Hat Trick: Menlo’s Third Investment in Finch in Three Years
Congratulations to Jeremy Zhang, Ansel Parikh, and the Finch team on raising their Series B! For Menlo, it’s an exciting milestone, marking the third consecutive round we’ve invested in Finch. We made a seed investment in 2020, led their Series A in 2021, and are now co-leading their B round with our friends at General Catalyst, alongside top fintech investors like QED, Altman Capital, and PruVen.
When we announced their Series A, we talked about the new market Finch was creating. As a refresher, Finch provides an API layer for companies to connect to employment systems of record, enabling hundreds of leading startups and enterprises across fintech and HR tech to build products on top of employment data. These employment systems were previously walled gardens, but Finch has succeeded in both unblocking countless new use cases built on top of that previously illiquid data while also providing the infrastructure to automate the direction and movement of trillions of dollars of employer-directed payments.
We love API-first businesses and their potential to provide the foundational building blocks and pipes for net new markets and applications. And when we apply our six-part API framework to evaluate the potential of a Menlo investment, Finch knocks it out of the park on all fronts:
1. High number of end systems to which to connect and distribute
There are thousands of employment systems of record in the U.S. alone, from small regional payroll systems to legacy HRIS platforms to benefits administration and staffing. Even the largest platforms like ADP, Workday and fast-moving challengers like Rippling and Gusto only represent a small minority of total employees nationally. This distribution and fragmentation make it impossible for any end customer to build and maintain even a fraction of these connections.
2. Difficulty of access or transformation
Most employment systems still lack any semblance of modern APIs, and the messiness and lack of uniformity of data or endpoints even across multiple instances of the same end platform, represent a major challenge for any horizontal player to provide a best-in-class solution.
3. Diversity of use cases
Every month, we’re finding new, major use cases of customers who want to connect to Finch’s employment platform, from simply reading employee census data to complex payment operations for retirement and benefits direction.
What is “graduation” risk or “switching” risk? Sometimes API-first businesses are the victim of their own success; if you grow revenue linearly with a customer, at some point, there is always the risk that it becomes more economical for customers to build the highest-volume connections themselves via insourcing or switching to a lower-cost provider. The risk is mitigated if one of two things happen: there is a lack of a “fat head,” where no system is dominant, or when the costs of buying continually outweigh the costs of building, after factoring in maintenance costs.
5. Hard dollar ROI that supports high ACVs
Finch shines on two axes: They save tedious, repetitive, non-core engineering time and resources by automating these connections, and they allow their customers to serve previously unaddressable net new customers.
6. Clear initial wedge
What ancillary connections, data products, or workflows can become unlocked by the initial product? From day one, Jeremy and Ansel have viewed stitching together employment systems as a fundamental building block in their mission to make employment both connected (reading) and programmable (writing). Reading employee data to build into a product is just one step in their bigger vision: Finch makes it possible to also write back to employment systems, unblocking trillions of dollars of employer-directed money.
These are all inputs that help define moat, network effects, and TAM and inform the health or strength of unit economics (the ultimate output of what makes a fantastic business!). Finch is best-in-class on these outputs—top-tier growth, net dollar retention, and efficiency—and in the early innings of tackling a massive end market. But ultimately, where Finch shines most is the quality of its team. When evaluating founders, we always talk about “clock speed,” and the speed at which Jeremy and Ansel iterate, learn, and evolve is truly impressive. Business results aside, we see that culture of excellence and growth permeate and shine through the organization, exemplified in some of the leaders we’ve brought on in the past year, with solid hires from companies like Auth0, Segment, Lattice, and Checkr.
Three funding rounds later, we’re unbelievably excited about the opportunity ahead for the company and are grateful for the chance to work with such a phenomenal team. From companies like Chime, Carta, Airbase, Bluevine, Betterment, Finch, Prodigal, and many more, we’re actively investing in fintech, so if you’re building anything, especially fintech infrastructure or anything B2B, please don’t hesitate to reach out. You’ll be in good company!