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Tech's potential to change the system, ecosystem infrastructure, and flywheels
The future of tech is global. We discuss it here
Topic of the week: tech’s potential to change the system
I am an avowed techno-optimist (though over the last few years, dosed with a healthy dose of realism). The reason I continue to be committed to the world of innovation is its potential not just to create meaningful businesses but to generate system-wide change.
Arguably, one of the best examples is Tesla. Tesla didn’t just build a car company. They demonstrated that electrification of cars was a superior product. And now, electrification is center-stage for every car manufacturer around the world. It is also a great business - Tesla’s market cap today exceeds $800b, larger than all other auto companies and Elon Musk is the world’s richest man.
In fintech, where I principally invest, many of the best innovators are also causing system-wide change. For example, one of the most egregious features of the American banking industry is the overdraft fee. American customers with insufficient funds often face a fee in the order of over $30. It is a $15b industry.
But things are changing. Citibank, following the moves of many other players in the U.S., just announced they were doing away with it.
Innovators have been part of the catalyst for change. Fintech startups offer no overdraft, and generally simpler, more transparent (and often free) bank accounts and other products. Chime (a portfolio company) has been a player in this shift, among other innovators in the country (see video below if you’re interested in more).
Building customer focused products and changing the game is the reason many fintechs are today worth more than traditional incumbents. And they are changing the system.
But of course, removing overdraft fees doesn’t solve the larger problem. We also need to drive financial health - the conditions that caused the overdraft situation in the first place. This is a much larger, thornier and multi-faceted challenge.
The list is long, but what are other industries where you have seen a set of startups create long-term system change?
The best ideas come from anywhere and scale everywhere. This is a topic I’ve written about at length in Out-Innovate and more broadly. In that vein, enjoyed this piece diving into the phenomenon - not about technology, but a culinary innovation: pizza. “you couldn’t order a pizza in the vast majority of Italian restaurants in America prior to 1945. And the reason you couldn’t order a pizza in Italian restaurants is because pizza isn’t Italian…Pizza is Neapolitan. It’s a distinct speciality of Naples, developed at at time when Italy didn’t even exist as a nation…The more you look at it, the more you realize that pizza is more American than Italian, in that most of the current popular variations, from deep dish to pepperoni, were developed in the United States and shipped outward to the world.” In short, the model changed, adapted, localized and changed again.
Ecosystem infrastructure is powerful at catalyzing innovation. I found this piece fascinating about the rise of fraud. “Fraud is a growing issue for fintech companies, as bad actors are doing everything from stealing identities to exploiting the slow U.S. bank-to-bank transfer network to siphon off money…The slow speed of America’s bank-to-bank transfer network makes certain types of fraud possible. Since transactions can take days to settle, people can move money from one account to another and then withdraw the same funds from both accounts while a transfer is in process–that’s why some fintechs are afraid to accept transfers.” In many emerging markets, new faster government sponsored payment systems are real time. PIX in Brazil covered last time is a potent example.
I often describe the areas I’m passionate about investing in as those that power “human resilience”. In that vein, enjoyed this call to arms from my investing alma matter, Omidyar Network, about how we can reimagine capitalism - the system as a whole - with resilience in mind. “Unfortunately, not only is our economy itself vulnerable to being overwhelmed by new shocks, it also actively contributes to a number of the crises that we are facing…If we are to survive as a prosperous, democratic society, we need our economy to stop being part of the problem and instead become part of the solution. Indeed, there is no feasible way in which our society can build enough resilience to survive — let alone thrive — in the face of these crises without the support of a vibrant, competitive, and inclusive economy.”
Is the future of work remote? The answer is yes, no and maybe. What I mean is that for some companies, with the right culture, and building the right product (e.g. digital good), remote will be a longer term viable option. But building remote teams obviously doesn’t mean that people never see each other. Thoughtful construction of the work, and the way we work, and the cadence of in-person meetings becomes even more important. In that vein, enjoyed this piece on the fallibility of trying to lure people back to the office and tips to build remote teams.
Innovation ecosystems take hold when there is a flywheel. Founders are supported by mentors. As they scale they support the next generation. In many emerging ecosystems, many startup builders are taking both roles on at once, also supporting the next generation at the same time. Fascinating piece on the dynamics at play in Africa. “Perhaps the most notable development of the last couple of years has been the increasing number of founders and senior tech executives — who, during later stage funding rounds, are “taking cash off the cap table,”… to invest back into the next generation of founders.”
The WSJ asked amid a reset in public and private market valuations, what is the effect on startups? There are many things VCs can do. But as I answered, there is also much startups can start thinking about from day one. “Startups should think like camels from the beginning—build a business that is resilient to downturns, has a strong foundation of unit economics and managed cash burn, and, ultimately, because they don’t depend on it, has the power to say no to VCs.” This prepares them in a downturn.
Venture is globalizing - notably, in Europe. Great piece about the drivers and players on the continent. A similar dynamic is playing out globally. Another geography of note is Africa. Interesting analysis on some of the dynamics at play and the role of fintech specifically on the continent.
If you’re interested, had a fun discussion exploring what it takes to scale innovation in emerging markets this month on Emerging Markets Today.
Book of the month
This month I’ll share one of my favorite books in a while: Americana: A 400-Year History of American Capitalism.
I have read a small army of books on American history. But Americana took a completely different lens at explaining the currents of American history, beginning with capitalism’s influence from day one and the Mayflower. As the Economist reviews it: “European settlement in America was originally driven by commercial imperative. In 1606 the British chartered the Virginia Company of London as a profit-seeking operation; an early version of ‘venture capital.’”
But at the same time we have a revisionist history in America when it comes to capitalism, and forget the important role of the state in powering commercial and free enterprise in the country. “American capitalism has always had a strong input from the state: the tariffs that shielded industry in the 19th century; the military expenditure that helped develop radio, satellites and the internet; farm subsidies; the federal guarantees for bank deposits and home loans; and so on… It was an endlessly calibrated balance between state subsidies, social programmes, government contracts, regulation, free will, entrepreneurship and free markets.”
What do you think?