Generative AI, data breaches as personal liability, camel contagion
The future of innovation is global. We discuss it here.
The long tail gets longer
The mega theme of this newsletter is the rise of entrepreneurship everywhere. One of the drivers of this phenomenon is the horizontal infrastructure that enables startups. Because of cloud computing, startups anywhere can rent a supercomputer by the hour (obviating the need for physical Silicon, the original reason for Silicon Valley’s namesake).
Since then, many other tools have scaled. Shopify means everywhere can start an ecommerce store with the scaled infrastructure of a giant. Stripe empowers payments. Startup culture itself has horizontalized, with knowledge and best practice increasingly accessible via blogs. Even VC is globalizing, as is my own personal mission.
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This week, I used Dall-E for the first time. As an author and the editor of this newsletter, I’m often looking for just the right picture. But I don’t have the resources of a large agency or production house.
Generative AI is yet another tool that levels the playing field. I asked DALL-E to generate a Banksy-style global connected network. I was struck not just by how proximate it was to the idea in orthogonal ways, but also how eerily striking they were.
These programs don’t obviate the need for true creativity, but they are another tool in a growing trend of mass customization. And it’s impact will be far reaching. “Experts believe generative AI will soon enter workplaces: Sequoia predicts that by 2023, generative AI will be able to put together scientific papers and visual design mock-ups; and by 2030, it will write, design, and code better than human professionals in the field.” But it won’t replace workers. “But it will revolutionize the future of work by giving people back invaluable time to do the work that really matters.”
Ultimately,, it is yet another tool that makes the long tail longer. And weirder.
I have argued of the importance of distribution in fintech companies. But not all distribution is created equal and relying on undifferentiated channels can send you down ‘hell’s flywheel’. “If you were interested in quickly launching a startup, here’s an easy formula for finding product market fit. First, identify an existing product in an industry with a low NPS (like most financial services) that has not traditionally been sold online. Second, create a new digital on-ramp to that existing product, such as digitizing an insurance or lending application. Third, start to buy digital ads to drive customers to said product. Assuming the digital ad market is not yet efficient, there is an opportunity here to quickly scale.” This certainly is the common strategy. Yet this piece argues the logic creates hell’s flywheel. Read on.
This rise of fraud is one of the reasons a growing sector in fintech is in identity verification, where a panoply of startups have emerged. Great and helpful sector map about the space.
Do startups succeed because they have better products, or because they’re willing to try different things? Fascinating piece argues that one of the reasons fintech grew so much would surprise us. “Today, more than a quarter of Gen Zers, one third of Millennials, and roughly one out of every five Gen Xers call a digital bank their primary checking account provider. This growth has come at the expense of traditional financial institutions of all sizes, with smaller institutions ending up in the worst position. More Gen Zers and Millennials call a digital bank their primary checking account provider than those that consider a community bank or a credit union to be their primary checking account provider — combined.” Yet part of this growth, the piece argues, is because of a higher tolerance for fraud.
Data breaches are serious risks. They are now potentially serious personal risks for corporate leaders who may be penalized much more directly. “The Federal Trade Commission plans to take the rare step of bringing individual sanctions against the CEO of alcohol delivery company Drizly for data privacy abuses, following allegations that the company’s security failures under his watch exposed the personal information of about 2.5 million customers.”
Failing in startups is normal. Yet, we often don’t talk about failure that often. In that vein, loved this thoughtful post mortem on a business in Mexico.
Solving climate through financial innovation? One $300m bond market might hold one of the keys. Yet it needs much to scale and succeed. “In less than a decade, China has built one of the world’s biggest green bond markets, with more potential than any other to alter the course of climate change. But as the country’s pile of green debt swells beyond $300 billion, investors and regulators are confronting a troubling reality: It’s almost impossible to know how the money is being spent – or whether it’s having the intended impact.”
How will interest rate changes affect tech? It will likely depend by sector. Retail’s impact will likely be mixed, and in reality faces other challenges. “As the Federal Reserve continues to aggressively raise rates to stem the rising tide of inflation, retailers will feel the impact as consumer sentiment worsens. But for an industry that’s faced a persistent onslaught of challenges in recent years, inflation itself isn’t the most pressing issue facing retailers. A fundamental shift in consumer demand combined with supply chain challenges have made inventory-related issues loom larger than inflation or interest rates.” Perhaps asset-intensive players will feel it more acutely, notably in fintech. “Unlike retail, financial services will likely experience a tectonic shift driven by a change in the conditions that have defined the past decade. These conditions — notably the availability of cheap capital, easy credit, and surplus savings — led to the explosion of several large FinTech categories, including BNPL, bank challengers, retail brokerage, crypto, and embedded lending.”
Emerging market investing has unique risks. But these risks are changing. Great piece diving into the African context: “The associated risks with investing in the old Africa of twenty years ago when the Economist dubbed the region ‘the hopeless continent’ are not those of the Africa today. Risk perception must be updated to reflect the increasing resilience, digitization, and integration that now are taking hold in African markets. The investors who will succeed will work to understand market realities instead of coming with pre-defined investment strategies, will find the overlap between their internal requirements and market needs, and will embrace flexibility and intersectional approaches. The geopolitical and economic dynamics of this post-COVID-19 world make looking at African markets not a niche option but rather a mainstream necessity.”
In previous episodes, I’ve written about the challenges of ESG frameworks. Fascinating piece on managers finding alpha in emerging markets where there is limited ESG data transparency.
What is the hardest part of entrepreneurship? Many think it is fundraising, or hiring. Compelling piece that the hardest part, or perhaps the most artful is the exit. “Companies are bought not sold. But that doesn't mean you should sit around waiting for gifts to happen. Against the current challenging backdrop, when exits get tougher, founders, now more than ever, need to think ahead about where they want to take their business. Financing options are not going to be as abundant, and adding exits into your options pathway makes a lot of sense.” This is perhaps most true in emerging ecosystems without long-term track records of successful startup acquisitions.
Where is the future of fintech going? I wrote about a few trends coming out of Money2020, but sharing this podcast I did during the event.
Thinning the unicorn herd?
Will we see as many unicorns? Perhaps not.
“Nearly a decade after the term "unicorn" was coined, venture capital's best and brightest companies may have finally outgrown what the ecosystem can sustain. Their rise was a product of business models that engineered growth with cheap money, and the financial conditions that made this model possible have changed profoundly. Starting in 2021 and continuing for much of this year, the top 10% of US startups could reliably expect a unicorn valuation. Not anymore. The rate at which new unicorns are being formed globally has dropped precipitously after a truly exceptional 2021, in which 584 VC-backed companies secured a valuation of $1 billion or more.”
The growth at all cost methodology simply does not cut it anymore. There are costs, and these should be managed.
That’s one of the reasons, the Camel approach is so critical, and seems to be resonating more today than ever before.
The shift will also bring about a range of evolutions in the market. For one, we’ll likely see new types of VC funding. We’ve already seen the rise and commoditization of revenue-based financing.
Perhaps the answer will be in the world of distressed investing. “The typical venture model relies on a lot of misses and a few home runs to offset losses elsewhere. But for startups that fail to get follow-on funding, distressed venture offers a chance to rebuild outside of a growth-at-all-costs mindset.”
Book of the month
This month I read two pieces around identity, balance and long-term health in entrepreneurship. Both made me reflect.
The first was a broad piece arguing a shift is occurring in Silicon Valley towards temperance. “Credit wearables. Or edibles. Or the pandemic. Or a new emphasis on a good night’s sleep. But whatever the reason, much of tech suddenly seems to be dumping the booze.”
The second was much more personal, a memoir of one' successful entrepreneur and venture capitalist whose life went awry on excess, and who brought it back together at the end. Jason Portnoy was a member of the Paypal mafia and founding CFO of Palantir. With a life full of external success he dives into his personal challenges, hitting rock bottom and coming back up again. His book: Silicon Valley Porn Star: A Memoir of Redemption and Rediscovering the Self tells that story
A nice review below.
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