Mark S. Casady
General Partner & Co-Founder
As General Partner and Co-Founder of Vestigo Ventures, Mark S. Casady is at an exciting juncture in his career. The former Chairman and CEO of LPL Financial recently embarked on a new undertaking — an early stage, FinTech-focused venture capital fund. To date, Casady’s firm has raised nearly $50 million in the initial fundraising phase for Fund One. The intention, ultimately, is to create multiple funds over multiple years to maintain the orientation to early stage start-ups.
Embracing a new paradigm
I started the interview by asking Casady to outline Vestigo’s business model and goals. Can you give me a sense of the scale and scope of this new firm?
“In Fund One, the firm will have 20 investments – 20 companies that are part of the portfolio –and will be working to help those companies become more successful over time. Some companies won’t succeed and Vestigo will not get its capital back, while others will be wildly successful, and the firm will get a lot of its capital back as returns.
“My role is to help oversee the management company that reviews and analyzes potential investments and puts forward a recommendation whether to move forward. Dave Blundin, the other general partner, and I make the final decision. If we both believe the company is a good risk, we make an investment.
“It’s a fairly formal process to decide where to make those investments, which is as it should be. Most of my time is spent meeting start-up teams, evaluating business plans, and talking through a business’s prospects with our partners. Additionally, I chair the advisory board, a group of 16 individuals from a variety of backgrounds who help us with deals. They either bring deals to us or help us evaluate deals when we find something that’s in their area of expertise. They may also join boards on our behalf.
“The majority of the people on our board are either in the industry or were in the financial services industry, so they understand the problems that need to be solved, and they have connections to help those start-ups meet the right people to get their next contract.
“That describes probably 80 percent of the advisory board. The other 20 percent are either academics or consultants. For example, we have Anders Brownworth, the blockchain expert from MIT, who is fantastic at evaluating blockchain-oriented companies. We also have Brigitte Madrian, a behavioral finance expert from Harvard, whose expertise is thinking through how consumer-based financial services companies should orient themselves to be successful. We have George Wilbanks as well, who helped us with our evaluation model for human capital, which has been great.
“We have a 20-point questionnaire that we administer when we’re in the final stages with a start-up, because even though they’re early stage, most of the start-ups we’re seeing have already formed teams of 6 to 15 employees. As investors, we want to know things like, ‘Are they good talent attractors? Does the team have good interactive dynamics?’ Essentially, you look for all the things you’d look for in a much larger setting, and frankly, they’re more fatal in a startup. For example, if they’re not good talent attractors, they’re going to have a big problem scaling.
“Ray Wang is also on our advisory board. He wrote a great book called Digital Disruption, which examines how the digital world is basically taking over every industry and offers advice on what to do about that if you’re an incumbent in the industry, if you’re a start-up, etc. It’s a powerful book and a quick read. I read it several years ago and it gave me a new framework for thinking about digital and what it means in a business.”
Keeping an open mind
Casady’s observations offered a perfect segue into my next question. You built a great reputation at LPL. What drove your interest in the venture capital business?
“My other general partner, Dave Blundin, and I have done this sort of thing informally for the last 12 years or so. Dave’s the classic entrepreneur software guy – he would get an idea and then come talk to me about it. I could add the human capital side – what do you need for that idea to be successfully executed – and the strategy. I’ve always been good at seeing what’s going to happen next, so it was fun.
“Then I began thinking about my next chapter after LPL, knowing that the administrative aspects of a public company are less interesting over time. I was looking for something that would open my thinking to what start-ups do, why they succeed or fail, etc., and venture is a natural way to approach that subject. We talked about numerous ways to get there and decided that a venture fund focused on early stage would likely be the most successful, because our operating experience is valuable to start-ups.
“So, it was Dave who awakened that interest in me. Frankly, I’ve always been a little fearful of start-ups because they have such a high failure rate, and like most people, I want to be successful. But I learned it’s just a matter of odds – you don’t invest in just two or five firms, you invest in 20, because with 20, your odds get better.
“The other big reason, which is a little more existential, is that if you think about most industries, they’ve digitized. In the music industry, for example, we’ve gone from records to eight-track tapes to cassettes to CDs to iTunes, Pandora and Spotify. And what’s interesting is that most of those companies were created because a start-up had a problem it was trying to solve, e.g., people want music, but they don’t want to lug a CD player around. The financial services industry hasn’t yet had the same journey, but I think you’re going to see an awful lot of digitization occur within the next 10 years. I believe it will occur very differently than it did for music – that has displaced whole industries. Digitization will cause a lot of displacement in financial services, but in a very different way, because the incumbents will likely adopt those new methods, make them their own, and learn how to be successful. In fact, I’ve got some good examples of that occurring already.
“I also decided to start Vestigo because I wanted to be out in the world where digitization is happening, investing in the partners who can help incumbents succeed as digitization occurs. And it’s going to occur everywhere, from insurance companies to banks, asset managers, and distributors like LPL. I didn’t want to be just in one of those categories, I wanted to be in all those categories, because I like the intellectual stimulation that comes from those different parts of our industry. I thought, ‘What better place to do that than in an early stage venture firm, because then you can see the entire industry being changed at once.”
Leveraging tech strategically
With a firm understanding of Casady’s motivations, I was eager to get his take on FinTech’s potential impact on the industry. What are your thoughts on technology’s ability to reshape or impact competition in the sector?
“I think we’ll see everything that’s occurring today change in the next decade. The reason: there’s a massive amount of data that’s pretty easy to get to today. For example, let’s think about an insurance company. It still has mainframe computers, which is impossible to believe, right? There’s lots of data in there about you and me and insurance payments we’re making. In the past, they couldn’t get to that data very easily. Now, however, there are simple tools that allow existing companies to get that data out. So, we’ve amassed a lot of old data, and we also have a lot of new data occurring. Think about it – we’re sitting in my office, I’ve got my iPhone, my iPad, and my Apple laptop, all of which are generating data that gives you a profile of a late 50s person who’s doing something on the web. That data can now be captured. Suddenly, there’s a proliferation of all these sources of new data that are occurring alongside the old data and getting untrapped. Now I’ve got a big pool of data that I can analyze, and I can see things that I couldn’t see before.
“The next thing I need is a way to process that information. As a human, I can’t process that much data, it’s just not possible. But what I can do is take something like artificial intelligence (AI), algorithms that look at data, and suddenly I can find relationships that humans can’t find, or at least can’t find very easily.
“For example, I’m an irrational person, all humans are, and I always jokingly say that when I want to retire, I’m rational about your money, but I’m completely irrational about my money. So, imagine if the AI said, ‘Hey, when the market moves negative by this much today, we know Mark’s going to be anxious about it.’ So, a program could just send me something that said, ‘Hey Mark, the market went down by 100 points today, but you don’t need to worry about it, and here’s why.’ In other words, the software could anticipate things that are the human condition. That combination of data plus AI suddenly creates an ability to be responsive or to find data insights you couldn’t find before. That’s the big change that has made FinTech so exciting.
“Add to that the third component, which is that you have a world of digital assets and our thesis is that digital assets, whether cryptocurrencies like Bitcoin or ICOs, which are essentially stock offerings of companies, and that world is also going to change a lot of what we do in financial services. People today see it as a bit of a hobby, and it is, and some look at it as a place to be avoided. But, it’s actually just digitizing the store of wealth, and if you’re 20 something, you’re just as happy to have your wealth in your Coinbase account because that makes it easier for you to move that money around. So, you’re going to start changing consumer attitudes, you’re going to start changing the way things get transferred, and you’re going to be able to fund companies that allow you to create new capabilities because they’re essentially run by engineers.
“That last category, digital assets, essentially creates a way to pay engineers to program, whether they’re sitting in the Ukraine or in southern California, because you’re paying them through Bitcoin, and they can program an open source code that actually makes running an insurance company a lot easier. It’s hard to imagine today, but it’s going to make that whole process of trade much, much easier along the way.”
Keeping the customer in mind
With Casady’s outline of the opportunities in mind, I thought it would also be interesting to discuss threats. What are the biggest threats for companies with respect to technology?
“Cost and customer delight. Whether you’re an asset manager, a bank, or an insurance company, if you run your business thinking, ‘How can I lower my cost and delight my customers?,’ you’re going to be wildly successful. Sounds simple, but you’d be surprised how often people don’t think about those things. And in asset management, we’re already seeing the advent of cost pressure because ETFs are the new technology. They’re coming along and displacing the old technology, which are mutual funds. So, ETFs are lowering the cost of getting asset management exposure. That’s all that’s happening, it’s just a cost issue. Now, are they also delighting clients? Well, it turns out they are, because they’re easier to trade, and they’re easier to get minute-by-minute pricing on, because mutual funds are priced once a day and ETFs are priced every second of every day. So, if you think about it, they’re also delighting clients because they’re providing more information.
At LPL, when we thought about issues where we wanted to invest or ideas for the business, we always started with that principle: will this lower the cost for the investor and advisor and will it delight the client? And if the answer to both those things was ‘yes,’ we did as many of them as we could. And if it didn’t, we tried to understand the tradeoff of one for the other. We believed that we had to keep lowering our cost of serving to be competitive against anybody else, let alone start-ups.”
What would you recommend to financial service firms seeking to reduce risk?
“There are a few characteristics that we think predict success around innovation or reducing risk in this new world. One is a willingness to fail. The risk companies need to reduce is that of displacement that occurs because of this new digital world. Say you’re a big asset manager, for example — one of the ways to reduce risk is through experimentation. It might be experimentation with a startup, with ideas from your own team, with the launch of new services, etc. Those are all ways to reduce risk in the company, but you also have to understand that it’s inevitable that you’re going to fail, and a lot of companies just don’t want to believe that failure’s okay. We also understand the difference between big failure and small failure – these are all meant to be small failures. If I partner with a start-up and it doesn’t work, I can just stop. If I launch a new product and it doesn’t work, I can just stop. I haven’t bet the business on it. I think that willingness to fail is a key part of reducing risk. Ironically, you’re increasing your risk of failure, but you’re reducing your risk because you’re learning what works and what doesn’t through experimentation. You’re also learning what risk to accept, which is important.
“The second thing savvy incumbents are doing is partnering. They have a structure for dealing with a start-up that’s got to go through procurement and approvals. They can make that really hard or really easy, and the smart ones are reducing risk by making that process easier. Ultimately, all this activity reduces risk for existing companies because they’re learning what’s happening in the world and about ways that they can be more successful with this digitization.”
Employing regulation wisely
At this point, I thought it would be interesting to shift our focus from risk to regulation. There have been a number of regulatory changes taking place in financial services since the new administration came to power. As a former member of the Financial Regulatory Authority board of governors and former chairman of the Insured Retirement Institute, can you offer some perspective on these shifts? What opportunities do you see? Anything you’re particularly concerned about?
“We’ve been in a phase of very heavy regulatory intervention, and now we seem to be coming out of that, which is helpful. The regulatory environment is definitely less difficult than it was two years ago. Let me explain how that turns into real work for an organization. Capital is good at a bank, right – having more capital reduces risk. That part of regulation has been smart, and the banking system is much safer today than it was during the crisis. But as part of having that capital, you report back in something called Comprehensive Capital Analysis and Review (CCAR). It’s a 20,000-page document that outlines the process that every bank above $50 billion in assets must follow, and I think it’s an example of where the regulation just has gotten in the weeds. What we need to come back to are some first principles such as sufficient capital, a good risk infrastructure, a good process for audit inside of an organization – all key factors to making sure your company is being as well run as it can be from a risk standpoint.
“For the most part, I think that, moving forward, less regulation is going to be very helpful to financial services companies. In the start-up community, we’re seeing are a lot of companies using either blockchain or AI to make risk management processes more efficient. Know your customers (KYC) is a critical issue, and we’ve seen a couple of interesting blockchain companies who have a way of making that process more cost-effective than it might otherwise be. That’s what we’re looking for in the start-up world: can we take this regulatory structure and make it cheaper to do?”
Is there anything that particularly concerns you?
“That’s a good question. I’m a lot less concerned than I was when I was in the seat at LPL because we were still in the period of more regulation. The only thing that concerns me now is the question of whether we are creating a structure that incentivizes people to keep companies private. LPL was owned by its founder, and then he retired, and we sold his shares to two private equity firms. I took the company public just over seven years ago. The difference in the governance process between being a public company and being owned by a founder or by PE firms is enormous.
“There are millions of dollars spent on Sarbanes-Oxley, a lot of infrastructure, and a quarterly reporting cadence you have to follow. I don’t know of any business that does well quarter by quarter. If you’re lucky, the business does well over a year and if you’re really thinking about what it must do, you might think about a business over several years for it to be successful. So, you might have a down quarter or two because you’re investing towards growth that comes a year later, which is very normal, but doesn’t work well in the public company world.
“With regulation, my worry is that we’re incenting companies to stay private, which is why there are fewer public companies to invest in today than there were 10 years ago. This creates structures where there’s more have and have nots. Conversely, as a venture investor, I can invest in a start-up that’s private, I can watch over that company over a long period of time, I can sell my interest to somebody else, and I can keep all that private. But only accredited investors could invest in my fund, whereas if I’m a public company, then anybody can invest in me, and that just makes it a bit more democratic.”
Honoring the opportunity to give back
Having covered a number of business topics, I decided to get a bit more personal. You’re involved with several philanthropic causes, including your family’s education foundation, One Step Forward, as well as Invest In Others. What drives your involvement in these organizations?
“A big part of my life has always been about giving back. My father was a minister, so he instilled the importance of giving back. My wife Julia and I both feel strongly about this, and for us the focus is education.
“We have four kids and we’ve seen the power of education for them. And frankly, we’ve had the means to provide them with the best educations, so what we wanted to do with One Step Forward was find a way to help kids who don’t have the same advantages. We’ve done experimental programs at MIT and one in the Boston school system, and what we’ve found is that foundation monies are similar to venture capital – they allow people to experiment with ideas and then see how they can be scaled by somebody else. We’ve had some failures and things that didn’t work the way we had hoped, but we’ve also had some successes. It’s been fun.
“Invest In Others is another very personal venture. I created the foundation both from a capital standpoint and from an idea standpoint, but it was named by my third daughter Maggie. What it was meant to do was demonstrate that financial advisors do really great things for their community. Invest In Others was designed to match contributions they make in their local community, and also highlight them. We’ve created a dinner, now in its 10th year, that raises most of the capital for the foundation and highlights nominees in five categories who are doing something good in the world. It’s a counterbalance to all the bad things you read about advisors and the greed in our industry and it’s a way for people to give back to their communities.”
Remembering to breathe and laugh
As our interview drew to a close, I asked a favored question: Is there any advice or valued experience you’d like to share with readers?
“I’ve been away from the day-to-day work life for over a year now and a friend recently said, ‘You seem so much more relaxed.’ If I could go back in time, I think the one thing I’d do differently would be to find a way to relax, because I think you make better decisions when you’re relaxed and don’t let emotions take over.
“I also think I would have had more fun if I’d learned to take a breath and laugh at some of the difficult things that we faced as an organization. I’m proud of what we accomplished, but it’s so important to take a break and smile. Learn to have joy in that moment, even when it’s a difficult one to appreciate.
“About four years ago when I was still at LPL, we were doing some heavy investing in core infrastructure, and it was tough going. So, I bought myself a little China plate with a Winston Churchill quote that says, ‘If you’re going through hell, keep going.’ It offered me a moment of levity when I needed it. It’s very important to remember to have fun.
“Lastly, take vacations. I took time off, but it was never more than about a week. Looking back, I realize it would have been smarter to take more time away. The world’s going to keep spinning.”