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Cross-pollinating payments, the "P" in ESG, and fraud
[99%Tech] The future of innovation is global. We discuss it here.
Topic of the week
In the last episode of [99%Tech] I explored the cross pollination of innovation. Specifically, I wrote about the rise of global commerce in China, India, Brazil and beyond. We will see more and more of this, where the best ideas come from anywhere and scale everywhere.
This is not (and should be) exclusive to startups.
Governments and ecosystem builders can be a powerful cross-pollination force as well. One example is in real-time payments. The case of PIX in Brazil is notable. “Pix, a system which allows fast money transfers over smartphones, has become ubiquitous in the 11 months since it was launched by Brazil’s central bank. All that’s needed to send cash to someone is a simple key they’ve set up, such as an email address or phone number…It’s already been used at least once by 110 million Brazilians and about $89 billion has moved through the network. Brazil now registers more instant transfers than the U.S.”
Free, real-time payments can be both a powerful force for financial inclusion as well as a platform for further innovation. “The hope for Pix is that by speeding and simplifying payments, banks and financial technology companies will be goaded to innovate and provide new, more accessible services.”
This model of real time payments facilitated by the central bank is playing out in multiple markets around the world, largely in emerging markets, leapfrogging existing solutions. From here we’ll see a swath of new ideas emerge to take advantage of this infrastructure.
Venture Capital’s reinvention
I have often argued that the venture capital model will see innovation to itself, including in how funds are structured.
As the Economist describes it, capitalism is being reinvented by “a few thousand investors, mostly based in Silicon Valley, running less than 2% of the world’s institutional assets.” This is changing the game as “capitalism’s dream machine is itself being scaled up and transformed, as an unprecedented $450bn of fresh cash floods into the vc scene [which] in the long run it also promises to make the industry more global, to funnel risk capital into a wider range of industries, and to make vc more accessible to ordinary investors. A larger pool of capital chasing a bigger universe of ideas will boost competition, and is likely to boost innovation, leading to a more dynamic form of capitalism.”
It is globalizing: “What once was an American affair is now a global one, with 51% of deals by value in 2021 happening outside America.” One such place for example is South East Asia. “‘Capital goes where welcome, stays where well-treated.’ The quote belongs to Walter Wriston, a famous U.S. banker. ‘The Latin word for capital is capitalis, which is the head, the source of ideas. Capital is ideas, entrepreneurs, and investment. It’s creative energy. It yearns to go where it can do exciting, productive things.’” One such region is South East Asia where “VC investment has grown 5.2x between 2015 and 2020.” Growth is taking place across the capital stack, from seed through growth.
We are also seeing new structures. The biggest example this month was by Sequoia Capital. “Ironically, innovations in venture capital haven’t kept pace with the companies we serve. Our industry is still beholden to a rigid 10-year fund cycle pioneered in the 1970s. As chips shrank and software flew to the cloud, venture capital kept operating on the business equivalent of floppy disks. Once upon a time the 10-year fund cycle made sense. But the assumptions it’s based on no longer hold true, curtailing meaningful relationships prematurely and misaligning companies and their investment partners. The best founders want to make a lasting impact in the world. Their ambition isn’t confined to a 10-year period. Neither is ours.” In short, they created an evergreen holding structure to support their multiple funds.
Of course, one much talked about mover & shaker in the global venture space is Tiger Global, investing in startups around the world. Fabulous in-depth report on the topic.
Interesting discussions
In last month’s round-up, I explored the rise of ESG reporting and the increase in scrutiny of what qualifies. In that vein, this is a great piece that argues that raising the ESG bar should not sacrifice other worthy projects: “Higher ESG standards don't necessarily mean greater ESG results… ESG is a worthy goal but it should not come at the expense of "P," as in poverty reduction…Investments that lift people out of economic deprivation are as vital to the planet as those that lower the carbon footprint, promote health and safety and strengthen transparency. In poor countries, ESG ratings have disfavored investments in industries that create value, including mining, energy and natural gas.” The risk is that “the loss of incentives promoted by ESG ratings might slow the economic growth of emerging countries relying heavily on natural resources.” ESG is one part of the equation but not the entirety of it.
In emerging ecosystems, scaling startups is a key challenge. Many startup ecosystems have myriad early stage ventures, but fewer ones that have broken through. A new report focused on the Greek ecosystem explored some of its dimensions. Notably, the three biggest challenges were: “finding mid/senior management and skilled tech talent, fundraising and finding strategic investors, establishing a strong global brand and partnering with large international partners, and creating and retaining a company culture, as the company scales.” Worth noting that fundraising was only one of the four challenges, and not the top one.
One complicating factor for scaling startups (and business more broadly) in the years to come is human capital. The “Great Resignation” is underway and will have profound impacts on the innovation economy. “‘Quits,’ as the Bureau of Labor Statistics calls them, are rising in almost every industry. For those in leisure and hospitality, especially, the workplace must feel like one giant revolving door. Nearly 7 percent of employees in the “accommodations and food services” sector left their job in August. That means one in 14 hotel clerks, restaurant servers, and barbacks said sayonara in a single month…But this level of quitting is really an expression of optimism that says, We can do better.” And on the entrepreneurship side: “there is a Great Reshuffling of people and businesses around the country. For decades, many measures of U.S. entrepreneurship declined. But business formation has surged since the beginning of the pandemic, and the largest category by far is e-commerce. This has coincided with an uptick in moves, especially to the suburbs of large metropolitan areas.” How this settles out will deeply impact the startup landscape.
What is the opportunity for crypto in emerging markets? “As is well-known in the crypto ecosystem, the economic interest in crypto comes in waves — we have already gone through two waves of this and are in the middle of a third one. However, all through this, the ecosystem has been maturing quietly and resolutely underneath all the hype and noise.” Specific opportunities will emerging in emerging markets, including in platforms that understand (and respect) local compliance and needs or blockchain infrastructure for emerging market specific applications.
Nothing to do with tech, but loved this experiment. “A 1954 drawing by Andy Warhol, titled Fairies, has been appropriated into a new work by the Brooklyn-based collective MSCHF (that’s mischief, for the uninitiated) as part of the collective’s Museum of Forgeries project. The collective says that their work—titled Possibly Real Copy Of ‘Fairies’ by Andy Warhol (2021)—is a series of 1,000 identical artworks. They are all definitely by MSCHF, and also all possibly by Andy Warhol. Any record of which piece within the set is the original has been destroyed.” I purchased one. For me the concept of owning a piece of art by a renowned artist I appreciate (but a piece I don’t love) is a fascinating reflection on what gives art value - its scarcity, originality, beauty, personal connection, etc.
Book of the month
I just finished “The Key Man: The True Story of How the Global Elite Was Duped by a Capitalist Fairy Tale” by Simon Clark and Will Louch. It is the story of Abraaj and its alleged fraud. It is also a story about the limits to impact investment.
As the Guardian reviews it: “Arif Naqvi, founder of Abraaj, a private equity fund that managed nearly $14bn and had stakes in a hundred companies… Arif’s promise to give capitalism a conscience seduced western governments and billionaire Bill Gates…Bernie Madoff was saying to investors, give me your money, I’ll give it back to you and more because I’m going to invest profitably, and the ‘Wolf of Wall Street’ was doing the same thing. Abraaj went a step beyond that, saying to investors, give me your money, I will make you profits and, at the same time, we will end poverty in the developing world. In order to do that, he wasn’t just making an investment pitch. He was making a pitch in terms of how he could provide public goods: he could do something for the common good of the world.”
Impact investing in my view is a powerful force for impact. But it is also not a panacea. While it can be seductive to think that technology and business model innovation can be game-changers, business alone will not solve deep poverty, medical access or quality education or financial exclusion. Long-term change requires many players at the table - from government, to the social sector, to philanthropy and of course also business. Only then can real long-term sustainable change occur.
