to relax?"
In some ways, they don't have the dials, the measure metrics, to determine what's a good company and what's not. We start with the foundational stuff: What is the problem you're trying to solve? We never focus on a technology and look for where you can apply it. We focus on: What's the problem? What's the friction? Who will pay you to fix that? What evidence do you have that somebody will pay you to fix it? What do the unit economics look like? If you get these basics right, these basic molecular building blocks, then you have your helicopter that you are flying. You've got dials. You can actually see what's happening. And if you don't have those kinds of metrics, and you're not really au fait and really comfortable with deploying them, how do you know what's good and what's not?
Then you see this massive uncertainty in the economy. How deep is the recession going to be? How would a recession impact this business? There's a tendency to stay on the sideline. If we look particularly at [the] lending businesses, the time that you make the best cohort returns in lending is the year or two following a recession. If you call the economy correctly—because banks, and the same with Venture Capital firms, they're not investing until they can say, "All clear. No recession. Certainty is back"—that's the time when you'll make the most aggressive returns.
There are patterns here. I think this is the fourth or fifth recession I've been through. It, too, will end. Knowing when to start and push forward, particularly if you have the right metrics, is the right thing to do. So there's a lot of dry powder, but there's a lot of people who don't really know how to evaluate what's great and what's not great.
Affinity: There is this proposition floating in the ether now that tech companies are no longer the darlings of venture capital. Do you agree with that? What does the future of Fintech look like?
Morris: It comes back to fundamentals. Are you solving a problem? Will people pay you for it? If you have great unit economics and you can scale it, in the end you become profitable, and in the end you'll be able to grow really fast. And with that, people will pay you multiples of revenue or multiples of earnings.
A complete fallacy in Fintech is that, “I grow really fast, and I build a brand, and then I figure out how to make money later.” That invariably ends in tears in this business. So you've got to be very focused on the foundations and build up from that. And then scale judiciously. Because you get ahead of yourself, you hire the wrong people, you hire too many people, you lose track of your unit economics, and then you have to suffer the consequences from that. And I think we're seeing a lot of people suffer the consequences.
With Fintech, we're just at the beginning of the journey. We are in the second chapter, not the eighth chapter. It is so massive and so exciting, and the innovation is going to come from the Fintechs through VC money—not from the incumbent [banks]. The incumbents may in the end be able to leverage [innovation], but it's going to come from the small entities of people building cool stuff in their garage.
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