February 25, 2025 • 25 mins
Why are some SaaS companies able to generate more than half of their revenue from payments, while others struggle to get customers to use the payments feature? Matt Brown of Matrix Partners shares his lessons learned from building fintech into the vertical SaaS platform at Bonsai and working closely with top SaaS and fintech leaders as a VC investor. He covers:
- Why payments should be the first embedded fintech product for almost every vSaaS (hint: customers love to get paid).
- How SaaS platforms can become the system of record by managing workflows, data, and financial transactions all in one place.
- Where platforms can find additional growth beyond the typical scope of vSaaS and embedded fintech
- How nuanced details in pricing and risk management can make or break an embedded fintech offering
- The critical importance of prioritizing customers and vertical-specific needs over one-size-fits-all playbooks
The Payments Strategy Show is brought to you by Rainforest, embedded payments purpose-built for vertical SaaS.
Grow revenue with the only payfac-as-a-service provider optimized to help you drive more payments volume at higher margins, without risk or compliance headaches.
Learn more: https://rainforestpay.com
Connect with us on LinkedIn: https://linkedin.com/company/rainforestpay
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Joshua Silver (00:00):
Hey everybody and welcome to another episode of
the Payments Strategy Show.
I'm Joshua Silver, founder andCEO of Rainforest.
Rainforest helps softwareplatforms embed payment
processing so they can improveprofitability and increase
customer retention.
I'm here today with Matt Brownfrom Matrix.
(00:20):
Matt is very interesting from abackground perspective because
he's been both a founder and nowan investor, so he brings a
truly unique perspective to thedialogue.
Thanks for joining us, matt.
Happy to be here.
So, to get us started, tell usa little bit about your journey
into SaaS and fintech, and theneventually to the other side,
(00:42):
becoming a VC.
Matt Brown (00:45):
Yeah, absolutely Well.
Thanks again for having me,obviously a big fan of
Rainforest and, as we'll getinto, I think, spent a lot of
time in SaaS and payments.
I think what Rainforest isdoing is a big breath of fresh
air for the industry.
So, rewinding a bit, as youmentioned started my career as a
founder in SaaS back in theearly SaaS days, when people
(01:08):
were still writing blogs andfiguring out what CAC and LTV
was, and started a series ofcompanies in the space.
But my vertical SaaS journeystarted around 2015, where we
built a vertical softwarebusiness for professional
service firms called Bonsai,built a vertical software
business for professionalservice firms called Bonsai,
(01:31):
started with freelancers andeventually moved up to law,
accounting and various otherprofessional service firms.
It was a SaaS business to start,because that was my background,
that's what we knew very well,and we had built an invoicing
product and plugged in Stripebecause that's what you did at
the time and kind of fell intothe payments component of it
where we realized, hey, we havethis invoicing product, now
we're processing payments, eventhough we don't really know
(01:51):
payments.
That made it prettystraightforward to do, but we're
actually generating revenue.
What are all the differentlevers that we can pull and
knobs we can turn to increaseadoption and monetization.
So went down that whole pathand ended up adding other
financial products and buildingout a pretty robust software and
kind of FinTech suite ofproducts there.
We eventually joined anotherbusiness called Afterpay, which
(02:15):
was a buy now pay later out ofAustralia.
That was eventually acquiredand then joined Matrix as an
investor about three years ago.
Matrix, briefly, it's anearly-stage venture firm.
I'm based in San Francisco butwe have offices in Boston and
New York focused on early-stageventure seed and Series A across
(02:36):
a range of industries a lot offintech and B2B software, but
healthcare, frontier technologyand semiconductors as well.
Joshua Silver (02:45):
But healthcare, frontier technology and
semiconductors as well.
Very good, Tell us a little bitabout how does your perspective
change when you transition frombeing an operator to an
investor and how.
Matt Brown (02:57):
so I think every investor will have.
Every investor who's been afounder will have a slightly
different answer.
At least the way that weoperate at Matrix it's been a
founder will have a slightlydifferent answer.
At least the way that weoperate at Matrix it's been
pretty similar, where we investvery early on, we don't do later
stage investing, so seed inseries A, we do a small number
of investments, so we're notspending time with 20 companies
(03:19):
per year.
So in a lot of ways it's verysimilar to being on the founding
team or early employee of acompany where you see all the
daily, weekly existential crisesthat companies go through.
(03:46):
Having seen a number of earlystage companies, now as an
investor, it kind of goes back.
I think a lot about how founderpsychology matters and managing
your own, managing your ownpsychology and you know there's
always a fire, there's always uh, there's always uh something
going on, there's a, anexpression and long distance
running, something like it.
It never gets, gets easier, youjust get faster.
And so I think there's a lot ofthat in company building, where
(04:07):
you think the problems thatyou're facing as a 10 person
company will magically go awaywhen you're a hundred or a
thousand, and they're justdifferent permutations of the
same same problem.
So it's been interesting to tosee both or again, starting as a
founder, having gone throughthose, and now seeing those at
different scales and as aninvestor.
Joshua Silver (04:26):
What advice would you give you know, specifically
to founders who might bestruggling to manage all the
fires?
You know, how do you keep thatpsychology in check, Any tips
that you've seen that workparticularly well?
Matt Brown (04:42):
I think, founder, having a group of friends or or,
or you know people that youknow that you can have a human
conversation with not you knownetworking in this or that, but
folks that are, you know, maybea few stages ahead of you, or
maybe you know a few stagesbehind you, but you can.
You'd be surprised, you get, uh.
(05:03):
Or maybe not surprised, but youget.
You know a few stages behindyou, but you can.
You'd be surprised, you get.
Uh, maybe not surprised, butyou get.
You know a few founderstogether and have a few beers
and you start talking.
It's not talking about productstrategy, you're not talking
about these.
You know grand sweeping things,but it's a lot of the
psychology of oh, we have, youknow, this executive and they're
this problem where we're like Ihave to fly out and take a red
eye tomorrow to talk to ourlargest customer because there's
(05:23):
this going on.
So just having a support groupthat knows what you're going
through more than employees,more than even other executives,
but folks who are in thatfounder seat is really helpful.
Joshua Silver (05:39):
Yeah, I think that's definitely true.
As a founder myself multipletimes surrounding yourselves
with other founders who reallyunderstand what you're going
through.
I often met periodically, oncea quarter, with a cohort, if you
will, of other SaaS companiesthat were in the same rough
growth path as we were and thatcontinued on for probably a
(06:02):
decade, and I'm still reallygreat friends with many of them
today.
So I think that's really sageadvice.
Matt, you've looked at lots andlots of vertical SaaS companies
.
You've run some.
What would you say, separatesmarket leaders from the rest.
Which are those variables thatreally make a difference?
Because there's so many datapoints today, especially with AI
(06:25):
and the plethora of data, wecan crunch things in so many
different ways that maybe 10 or20 years ago we couldn't.
But do you have any insights onwhat really makes a difference?
What are those market leadercharacteristics that you look
for?
Matt Brown (06:40):
Yeah.
So there are a few things here.
One is you know, when peopleuse the phrase vertical SaaS a
lot, there's kind of pointsolution, vertical point
solutions, which are oftencategorized in vertical SaaS,
and like true vertical SaaS,where you're and this is what I
define as vertical SaaS whereyou're attempting to build the
(07:00):
system of record in a way forthat vertical.
So you're owning some portionof the workflow but you're also
owning the customer records,you're owning the payment or the
flow of funds, you're owningsome concept of the expenses for
that vertical.
It's this very expansive view,or expansive vision of what you
(07:21):
want to be in that vertical.
So I think that is the firstthing is, even if you're
starting with a point solution,having a pretty clear
step-by-step plan of how to ownmore and more of the workflows
of that vertical.
And that's the beauty ofvertical software is, if you get
(07:41):
that wedge product right, ifyou have a good relationship
with your customers, they willwant to eventually offload more
and more of their workflows toyou.
They want fewer logins, fewerfragmented systems, fewer bills.
They're happy to put more andmore of their business onto one
(08:03):
platform that's built for them.
So I think that expansivevision is one that you see
pretty commonly amongst thewinners.
Two is and this is obvious, or Isay this is common across
startups in general but just adeep understanding of, and
empathy for, the customer.
(08:24):
It doesn't mean that if you'rebuilding in a vertical, you're
building in the roofing vertical.
You need to have spent 10 yearsas a roofer, but some kind of
on the ground.
You know, knowledge of whoyou're building for and
appreciation for the workflowsthat they go through.
So, whether it's in diligencingthe vertical before you spend
time in it or again, justchoosing vertical, having some
(08:47):
aspect of firsthand knowledge ofwhat your customers are going
through that informs that bigvision.
And then, relevant to Rainforestand this whole podcast and
relevant to this expansivevision, is it's not just
software into this expansivevision?
Is it's not just software?
Small businesses if you come atit from a SaaS perspective, a
(09:08):
lot of things are software, butfrom a small business owner's
perspective, software is oneaspect of how they get things
done.
But there's a lot of moneymovement in small businesses
where they're getting paid bytheir customers, they're having
to pay out their employees,their vendors, and not just
having a well-designed softwareproduct that maps to all these
(09:29):
different workflows, but havinga well-designed software product
that maps to the financialflows through a business.
And again, every vertical isdifferent.
Some may have more fragmentedcustomers, some may have a very
fragmented set of vendors on oneside or the other, but this
very thoughtful combination ofexpansive software that's then
(09:52):
mapped to financial flows in andout of the business are what
you see the leaders mostcommonly working their way
towards.
Joshua Silver (10:03):
Makes total sense .
As we dive a little bit moreinto the focus in terms of
embedded financial products,what advice, specifically around
folks who are adding theirfirst embedded financial product
, would you give to verticalSaaS leaders and any thoughts
(10:24):
especially on how that can tieto driving revenue, increasing
enterprise value?
You know really those top lineobjectives yeah.
Matt Brown (10:36):
So a few, a few few things here.
Um, one is it's it's alwaysimportant to work backwards from
the problems of your industryrather than try to apply some
playbook that works in someother vertical but doesn't.
You know, may work inrestaurants but doesn't work in
legal, or may work in wastehauling but doesn't work in
construction, whatever it is.
(10:57):
Work in waste hauling but itdoesn't work in construction,
whatever it is.
That all being said, I'd donesome research, I think, last
year, where we looked at acouple hundred vertical software
companies and what financialproducts they had adopted and in
what order they had adopted thefinancial products.
And the clear winner as far aswhat embedded financial product
(11:20):
did they adopt and which one didthey adopt first payments, was
number one in both categories.
I think something like 80% ofvertical companies have
integrated payments in one wayor another, and then it drops
off very, very steeply fromthere.
Now the opportunity for embeddedproducts is massive.
I think we're very early therebecause when you look at the
(11:40):
flip side of it, even though,say, one vertical has embedded
payments but not embeddedbanking, whatever it is, 100% of
those end businesses have abank account.
They likely have some kind ofloan or credit product.
They likely have some kind ofsmall business card, so the
opportunity there is prettysignificant.
But, just you know, a lot ofthem are starting with payments
(12:03):
and I think the reason for thatis is is pretty obvious If you
don't get paid, you don't have abusiness like the, the.
At the end of the day, you're asmall business.
If you're not receiving fundsfrom your customers and if
you're not making it easy forthem to pay you, then you don't
have a business.
And then the, if you look at itfrom the vertical software
(12:24):
perspective, there's just a lotof value add things aside from
making it easier to get paid andget paid faster, more
convenient for their customers.
You know whether it'sreconciliation, whether it's
understanding your cashflow,whether it's, you know, tying,
invoicing and resourcemanagement and employee
utilization.
There's a lot of interestingworkflow and data problems that
(12:48):
come before and come afterpayments.
That make it a pretty obviousplace to start, and it's a place
where, again, folks likeRainforest have made it pretty
easy and straightforward andpowerful and not just a
check-the-box feature but a realrevenue driver for a lot of
these vertical softwarecompanies that then help them
(13:08):
get their training wheels offand do embedded finance fintech
products very well, and thenstart to add those second, third
or fourth products.
Joshua Silver (13:17):
Then start to add those second, third or fourth
products.
Yeah, we see at Rainforestobviously huge success when
software platforms are addingpayments in, because it turns
that software business, thevalue proposition that they
deliver to a merchant from.
We're here, software to helpyou run your business.
To you, we're putting dollarsinto your bank account every
(13:38):
single day.
That's really the lifeblood ofany small business is cashflow,
and so I think that's reallypart and parcel to the whole
concept of embedded finance andthe sum is greater, or the total
is greater, than the sum of theparts.
I think that really applieswhen you add SaaS and embedded
finance together.
Matt Brown (13:58):
One thing I just add as an example of that is you
think about another commonembedded product that a lot of
companies talk about is banking.
Let's add embedded banking toour vertical software.
Well, a big challenge withembedded banking is how do we
get you set up this account?
How do we can we switch overour payments, we connect our
payroll.
So even once you've gonethrough the challenging work of
(14:21):
getting your small businesses toset up this embedded bank
account, you have to fund it.
You want funds constantly goingin there.
If you don't have embeddedpayments set up, it's going to
make the success of yourembedded banking product even
more difficult to achieve.
Or let's say, embedded lendingIf you didn't already have
embedded payments set up, it maymake underwriting lending to
(14:42):
those small businesses on yourplatform even more difficult, or
repayments or managing risk,because you're not sitting in
their flow of funds.
And so all these other products, even if they're theoretically
upstream of payments, reallyrely on the software platform
having a strong reason to ownand provide payments to their
(15:03):
end customers, and that is inmany ways, the necessary
condition for success for a lotof these other embedded products
.
Joshua Silver (15:11):
Makes sense Looking towards the future, and
you talked a little bit aboutthis in your recent blog post
about invisible asymptotes invertical SaaS.
Talk to us a little bit aboutthis in your recent blog post
about invisible asymptotes invertical SaaS.
Talk to us a little bit aboutwhat you see as the next
frontier.
You know go, you know, hopforward a generation or two.
What is next, do you think?
Matt Brown (15:34):
So there are a couple of things that are
emerging there.
There are a couple of thingsthat are emerging there.
The idea behind that post wasthat a lot of vertical software
today is about taking thesedisparate workflows and
disparate problems and it's veryvaluable to do this, combining
them into a single tool that'spurpose-built for this vertical.
You're not stitching together abunch of different tools.
(15:55):
It's one login, onesubscription, one value prop and
multiple boxes checked there,but it's effectively making your
existing small business moreefficient.
It's improving what's there.
And a lot of where we see themarket-leading vertical software
companies going is how do youthose those small businesses on
(16:19):
your platform?
So maybe it's um, you know.
Maybe it's embedded marketingtools.
Maybe it's some kind of uh, um,uh marketplace component where
you can drive leads or drivebusinesses to the um, you know,
to the, the small businesses onyour platform.
Maybe it's um a brand, that theplatform itself has a brand and
(16:40):
they're driving folks there.
Um, maybe it's a relationshipwith uh, with vendors or
suppliers, where you can do somecomponent of group buying.
If you're a uh, a verticalsoftware for coffee shops, can
you make it easier for thatcoffee shop to buy milk and
other supplies in bulk cheaperthan they would otherwise be
(17:00):
able to do as a smallindependent shop.
But through this group buyingyou can meaningfully improve
their economics.
So there are a lot of thingsaround that we kind of group
these businesses on yourplatform together.
Obviously, ai is a big trendright now.
Where, if you're a smallbusiness, what are the roles you
(17:21):
would love to fill if you could, but maybe it's too expensive
or maybe you wouldn't have fullutilization of somebody to pick
up the phone and qualifycustomers 24-7, or to do better
scheduling or things like that.
So I think there are a fewemerging models there, but again
(17:42):
, it really depends on thevertical and what the main
constraints they're facing are.
Joshua Silver (17:48):
So I think, to summarize, it's really kind of
expanding beyond just kind ofthe core, traditional embedded
finance that one might think of.
You know issuing lendingbanking payments, really to see
how you can help them grow theirbusiness, either through cost
takeout, better marketing, youknow, growing the customer base.
(18:12):
That's really expanding theentire business, not just
helping it run more efficientlyfrom a financial services
perspective.
Is that a fair synopsis?
Matt Brown (18:23):
Yeah, I think that's very eloquently put and I think
the benefit of that is all ofthis flows back to the core
value prop of the verticalsoftware business, which is
you're helping them run theirbusiness more efficiently and
kind of taking a tax, if youwill, in a positive sense, on
their success.
So if you're a verticalsoftware company and you embed
(18:47):
marketing features let's say youhave embedded payments already,
but you then embed marketingfeatures all these new customers
that you're getting paid todrive to your end customers
they're eventually checking out,they're eventually buying, and
that's additional paymentsrevenue that goes to you, the
platform, or those areadditional leads that fill up
the CRM that potentially you'recharging for.
(19:08):
So again, the beauty ofvertical software is the
platforms grow as their smallbusinesses grow, and so the more
you can, as a platform, enableyour small businesses to become
successful, you benefit as well.
Joshua Silver (19:22):
Yeah, and we see that ourselves at Rainforest.
As the vertical SaaS platformgrows.
We grow because we'reconsumption-based.
They grow as their end smallbusiness or merchant grows, so
it's a very virtuous cycle forsure.
We've talked a lot about apretty rosy future.
All these things adding revenue, adding margin, adding
(19:45):
resilience.
Nothing comes withoutchallenges.
What do you think are some ofthe challenges that we may face
in the embedded financial spacegoing forward in the next coming
years, and what do you thinkfintechs and SaaS companies both
can do to prepare to neutralizeany of those challenges or to
overcome them?
Matt Brown (20:06):
prepare to neutralize any of those
challenges or to overcome them.
So there are a few things there.
I think one is as much as we'vetalked about this ambitious
vision and being verymulti-product, and we're talking
about multiple software suitesand multiple financial products.
It's very easy to build thoseout to go what is it?
(20:26):
A mile wide and an inch deep?
And even though you are servinga particular vertical, the
products aren't connected welltogether.
Or just because you offerembedded payments on your
platform, it doesn't work reallywell with the invoicing product
or expense, whatever it is thatyou have be it can be tempting
to say we to throw a bunch ofstuff together, not connected.
(20:49):
Um, you know very well to thinkabout this the success of one
product spilling over to othersand you know, I think payments
is the perfect example of this,where we we did this with my
first company back in 2015,where we said or hearing that
toast is doing a great job withwith payments, let's just embed
payments and then we can move onand we're going to make so much
money from it.
But the devil really is in thedetails, with payments in
(21:12):
particular, where it's how doyou price it and what effect
does pricing have on adoption,do you allow the payment fees to
be passed on to customers?
Do you offer embedded?
Do you offer, you know, instantor faster payouts, and how do
you balance risk of this with?
You know your economics and youknow premium features and
(21:32):
what's the relationship betweenpayments pricing.
I mean, you can go on and onand on, but there are so many of
these details that you know arenot obvious and you don't
really even understand thatthere are choices to be made
there, unless you, you know,know, kind of go down that that
rabbit hole of what, what'spossible with payments.
And so, um, yeah, I think,taking the time to get the, the
(21:54):
pillars of your strategy right,it sounds like a lot of uh,
founders know what those pillarsare with, with software, but
with embedded fintech andpayments in particular, um,
again, the devil is just just inthe details.
And so I think just checkingthe box and moving on is often a
recipe for disaster, for a lotof wasted time and effort.
Joshua Silver (22:18):
Stage words as we come to closing.
If you could give just onepiece of advice to SaaS leaders
who wanted to recognize the fullpotential of embedded finance,
what would you tell them?
We've talked about a lot of italready today in the podcast,
but if you had to distill itjust down into one focus area,
what would it be?
Matt Brown (22:41):
Of embedded fintech generally.
Joshua Silver (22:44):
Yeah.
So for SaaS leaders who arelooking to add financial
products and bed financialproducts, what would the one
piece of advice you'd give thembe?
Above and beyond, obviously,what what we've?
We've already talked about thatso far.
Matt Brown (23:07):
I would say listen, listen to your, listen to your
customers.
I think the you know yourcustomers, almost regardless of
the vertical, are going to tellyou that you know, payments,
again, are the lifeblood oftheir business.
They're very important.
Um, try to try to understand how.
How do they think about thecost of payments today?
Do they care about faster flowof funds?
(23:30):
Do they care about reliabilityof payments?
Understand what is unique aboutpayments in their vertical and
then again this is why I'm sucha fan of Rainforest merge that
with the expertise thatRainforest has and payments
itself, as well as how paymentsdiffers across these verticals.
(23:51):
Even I've seen very differentpayment strategies in the same
vertical, but SMB I'll take ananonymized example here but SMB
professional services firmsversus mid-market professional
services versus enterpriseprofessional all effectively the
same vertical, but verydifferent payments and kind of
(24:13):
embedded financial productstrategies that are necessary
there Because, again, eventhough those businesses look the
same on the outside, just thatthe size has very different
implications for the idealpayments and financial product
strategy there.
So, talk to your customers,understand what's unique about
that industry and then work withfolks who not just know
(24:37):
vertical software and payments,but have seen that applied
across different industries.
Joshua Silver (24:43):
I love that advice about talking to
customers.
That's my number one piece ofadvice that I give to founders
is in any vertical, in anyindustry, in any type of
business, when you think you'vetalked to enough customers, you
still need to talk to two orthree times more because you're
always going to be learning.
The market's always evolving,there's always unique insights
and so super critical to get outthere and talk with customers.
(25:07):
And with that we've kind ofwrapped up our time here.
But, matt, thanks so much forjoining us on the podcast.
Really appreciated hearing yourjourney from founder through
acquisition, now a VC.
Your work certainly is reliedupon by many as they look for
data about the vertical SaaSmarkets and where it's going.
(25:29):
So thanks for all of yourcontributions towards helping to
grow the embedded financeecosystem.
And with that I'm Joshua Soferwith the Payments Strategy
Podcast.
And Matt, what's the best wayif our viewers want to reach out
to you?
What's the best way to contactyou?
Matt Brown (25:47):
I'm on Twitter, matt , with three T's Matt Brown and
I also have a website, mtbxyz.
Joshua Silver (25:55):
Amazing.
Thanks for the time, Matt.
We appreciate it.
Thank you.
Hey everybody and welcome to another episode of
the Payments Strategy Show.
I'm Joshua Silver, founder andCEO of Rainforest.
Rainforest helps softwareplatforms embed payment
processing so they can improveprofitability and increase
customer retention.
I'm here today with Matt Brownfrom Matrix.
(00:20):
Matt is very interesting from abackground perspective because
he's been both a founder and nowan investor, so he brings a
truly unique perspective to thedialogue.
Thanks for joining us, matt.
Happy to be here.
So, to get us started, tell usa little bit about your journey
into SaaS and fintech, and theneventually to the other side,
(00:42):
becoming a VC.
Matt Brown (00:45):
Yeah, absolutely Well.
Thanks again for having me,obviously a big fan of
Rainforest and, as we'll getinto, I think, spent a lot of
time in SaaS and payments.
I think what Rainforest isdoing is a big breath of fresh
air for the industry.
So, rewinding a bit, as youmentioned started my career as a
founder in SaaS back in theearly SaaS days, when people
(01:08):
were still writing blogs andfiguring out what CAC and LTV
was, and started a series ofcompanies in the space.
But my vertical SaaS journeystarted around 2015, where we
built a vertical softwarebusiness for professional
service firms called Bonsai,built a vertical software
business for professionalservice firms called Bonsai,
(01:31):
started with freelancers andeventually moved up to law,
accounting and various otherprofessional service firms.
It was a SaaS business to start,because that was my background,
that's what we knew very well,and we had built an invoicing
product and plugged in Stripebecause that's what you did at
the time and kind of fell intothe payments component of it
where we realized, hey, we havethis invoicing product, now
we're processing payments, eventhough we don't really know
(01:51):
payments.
That made it prettystraightforward to do, but we're
actually generating revenue.
What are all the differentlevers that we can pull and
knobs we can turn to increaseadoption and monetization.
So went down that whole pathand ended up adding other
financial products and buildingout a pretty robust software and
kind of FinTech suite ofproducts there.
We eventually joined anotherbusiness called Afterpay, which
(02:15):
was a buy now pay later out ofAustralia.
That was eventually acquiredand then joined Matrix as an
investor about three years ago.
Matrix, briefly, it's anearly-stage venture firm.
I'm based in San Francisco butwe have offices in Boston and
New York focused on early-stageventure seed and Series A across
(02:36):
a range of industries a lot offintech and B2B software, but
healthcare, frontier technologyand semiconductors as well.
Joshua Silver (02:45):
But healthcare, frontier technology and
semiconductors as well.
Very good, Tell us a little bitabout how does your perspective
change when you transition frombeing an operator to an
investor and how.
Matt Brown (02:57):
so I think every investor will have.
Every investor who's been afounder will have a slightly
different answer.
At least the way that weoperate at Matrix it's been a
founder will have a slightlydifferent answer.
At least the way that weoperate at Matrix it's been
pretty similar, where we investvery early on, we don't do later
stage investing, so seed inseries A, we do a small number
of investments, so we're notspending time with 20 companies
(03:19):
per year.
So in a lot of ways it's verysimilar to being on the founding
team or early employee of acompany where you see all the
daily, weekly existential crisesthat companies go through.
(03:46):
Having seen a number of earlystage companies, now as an
investor, it kind of goes back.
I think a lot about how founderpsychology matters and managing
your own, managing your ownpsychology and you know there's
always a fire, there's always uh, there's always uh something
going on, there's a, anexpression and long distance
running, something like it.
It never gets, gets easier, youjust get faster.
And so I think there's a lot ofthat in company building, where
(04:07):
you think the problems thatyou're facing as a 10 person
company will magically go awaywhen you're a hundred or a
thousand, and they're justdifferent permutations of the
same same problem.
So it's been interesting to tosee both or again, starting as a
founder, having gone throughthose, and now seeing those at
different scales and as aninvestor.
Joshua Silver (04:26):
What advice would you give you know, specifically
to founders who might bestruggling to manage all the
fires?
You know, how do you keep thatpsychology in check, Any tips
that you've seen that workparticularly well?
Matt Brown (04:42):
I think, founder, having a group of friends or or,
or you know people that youknow that you can have a human
conversation with not you knownetworking in this or that, but
folks that are, you know, maybea few stages ahead of you, or
maybe you know a few stagesbehind you, but you can.
You'd be surprised, you get, uh.
(05:03):
Or maybe not surprised, but youget.
You know a few stages behindyou, but you can.
You'd be surprised, you get.
Uh, maybe not surprised, butyou get.
You know a few founderstogether and have a few beers
and you start talking.
It's not talking about productstrategy, you're not talking
about these.
You know grand sweeping things,but it's a lot of the
psychology of oh, we have, youknow, this executive and they're
this problem where we're like Ihave to fly out and take a red
eye tomorrow to talk to ourlargest customer because there's
(05:23):
this going on.
So just having a support groupthat knows what you're going
through more than employees,more than even other executives,
but folks who are in thatfounder seat is really helpful.
Joshua Silver (05:39):
Yeah, I think that's definitely true.
As a founder myself multipletimes surrounding yourselves
with other founders who reallyunderstand what you're going
through.
I often met periodically, oncea quarter, with a cohort, if you
will, of other SaaS companiesthat were in the same rough
growth path as we were and thatcontinued on for probably a
(06:02):
decade, and I'm still reallygreat friends with many of them
today.
So I think that's really sageadvice.
Matt, you've looked at lots andlots of vertical SaaS companies
.
You've run some.
What would you say, separatesmarket leaders from the rest.
Which are those variables thatreally make a difference?
Because there's so many datapoints today, especially with AI
(06:25):
and the plethora of data, wecan crunch things in so many
different ways that maybe 10 or20 years ago we couldn't.
But do you have any insights onwhat really makes a difference?
What are those market leadercharacteristics that you look
for?
Matt Brown (06:40):
Yeah.
So there are a few things here.
One is you know, when peopleuse the phrase vertical SaaS a
lot, there's kind of pointsolution, vertical point
solutions, which are oftencategorized in vertical SaaS,
and like true vertical SaaS,where you're and this is what I
define as vertical SaaS whereyou're attempting to build the
(07:00):
system of record in a way forthat vertical.
So you're owning some portionof the workflow but you're also
owning the customer records,you're owning the payment or the
flow of funds, you're owningsome concept of the expenses for
that vertical.
It's this very expansive view,or expansive vision of what you
(07:21):
want to be in that vertical.
So I think that is the firstthing is, even if you're
starting with a point solution,having a pretty clear
step-by-step plan of how to ownmore and more of the workflows
of that vertical.
And that's the beauty ofvertical software is, if you get
(07:41):
that wedge product right, ifyou have a good relationship
with your customers, they willwant to eventually offload more
and more of their workflows toyou.
They want fewer logins, fewerfragmented systems, fewer bills.
They're happy to put more andmore of their business onto one
(08:03):
platform that's built for them.
So I think that expansivevision is one that you see
pretty commonly amongst thewinners.
Two is and this is obvious, or Isay this is common across
startups in general but just adeep understanding of, and
empathy for, the customer.
(08:24):
It doesn't mean that if you'rebuilding in a vertical, you're
building in the roofing vertical.
You need to have spent 10 yearsas a roofer, but some kind of
on the ground.
You know, knowledge of whoyou're building for and
appreciation for the workflowsthat they go through.
So, whether it's in diligencingthe vertical before you spend
time in it or again, justchoosing vertical, having some
(08:47):
aspect of firsthand knowledge ofwhat your customers are going
through that informs that bigvision.
And then, relevant to Rainforestand this whole podcast and
relevant to this expansivevision, is it's not just
software into this expansivevision?
Is it's not just software?
Small businesses if you come atit from a SaaS perspective, a
(09:08):
lot of things are software, butfrom a small business owner's
perspective, software is oneaspect of how they get things
done.
But there's a lot of moneymovement in small businesses
where they're getting paid bytheir customers, they're having
to pay out their employees,their vendors, and not just
having a well-designed softwareproduct that maps to all these
(09:29):
different workflows, but havinga well-designed software product
that maps to the financialflows through a business.
And again, every vertical isdifferent.
Some may have more fragmentedcustomers, some may have a very
fragmented set of vendors on oneside or the other, but this
very thoughtful combination ofexpansive software that's then
(09:52):
mapped to financial flows in andout of the business are what
you see the leaders mostcommonly working their way
towards.
Joshua Silver (10:03):
Makes total sense .
As we dive a little bit moreinto the focus in terms of
embedded financial products,what advice, specifically around
folks who are adding theirfirst embedded financial product
, would you give to verticalSaaS leaders and any thoughts
(10:24):
especially on how that can tieto driving revenue, increasing
enterprise value?
You know really those top lineobjectives yeah.
Matt Brown (10:36):
So a few, a few few things here.
Um, one is it's it's alwaysimportant to work backwards from
the problems of your industryrather than try to apply some
playbook that works in someother vertical but doesn't.
You know, may work inrestaurants but doesn't work in
legal, or may work in wastehauling but doesn't work in
construction, whatever it is.
(10:57):
Work in waste hauling but itdoesn't work in construction,
whatever it is.
That all being said, I'd donesome research, I think, last
year, where we looked at acouple hundred vertical software
companies and what financialproducts they had adopted and in
what order they had adopted thefinancial products.
And the clear winner as far aswhat embedded financial product
(11:20):
did they adopt and which one didthey adopt first payments, was
number one in both categories.
I think something like 80% ofvertical companies have
integrated payments in one wayor another, and then it drops
off very, very steeply fromthere.
Now the opportunity for embeddedproducts is massive.
I think we're very early therebecause when you look at the
(11:40):
flip side of it, even though,say, one vertical has embedded
payments but not embeddedbanking, whatever it is, 100% of
those end businesses have abank account.
They likely have some kind ofloan or credit product.
They likely have some kind ofsmall business card, so the
opportunity there is prettysignificant.
But, just you know, a lot ofthem are starting with payments
(12:03):
and I think the reason for thatis is is pretty obvious If you
don't get paid, you don't have abusiness like the, the.
At the end of the day, you're asmall business.
If you're not receiving fundsfrom your customers and if
you're not making it easy forthem to pay you, then you don't
have a business.
And then the, if you look at itfrom the vertical software
(12:24):
perspective, there's just a lotof value add things aside from
making it easier to get paid andget paid faster, more
convenient for their customers.
You know whether it'sreconciliation, whether it's
understanding your cashflow,whether it's, you know, tying,
invoicing and resourcemanagement and employee
utilization.
There's a lot of interestingworkflow and data problems that
(12:48):
come before and come afterpayments.
That make it a pretty obviousplace to start, and it's a place
where, again, folks likeRainforest have made it pretty
easy and straightforward andpowerful and not just a
check-the-box feature but a realrevenue driver for a lot of
these vertical softwarecompanies that then help them
(13:08):
get their training wheels offand do embedded finance fintech
products very well, and thenstart to add those second, third
or fourth products.
Joshua Silver (13:17):
Then start to add those second, third or fourth
products.
Yeah, we see at Rainforestobviously huge success when
software platforms are addingpayments in, because it turns
that software business, thevalue proposition that they
deliver to a merchant from.
We're here, software to helpyou run your business.
To you, we're putting dollarsinto your bank account every
(13:38):
single day.
That's really the lifeblood ofany small business is cashflow,
and so I think that's reallypart and parcel to the whole
concept of embedded finance andthe sum is greater, or the total
is greater, than the sum of theparts.
I think that really applieswhen you add SaaS and embedded
finance together.
Matt Brown (13:58):
One thing I just add as an example of that is you
think about another commonembedded product that a lot of
companies talk about is banking.
Let's add embedded banking toour vertical software.
Well, a big challenge withembedded banking is how do we
get you set up this account?
How do we can we switch overour payments, we connect our
payroll.
So even once you've gonethrough the challenging work of
(14:21):
getting your small businesses toset up this embedded bank
account, you have to fund it.
You want funds constantly goingin there.
If you don't have embeddedpayments set up, it's going to
make the success of yourembedded banking product even
more difficult to achieve.
Or let's say, embedded lendingIf you didn't already have
embedded payments set up, it maymake underwriting lending to
(14:42):
those small businesses on yourplatform even more difficult, or
repayments or managing risk,because you're not sitting in
their flow of funds.
And so all these other products, even if they're theoretically
upstream of payments, reallyrely on the software platform
having a strong reason to ownand provide payments to their
(15:03):
end customers, and that is inmany ways, the necessary
condition for success for a lotof these other embedded products
.
Joshua Silver (15:11):
Makes sense Looking towards the future, and
you talked a little bit aboutthis in your recent blog post
about invisible asymptotes invertical SaaS.
Talk to us a little bit aboutthis in your recent blog post
about invisible asymptotes invertical SaaS.
Talk to us a little bit aboutwhat you see as the next
frontier.
You know go, you know, hopforward a generation or two.
What is next, do you think?
Matt Brown (15:34):
So there are a couple of things that are
emerging there.
There are a couple of thingsthat are emerging there.
The idea behind that post wasthat a lot of vertical software
today is about taking thesedisparate workflows and
disparate problems and it's veryvaluable to do this, combining
them into a single tool that'spurpose-built for this vertical.
You're not stitching together abunch of different tools.
(15:55):
It's one login, onesubscription, one value prop and
multiple boxes checked there,but it's effectively making your
existing small business moreefficient.
It's improving what's there.
And a lot of where we see themarket-leading vertical software
companies going is how do youthose those small businesses on
(16:19):
your platform?
So maybe it's um, you know.
Maybe it's embedded marketingtools.
Maybe it's some kind of uh, um,uh marketplace component where
you can drive leads or drivebusinesses to the um, you know,
to the, the small businesses onyour platform.
Maybe it's um a brand, that theplatform itself has a brand and
(16:40):
they're driving folks there.
Um, maybe it's a relationshipwith uh, with vendors or
suppliers, where you can do somecomponent of group buying.
If you're a uh, a verticalsoftware for coffee shops, can
you make it easier for thatcoffee shop to buy milk and
other supplies in bulk cheaperthan they would otherwise be
(17:00):
able to do as a smallindependent shop.
But through this group buyingyou can meaningfully improve
their economics.
So there are a lot of thingsaround that we kind of group
these businesses on yourplatform together.
Obviously, ai is a big trendright now.
Where, if you're a smallbusiness, what are the roles you
(17:21):
would love to fill if you could, but maybe it's too expensive
or maybe you wouldn't have fullutilization of somebody to pick
up the phone and qualifycustomers 24-7, or to do better
scheduling or things like that.
So I think there are a fewemerging models there, but again
(17:42):
, it really depends on thevertical and what the main
constraints they're facing are.
Joshua Silver (17:48):
So I think, to summarize, it's really kind of
expanding beyond just kind ofthe core, traditional embedded
finance that one might think of.
You know issuing lendingbanking payments, really to see
how you can help them grow theirbusiness, either through cost
takeout, better marketing, youknow, growing the customer base.
(18:12):
That's really expanding theentire business, not just
helping it run more efficientlyfrom a financial services
perspective.
Is that a fair synopsis?
Matt Brown (18:23):
Yeah, I think that's very eloquently put and I think
the benefit of that is all ofthis flows back to the core
value prop of the verticalsoftware business, which is
you're helping them run theirbusiness more efficiently and
kind of taking a tax, if youwill, in a positive sense, on
their success.
So if you're a verticalsoftware company and you embed
(18:47):
marketing features let's say youhave embedded payments already,
but you then embed marketingfeatures all these new customers
that you're getting paid todrive to your end customers
they're eventually checking out,they're eventually buying, and
that's additional paymentsrevenue that goes to you, the
platform, or those areadditional leads that fill up
the CRM that potentially you'recharging for.
(19:08):
So again, the beauty ofvertical software is the
platforms grow as their smallbusinesses grow, and so the more
you can, as a platform, enableyour small businesses to become
successful, you benefit as well.
Joshua Silver (19:22):
Yeah, and we see that ourselves at Rainforest.
As the vertical SaaS platformgrows.
We grow because we'reconsumption-based.
They grow as their end smallbusiness or merchant grows, so
it's a very virtuous cycle forsure.
We've talked a lot about apretty rosy future.
All these things adding revenue, adding margin, adding
(19:45):
resilience.
Nothing comes withoutchallenges.
What do you think are some ofthe challenges that we may face
in the embedded financial spacegoing forward in the next coming
years, and what do you thinkfintechs and SaaS companies both
can do to prepare to neutralizeany of those challenges or to
overcome them?
Matt Brown (20:06):
prepare to neutralize any of those
challenges or to overcome them.
So there are a few things there.
I think one is as much as we'vetalked about this ambitious
vision and being verymulti-product, and we're talking
about multiple software suitesand multiple financial products.
It's very easy to build thoseout to go what is it?
(20:26):
A mile wide and an inch deep?
And even though you are servinga particular vertical, the
products aren't connected welltogether.
Or just because you offerembedded payments on your
platform, it doesn't work reallywell with the invoicing product
or expense, whatever it is thatyou have be it can be tempting
to say we to throw a bunch ofstuff together, not connected.
(20:49):
Um, you know very well to thinkabout this the success of one
product spilling over to othersand you know, I think payments
is the perfect example of this,where we we did this with my
first company back in 2015,where we said or hearing that
toast is doing a great job withwith payments, let's just embed
payments and then we can move onand we're going to make so much
money from it.
But the devil really is in thedetails, with payments in
(21:12):
particular, where it's how doyou price it and what effect
does pricing have on adoption,do you allow the payment fees to
be passed on to customers?
Do you offer embedded?
Do you offer, you know, instantor faster payouts, and how do
you balance risk of this with?
You know your economics and youknow premium features and
(21:32):
what's the relationship betweenpayments pricing.
I mean, you can go on and onand on, but there are so many of
these details that you know arenot obvious and you don't
really even understand thatthere are choices to be made
there, unless you, you know,know, kind of go down that that
rabbit hole of what, what'spossible with payments.
And so, um, yeah, I think,taking the time to get the, the
(21:54):
pillars of your strategy right,it sounds like a lot of uh,
founders know what those pillarsare with, with software, but
with embedded fintech andpayments in particular, um,
again, the devil is just just inthe details.
And so I think just checkingthe box and moving on is often a
recipe for disaster, for a lotof wasted time and effort.
Joshua Silver (22:18):
Stage words as we come to closing.
If you could give just onepiece of advice to SaaS leaders
who wanted to recognize the fullpotential of embedded finance,
what would you tell them?
We've talked about a lot of italready today in the podcast,
but if you had to distill itjust down into one focus area,
what would it be?
Matt Brown (22:41):
Of embedded fintech generally.
Joshua Silver (22:44):
Yeah.
So for SaaS leaders who arelooking to add financial
products and bed financialproducts, what would the one
piece of advice you'd give thembe?
Above and beyond, obviously,what what we've?
We've already talked about thatso far.
Matt Brown (23:07):
I would say listen, listen to your, listen to your
customers.
I think the you know yourcustomers, almost regardless of
the vertical, are going to tellyou that you know, payments,
again, are the lifeblood oftheir business.
They're very important.
Um, try to try to understand how.
How do they think about thecost of payments today?
Do they care about faster flowof funds?
(23:30):
Do they care about reliabilityof payments?
Understand what is unique aboutpayments in their vertical and
then again this is why I'm sucha fan of Rainforest merge that
with the expertise thatRainforest has and payments
itself, as well as how paymentsdiffers across these verticals.
(23:51):
Even I've seen very differentpayment strategies in the same
vertical, but SMB I'll take ananonymized example here but SMB
professional services firmsversus mid-market professional
services versus enterpriseprofessional all effectively the
same vertical, but verydifferent payments and kind of
(24:13):
embedded financial productstrategies that are necessary
there Because, again, eventhough those businesses look the
same on the outside, just thatthe size has very different
implications for the idealpayments and financial product
strategy there.
So, talk to your customers,understand what's unique about
that industry and then work withfolks who not just know
(24:37):
vertical software and payments,but have seen that applied
across different industries.
Joshua Silver (24:43):
I love that advice about talking to
customers.
That's my number one piece ofadvice that I give to founders
is in any vertical, in anyindustry, in any type of
business, when you think you'vetalked to enough customers, you
still need to talk to two orthree times more because you're
always going to be learning.
The market's always evolving,there's always unique insights
and so super critical to get outthere and talk with customers.
(25:07):
And with that we've kind ofwrapped up our time here.
But, matt, thanks so much forjoining us on the podcast.
Really appreciated hearing yourjourney from founder through
acquisition, now a VC.
Your work certainly is reliedupon by many as they look for
data about the vertical SaaSmarkets and where it's going.
(25:29):
So thanks for all of yourcontributions towards helping to
grow the embedded financeecosystem.
And with that I'm Joshua Soferwith the Payments Strategy
Podcast.
And Matt, what's the best wayif our viewers want to reach out
to you?
What's the best way to contactyou?
Matt Brown (25:47):
I'm on Twitter, matt , with three T's Matt Brown and
I also have a website, mtbxyz.
Joshua Silver (25:55):
Amazing.
Thanks for the time, Matt.
We appreciate it.
Thank you.
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