Vertical SaaS & Fintech Opportunities, Founder Lessons, and More with Matt Brown

In this episode of Fintech Layer Cake, host Reggie Young speaks with Matt Brown, early-stage investor at Matrix Partners and former product leader at Afterpay.

Matt dives into the evolving landscape of vertical SaaS, why embedded fintech still has massive untapped potential, and how PE and VC are converging to create new opportunities. He also shares lessons from founding Bonsai, including counterintuitive insights about customer feedback and learning rate. They cover founder-investor dynamics, the future of BNPL, and Matt’s writing process behind his popular “X topic in 1,000 words” series.

If you're building in fintech, SaaS, or just want to understand the deeper trends shaping both, this is a must-listen.

Transcript

Vertical SaaS & Fintech Opportunities, Founder Lessons, and More with Matt Brown

Reggie Young:
Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, Chief of Staff at Lithic. On today's episode, I chat with Matt Brown from Matrix Partners.

Matt is an early-stage investor at Matrix, where he focuses on fintech, vertical software, and adjacent areas. He previously led product at Afterpay and founded Bonsai and Seiza. You also might know him from his well-read X topic in 1,000 pieces, which are de facto required reading for anyone in fintech.

Fintech Layer Cake is powered by the card-issuing platform, Lithic. We provide financial infrastructure that enables teams to build better payments products for consumers and businesses. Nothing in this podcast should be construed as legal or financial advice.

Matt, welcome to the podcast. Super excited for our conversation today. You are kind of the fintech expert on vertical software and fintech, which is a pretty fun and exciting space, so I've wanted to chat with you for a while. And I think that's a good place to start, to be in the past that vertical software is a space that has private equity, PENV. In case listeners aren't familiar, what does vertical software refer to, and why does it get that private equity NV?

Matt Brown:
Yeah, absolutely. Well, first of all, thanks for having me on, a long-time listener, first-time caller, a big fan of the show.

Vertical software, it's one of those terms that a lot of people throw around but means different things depending on who you ask. For me, at least, a couple of different things. First, it's a company that serves a very specific vertical or type of business. If you go to the landing page, it should be very apparent from the first line that you read who they're serving. It can be wastehaulers. It can be pet adoption agencies. It can be specific types of construction businesses. So very specific- I don't want to say niche, but very specific types of businesses.

Second of all, the value prop is that they typically help them run their entire business better. They don't just do one thing. They're not a point solution, typically many, many different types of products. If you go to the product dropdown or solutions dropdown in the site, you'll see a bunch of icons, a bunch of different things. They have a CRM. They'll have project and resource management. Maybe they'll have payroll or employee management, invoicing and billing and payments, all these different products all in one. So it's a bunch of different products.

Oftentimes, none of them are particularly novel or unique in their own. It could be time tracking and a CRM and a marketing suite and invoicing and billing, but it's the fact that they're all custom built for that particular vertical and for that particular data model. So the workflows that you need for pet adoption are very different than the workflows that you need for home construction, are very different than the workflows that you need for small legal practice. And so even though all those businesses might have a CRM in the vertical software, the way the CRM is set up is very different and the data model in there is very different customized for those businesses. So multiple products, but the data model workflows customized.

And then the last thing, it's a long list I know, is typically they'll have multiple monetization strategies or multiple business models. So not just your classic SaaS pay-by-seat monthly or annual subscription, but often there's some aspect of an embedded payments product, and that's monetized by the vertical software company. Maybe they're issuing cards and have an expense management product, so there's some monetization there. Maybe there's some lending component to it. Maybe there's a procurement or marketplace component to it. This kind of multi-product, multi-business, or monetization model all apply to a very specific and kind of bespoke type of business is how I think about my definition of vertical software.

Reggie Young:
Sure. I think of Clio. Being a lawyer, I've seen Clio kind of spread through the industry. To your point, it's time tracking, client management, not sophisticated stuff, but when you package it all together, tailored workflows, you can also build your law firm clients all in one place, makes a ton of sense.

It's just an interesting application to me of fintech because I think, to your point, it's really about workflows that support a specific type of business rather than a financial product, and financial services happens to be one of the components, but there's potentially dozens of unique workflows to consider. What do you think are some of the most compelling opportunities in vertical software today?

Matt Brown:
There are a lot. Two things I'm constantly surprised by. One is how early payments and embedded fintech still is in vertical software. Think of this as kind of been there, done that, because we're in fintech and in venture capital, but there are businesses that are doing hundreds of millions or billions of dollars of annual payment volume that still don't have a head of payments or aren't thinking not only how can we monetize this better, but how can we provide a better product or payments experience to our vertical software customers. That's not even getting into all the other card issuing and lending and payroll and other interesting embedded products there. So I think embedded still has a long, long, long way to go.

I think about a year ago, I did a little kind of market survey and looked at all the leading vertical software companies out there and what embedded products they had. And a lot of them have payments. I think something like 80% had embedded payments, but only 20% had embedded, a card issuing, and spend management. Less than 20% had embedded payroll. Less than 20% had embedded banking. But look at the flip side of that, 100% of the customers of a given vertical software company, they all have banking. They all have payroll. They all are using some kind of a credit product. It's just not in that software yet.

The main reason vertical software is so successful and the model is so powerful is businesses want everything in one place. They don't want 5 different logins and 10 different subscriptions. Am I banking here? They want everything in one place. It takes some time, but eventually, you see that gravity of convenience pull all these financial products into the vertical software. So I think there's still quite a bit of that to go.

Reggie Young:
Yeah. I love it. To your point, the phrase embedded finance has been thrown around for what feels like a while. And so I think if you're deep in fintech, it can feel like, oh, it's a pretty saturated market, but there's just so much opportunity. I also think there's a little bit of buy now, pay later for socks type- you just get this hyper-specialization that didn't pan out. And so I think folks have a little hesitancy to return back to that. But I think when you're thinking about that verticalization, unique workflow application, it's a different analysis than like neobank for a certain affinity group or whatnot.

Any trends within vertical software that you're expecting to play a big role in the next, call it, three to five years?

Matt Brown:
You referenced this concept I talked about a lot, the PENV. The mental model that I have is private equity and venture capital, if you will, are two sides of the same coin. They both look at a vertical and say, okay, the average business in this market is not run very well. I think, whether it's through my playbook or my way of doing things, I can run it better, and I can make money helping these businesses run better, but they take very different paths to doing it.

The venture capital path is let's go fund a software company and let's build a piece of vertical software that encodes these best practices. Here's how a dental office should do CRM, and here's how they should do appointment scheduling, and here's how they should do billing. If they adopt this software, which has these best practices baked in, then those businesses will perform better. The other path is the private equity path, which is, oh, let's just go buy one of these businesses that's underperforming, and through force and mandate, implement these best practices and help the business improve.

Up until now, those have been two very different paths, but you see those coming together where the vertical software companies are saying, well, if there's only so much software we can sell to the dental offices in the United States or whatever it is, maybe we can grow our TAM faster, we can grow our revenue faster by maybe it's not acquiring businesses, but helping you, dental offices, get started. What are the barriers to people spinning off and starting their own practices? Can we not just sell software to them, but can we take a cut of their revenue, of their profit? I think you're starting to see founders of vertical software companies getting more creative about how they not only expand the products and services that they offer, but literally expand their TAM by helping new businesses start in those markets.

Reggie Young:
Yeah. That's such an interesting- VC and PE coming at it from different angles. I hadn't thought about that. Do you start with the underlying business, or do you start with the platform that that underlying business is going to ultimately use to run their business?

Matt Brown:
Yeah.

Reggie Young:
Interesting. I would love to chat about Bonsai for a little bit. Maybe in case folks aren't familiar, give them a short blurb on what it is. After the short blurb, curious to hear what your biggest lessons were from building Bonsai, in particular with respect to finding product market fit in fintech, because I think that can be a fickle, tricky thing in a highly regulated space. So I would love to hear about your Bonsai experience.

Matt Brown:
Yeah, absolutely. Bonsai is the second company I started, close to a little over 10 years now. It went through a few pivots in the early days, but eventually started building vertical software and embedded payments before it was as big of a trend as it was today. Like I said, we got there through a series of pivots.

I think one of the biggest lessons was, it's known start-up advice, make sure you talk to your customers. I think the thing that we learned in the early days is make sure you're intentional and careful about the customers that you choose to listen to. You should absolutely talk to them, but you can get conflicting advice. You don't want to just go build everything that every single customer is asking you to build. You don't want to go- sometimes even listen to your biggest customer.

I remember we had a handful of, at the time, customers that were paying us the most, that were great logos and pretty influential in the space we were building in. They wanted us to start to build something, which was generalizable, but we looked forward a few evolutions of what they were asking us to build. It was pretty custom and bespoke to them, and we felt like it was going to take us into something of a local maximum we wouldn't be able to get away from, and so made the difficult decision to effectively fire that customer.

I think that's one thing that when you're starting from scratch with the company, you want to get customers. You have nobody believing you. You have nobody using your product. And so just getting one customer is a big win. It sounds crazy to say, well, you should actually be more open to firing customers. That's, I think, some of the best decisions we made, were choosing who we decided to listen to as far as customer feedback and who we decided to support versus stay away from.

Reggie Young:
I love it. Yeah, very contrary- makes sense, but kind of contrary to typical. Definitely feel that talking with card programs in the space, a lot will give you, I want X, Y, or Z. It's just like Lithic having seen across many card programs and know that that is a shiny object, it will not get you the thing you want, and so you’ve got to take everything with a grain of salt for sure.

Matt Brown:
All revenue is not created equal. You look at this customer and say, oh, we're going to pay you X. And you say, well, that is more than the revenue that we're generating for all of our other customers combined today, and think about, we can go fundraise and we could do X, Y, and Z if we had that revenue or that growth rate. But I think the repeatability may not be there. Just because this customer is willing to pay you X, and that seems like a big number today, there may not be many other customers that have that one customer's need, or you may not know what you're signing up for there. There's this idea of early-stage companies.

What's most important is the rate of learning and the rate of validation and knowing- okay, it's not the revenue per se, the revenue is a proxy for that, but knowing who is a good customer and having confidence that this definition of a customer is the best customer, and there are a lot of them out there, and we know there are a lot of them out there, and we know we can solve their problem, is way more valuable than having a million dollars of revenue that comes from an ideal customer, a shiny object that's not going to actually have a repeatable sales process behind it.

Reggie Young:
Yeah. Your evaluation isn't multiples of revenue in the early days. It's almost like multiples of your learning rate and experience, which can only be acquired from doing the hard things.

Matt Brown:
Exactly.

Reggie Young:
You've been a founder, now also an investor. How has your experience as a founder influenced what you look for in potential early-stage investments?

Matt Brown:
It's always evolving. I'll give the background. I'm an investor at Matrix now. We're an early-stage venture firm concept to Series A. The firm is generalist, but individual investors focus on different areas. I focus on fintech and vertical software, but we also focus here to cover healthcare and B2B and AI, developer tools and infrastructure, semiconductors, so a mix of different areas.

I think one of the most interesting things coming into investing and seeing how the different investors here evaluate opportunities and think about things, it really is about the founder, the person, particularly at the early stage. One thing people talk a lot about is founder market fit. I think that's very important, like why is this person building this company? Do they have some prior work experience? Do they have some kind of research experience that's applicable to it?

I think so many people have started companies, or founding companies has become such a well trodden path, if you will, over the last couple of years. The thing I like to think about first is why is this person starting a company at all? In many cases, starting an early-stage start-up is a negative expected value bet. They're almost better off like, oh, you're really passionate about card issuing? Great. You should go work at Lithic rather than starting another card program or a card product or whatever it is.

Why is this person- why do they feel like they need to go do this thing that, quite frankly, has very slim chances of success and there's a lot of hard work and late nights and all this? Why are they doing it? Are they doing it because it's on the same path? It's like either I'm going to go work in banking or consulting, or I'm going to go start a company? Is it just one of the options on the road for them, or is it something that they just absolutely have to do? Or they have a chip on their shoulder for some reason, or they have something to prove? They have some kind of inferiority complex, or whatever it is, but trying to understand that, and that all kind of cascades down to, okay, the founder market fits and thinking about the market and the products and all of that. But a lot of it comes to, what is the reason why this person is doing this thing today?

Reggie Young:
So I have to ask, what was your reason for Bonsai then?

Matt Brown:
Well, it was my second company. I started a company before that and a couple of different things, but one, I actually was almost a lawyer, dropped out of law school.

Reggie Young:
Dodged a bullet.

Yeah, dodged a bullet. But at the time, my parents were like, you're ruining your life. This is a terrible decision. This was before start-ups. This was [inaudible] plus years ago. I felt a high degree of conviction, what I was doing at the time, but in their eyes, it was like I was going off to do something crazy and terrible and ruining my life. And so wanting to prove not only that I could do it, but that this was the right path, this was the right path for me and showing that I could do it was very important to me.

Reggie Young:
I love it. From the founder's point of view, when you're talking to potential investors- you made the comment to me before that not all investors are equal, right? They don't all bring the same things to the table. So how do you suss that out if you're in the founder's shoes?

Matt Brown:
Yeah. The most important thing is to avoid the shotgun wedding style of fundraising. I think we've kind of moved away from that, at least in early, mid- we're recording this in mid-2025. In AI, that still happens a bit. Okay, we're going to fundraise. We're going to do the fundraise in 10 days. We're going to meet with 50 VCs, and then we're going to do that. By the second week, we're going to have 10. And then we're going to run this quick process, and then we're going to be done. It is very- what folks say about this, it is a merit. You're signing up for a 7- to 10-year relationship with this investor. Whether the company goes well, whether the company doesn't go well, there are always tricky situations that you need to work on together as a team. This is a person that's going to be intimately involved in the thing that you're dedicating the next decade of your life to. This kind of speed dating aspect, I feel like, is always a bad way to set that up.

The best founders I know always have in the back of their minds a short list of investors that they want to work with in the next round. Maybe they know them from their industry. Maybe they've heard about them from other founders, but they are deliberate about trying to figure out who that is, and then spending time with those investors. And again, you don't want to spend- you have a company to build. You have to build the product. You have to recruit the team. You can go too far in the other direction of just spending all your time with investors when you don't need to. But on both sides, showing yourself as a founder to the right investors, not as this dot but as this line over time, showing them how you're growing the business, how you're responding to certain situations, your rate of learning is very important.

And then on the flip side, as an investor, same thing, seeing how a founder shifts from focusing so much on product in this quarter, this part of the year, to then building out the team and talking about the problems, their rate of learning is very important as well. So I guess to say the broader perspective is very important rather than trying to condense that all into a very short period of time.

I think the other thing is I call it the Goldilocks part of working with an investor, where you don't want an investor who is completely hands-off, not involved, like I'm just going to show up to the board meeting and then see you next quarter. But at the same time, you don't want an investor who's like, put me in the Slack and let's have a pipeline meeting every Friday. You don't want them so deep into the business that it's distracting. And so spending time with investors to know how they operate, what their level of involvement is, how much of the relationship is push versus pull, are there certain things that they like to- are they maybe a more product-centric investor, and so they really want to work with you on products? Are they a little more company building centric? Are they domain experts? Are they more generalists? So getting a sense for who the investor is, what gets them excited to work with given companies, and then finding the right fit with what your personality is and what your needs are as a founder, I think, is important.

Reggie Young:
Yeah, love it. All make sense. Next section I'd love to jam on for a bit is buy now, pay later, given that you led product at Afterpay. At this point, I remember 2020, COVID setting in, buy now, pay later is like this new shiny-ish thing in fintech. Now it feels a bit more established, well-worn, Affirm’s public. It's a kind of ubiquitous product in a sense. Where does buy now, pay later go from here?

Matt Brown:
It's a good question. I think a lot of the companies that- you have the big ones, the Affirms, the Afterpay, Afterpay is now part of Block, Klarnas of the world. I think they're still doing relatively well in the core- what I think of as the core buy now, pay later product, which is primarily for these low-consideration, low-value, e-commerce-type purchases. Afterpay still is very strong in fashion and beauty, for example. I'll talk mostly about those and not about- we've seen buy now, pay later for medical procedures and for travel and things that are maybe longer term, different types of purchases. So putting those aside for now and talking about the classic buy now, pay later, if you will.

I always go back to what most of the enduring payment method or payment companies are, which is they're really marketing products. You still walk by stores and you see the stickers on the window of like, we accept Visa, Mastercard, American Express, or you go to restaurants and the little folder that the bill comes in will be branded with American Express. At the end of the day, cards are a great example of this. They are about attracting customers, bringing customers in the door, ensuring them that they can actually spend money with the business because it's so convenient to spend money. Maybe they spend a little bit more. Maybe they check out at a higher rate. At the end of the day, that's what fundamentally the best payments products are about, is reducing the friction to commerce and helping businesses accept more payments.

That's what buy now, pay later is. It's that, but applied, and it really works for very specific types of products. E-commerce, when you're clicking around and you might buy this shirt or you might buy that swimsuit or whatever it is, but yeah, you're kind of on the fence about it, or maybe you see the price is a little bit high, and we're not talking about thousands of dollars, but it's maybe $20 more than you want to spend. The fact that you recognize one of the brands of the buy now, pay later providers, you know it's going to be no cost to you, this isn't a big, very considered financial purchase, but it's just- it chips away at the reasons why you wouldn't make that transaction. That, to me, is what some of the best payments brands and payments products are about.

And I think that's what buy now, pay later very much is. But yeah, it's a marketing and it's an acquisition and engagement tool. So when used in that context, I think it's most successful. That's why I think the Square, the Block, Afterpay acquisition made a ton of sense. It's building this new payment network with Cash App. They want a way to acquire and engage users, to bring them into the network, to remind them to constantly use the payment methods associated with Block. Again, I'm less close to the Klarnas and the Affirms of the world, but I think they, again, also see this as a way of building a brand, building a base of consumers, and keeping their payment methods top of mind for those consumers.

Reggie Young:
Who's going to be the long-term winner of them all, Affirm, Afterpay, Klarna? Who's going to be the biggest in 10 years? Who are we going to see come out on top?

Matt Brown:
If I had a crystal ball, I'd be a very different kind of investor. I'm biased, of course, because I worked there and still know a lot of great people there. But I think the very deliberate combination of the Afterpay buy now, pay later with the payment network that Block is building. There's obviously an amazing consumer brand with Cash App. Afterpay is a great consumer brand as well. With Afterpay, you have a lot of very powerful e-commerce brands that use it. Cash App has this peer-to-peer aspect to it. There are all these other consumer financial products that are bundled in there as well. I still think that's one of the smarter acquisitions that have been done. It's one of the larger acquisitions that was done in fintech. I think that consumer acquisition engagement value prop on top of the monetization that Cash App has on top of the payment network they're building, I think, is going to be a very powerful and compounding asset for Block.

Reggie Young:
I love it. The last thing I want to jam on is your writing process. You write these amazing X topic in 1,000 words. They're pretty standard for any new hire at Lithic. We hand them a large number of those pieces. What does your writing process look like for distilling- you typically take really complicated- stablecoin is a recent example I'm thinking of. You take this really complicated topic in financial services, highly regulated, complex industry, and boil it down to a thousand words. What does that look like? Do you just sit on it for a few weeks, pick a topic, and then sit down, jam it out, and do a light edit? What's the process? Just start longer and many edits and many versions?

Matt Brown:
Yeah. It varies by the piece. I'd say the advice that I got when I started writing was, one, write for yourself. Write something that you'd actually want to read. Thinking through what that would be, I thought back to when I started in fintech. You go to these meetings as a PM and you talk to different folks who have a lot more fintech experience, and they throw around words like interchange or different topics like that. The card networks, what is a card? Everybody says these words, and there's this assumed knowledge behind it. Then when you dig into it, everybody means a slightly different thing or has a slightly different definition. They've learned the meanings and the constraints and the definitions behind these words kind of through osmosis over time. That was the genesis of that series, was like, let me write the guide, the very simple definitional guide that I wish I had early on.

And this was before, I had said, okay, we're going to cap it to a thousand words. But when I started writing- I think the first one was on interchange. You start writing it, and all of a sudden, you have a short novel on the history of interchange, your card networks. You can tell these different things. So I think setting the constraints around the length of the piece was very important.

I'm also a very visual person. And so when I'm learning things or thinking about things, I try to think about them visually. And so I'll often start with a concept, whether it's stablecoins or interchange or the card networks or Payfacs, and try to make explicit the image that I have in my head on how these things work and then use that to build up the outline of the piece.

I think the other thing where those images are important is it forces you to keep the writing in this building block nature. I don't know if you've seen that meme where it's like, draw an owl, and it's like these two circles. And then the next step is this perfectly beautifully drawn owl. It gets very easy to skip all the steps in the middle. I use the images as a way for me to say, okay, I can't skip from talking about this very simple concept to this very advanced concept. Continue to build and use the images as a way to make those building blocks explicit between the introduction and the full overview of what you're talking about.

Reggie Young:
Yeah. I love it. Most of the great PMs I've worked with are able to distill something into a simple image. It's like the next evolution. I love the saying that good writing is good thinking or clear writing is clear thinking, but I think clear diagrams is the second step of that.

A quick wrap-up question for me, what's something that you've been thinking a lot about that you think folks in fintech aren't talking about enough?

Matt Brown:
I kind of come back to this idea of, okay, you see it in fintech and you see it in software and vertical software to a certain extent as well, but AI software is getting cheaper and cheaper to build, thanks to great infrastructure providers like Lithic, or Rainforest, and the Payfacs embedded payment side. It's getting easier and easier to embed and launch financial products. It's getting easier and easier to build software. And so knowing your customer, like we talked about earlier, knowing who you're selling to, what problem you're solving, but even more than that, or the important extension of that is like, how do you actually get in front of them in a way that's just not competing with everybody else buying Google ads or buying Facebook ads.

There are always going to be the people who are slightly better than everybody else at running Instagram ads and the marketing funnel and all of this, but the best companies aren't trying to squeeze through the same crowded lanes as everybody else, but are building their own distribution or have- it's more than a hack. I really don't like when people say distribution hack, because I think it needs to be something that's a little bit more authentic, a little bit more proprietary. Some of the most successful and interesting companies in fintech that I've seen are not just like, we think we can build this and we think we can do this a little bit better, or we think we can even do this 10x better, but we can do that paired with, we have this very insightful way of how to distribute this product.

Reggie Young:
Yeah, love it. Distribution is big, and user-facing products as well as infrastructure. So awesome.

Matt, all the listeners should go subscribe to your sub stack. I think it's notes.mtb.xyz. Do I have that right?

Matt Brown:
Yep.

Reggie Young:
Go subscribe there if you're not a subscriber. Otherwise, if listeners want to get in touch with you or find out more about Matrix Ventures, where should they go?

Matt Brown:
You can go to our website, matrix.vc, or you can shoot me an email, mb@matrix.vc.

Reggie Young:
Awesome. Thanks so much for coming on the podcast, Matt.

Matt Brown:
Yeah, great to be here. Appreciate you taking the time.