Without anybody noticing, the Israeli financial technology sector has suddenly become fertile ground for unicorns – startups valued at $1 billion or more. “The fintech revolution has begun,” says Dovi Frances, founding partner of the fintech-focused venture capital fund Group 11. The fund has $170 million to invest just in that segment.
The numbers are on his side. A report published last week by Start-Up Nation Central, a nonprofit group that promotes Israeli high-tech, found that in 2019 the Israeli tech industry completed 15 “mega-fundraisers” topping $100 million each. Of those, six were in fintech, more than in any sector including cybersecurity, the star of Israeli high-tech for years now.
The fintech fundraising was led by online insurance companies – Lemonade, which raised $300 million, and Next Insurance, which took in $250 million.
“I still encounter skepticism about fintech, just like there was about Netflix once,” Frances told TheMarker. “But the revolution is unstoppable.”
He cites three reasons for his optimism. One is the loss of confidence in the markets since the financial crisis of 2008. “That event hurt confidence in the traditional financial system,” he said. “Suddenly people found their loans were called in and their homes were foreclosed on. The image of the omnipotent banker was undermined. Look what happened to the market values of the big banks like Deutsche Bank since 2008. It’s down 80%.”
He said the entrepreneurs behind today’s fintech startups saw how their parents were hurt so badly by the banks.
The second big driver is technology, in particular the rise of mobile technology. The first smartphone reached the market in 2007 and the newest models have more memory than the Apollo 11 spacecraft had and 100,000 times the computing power. Even poor families in developing countries have smartphones and worldwide penetration is approaching 50%, Frances said.
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The third driver is changing demographics: Millennials are entering the job market and by 2025 will make up 75% of it.
“This is a generation that has entirely different expectations from its providers, including financial services,” Frances said. “This generation won’t wait on line or send a fax. Imagine, for example, a young entrepreneur running a website-building business. She’ll get her personal insurance from SoFi and her business insurance from Next Insurance. Her bank will be N26 and she’ll pay her suppliers with Tipalti.”
SoFi is an American online personal finance company, N26 is a German online bank and Tipalti is an American online accounts-payable service. They all offer a wholly digital alternative to traditional financial services. Some of the companies Frances named he has invested in. “What they’re actually doing is taking the banking system and dividing it into parts, into areas of specialization – each of them offers a different solution. They’re calling this process the ‘unbundling of banks,’” he said.
Not just the banks. For example, in insurance a small building contractor and a yoga instructor are both considered small businesses, but the risks they face are by no means the same. Today, with the help of artificial intelligence, insurers can get far better insights than ever into the differences, and price policies accordingly.
Frances, 41, is one of the best-known figures in Israeli venture capital, perhaps second only to Erel Margalit. His fame lies mainly in his role in the past year on the Israeli version of the U.S. television series “Shark Tank.” Broadcast on Channel 12, contestants compete to market their ideas to a group of investors in the hope of winning seed capital.
“We have to show people what the world of investing is like,” Frances said, explaining why he joined the show. “An Israeli TV viewer can’t be exposed only to cooking shows and the news. The show provides hope and dreams – people can see that they can aim higher. Look at me – I’m an average guy but I always pushed myself to be better.”
He says he has invested millions of shekels in proposals that came in the program, including the yet-to-be-broadcast second season. “A cynical point of view might say that every dollar I spend on ideas on the show pays for itself in marketing,” he said. “People now know what Group 11 is and that I invest in fintech.”
Frances is neither shy nor modest. His picture on his social media accounts shows him driving a Bentley. But he wasn’t born with money. “I’m a child of Holon, the son of a garage owner and a mother who worked for the city. Four brothers, playing on the sand dunes, a real childhood,” he says.
He did his army service in Nahal, where he was an officer. He later majored in a special track of behavioral science and management at Ben-Gurion University. He shared an apartment with Dror Berman, who later became a founding partner at the American venture capital fund Innovation Endeavors, and that took him in the direction of VC.
Frances went on to get an MBA from the University of California Los Angeles and since then has lived in the United States. He started his career in 2008 at Deutsche Bank in private banking, where he met the oligarch Sergey Grishin. Grishin took him on as operations manager at SG, a financial consulting firm for wealthy clients with offices in the United States, Russia and Israel.
From there, he formed mortgage and insurance companies and enjoyed fame in 2014 as the seller of a $201 million life insurance policy to an unnamed company in Silicon Valley. It’s still recognized as a record by Guinness World Records.
Even before that, Frances formed a VC fund in 2012. Called SGVC, it also specialized in fintech. Three years later he took the brave step of buying out Grishin (though Grishin remains an investor in Frances’ funds). Later he changed the fund’s name to Group 11, named after the column in the periodic table called “Group 11,” which includes gold, silver, copper and roentgenium used to mint coins in the ancient world.
Frances admits that jealously lured him into the VC world: “Dror [Berman], my best friend, got an offer from Eric Schmidt to set up Endeavor. So I decided to set up a tech fund, too.”
Group 11 has a clear investment policy. Besides its focus on fintech, it also concentrates on early-stage startups in which it will put in $5 million. Seventy percent of its portfolio is in Israel-related companies, which means the founder is Israeli, the firm conducts its research and development in Israel and/or is an Israeli company with a U.S. office.
The best-known startup in Group 11’s portfolio is TripActions, a Silicon Valley firm started by Israelis that created a revolution in corporate business travel. In June the company raised $250 million at a $4 billion valuation. Another unicorn in Group 11’s portfolio is Next Insurance, a small-business insurer that has raised $250 million.
The fund also counts a lot of smaller companies, like Lili, a digital bank founded by two former executives of Bank Leumi’s Pepper digital bank. It’s part of a Banking 2.0 wave aimed at the millennial generation.
“I think banking is going to disappear in the next 10 to 20 years,” Frances says. “Take a bank like Chime, which is a startup with a few thousand workers and a $5 billion valuation. Each month it adds more clients than Wells Fargo, a bank with 260,000 employees that trades at a market value of $230 billion.”
Not all banks will be equally affected. Investment banks, for instance, require a high level of training of their employees, as do business lenders. Retail banking, however, is a different story. It’s services can be digitized and it’s vulnerable because of the loss of customer trust.
The digital revolution is not good news for workers. The banking and insurance industry in the United States alone employs 6.3 million people. But in the next few years, Frances says, 60% of all bank branches will be shuttered as smartphones become the way most people do their banking. And, what happens to banking is happening to insurance, real estate and other industries.
Figures from SNC show that there are 419 Israeli fintech startups that raised a combined $1.8 billion in 2019. Group 11 competes with nonspecialist and specialist VC funds, among the latter, Viola FinTech. Group 11’s latest fund raised $52 million in November 2018 and counted among its investors Israeli institutions.