Is fintech dead?

Some have asked whether fintech is dead. Indeed, some headline stocks are down incredible amounts from their peaks.

My take: we are still in the early innings of fintech innovation.

Financial services represents ~20% of GDP. Yet fintech companies are <2% of public company financial services market cap today (down from 5% at the peak).

And while fintech stocks are down, they are broadly in line with the SAAS market as a whole. And more battle tested models have performed better.

I am as excited as ever for the sector.

For one, the underbanked story is still massive. There are still over 1.5b unbanked and the same amount underbanked. Technology is radically changing cost to serve. Much of this growth will come in emerging markets. No surprise the industry remains bullish about fintech’s impact potential.

New platforms are changing the game.

In Brazil, government-sponsored infrastructure and regulation catalyzed new players. “In 2010, Brazil was beholden to an oligopoly of five banks, who enjoyed record profits by focusing mostly on the top of the income pyramid (with mediocre products and services). In 2022, Brazil now has hundreds of fintech startups which have increased Brazilians’ access to financial services from 57% to 86% of the population in recent years.” Infrastructure like instant payments, open finance, licensing, payment acquiring & insurance have yielded new business models - see chart below.

A16Z research: https://a16z.com/2022/10/18/brazils-surprising-fintech-tailwind/

The same is playing out elsewhere, like in India with universal identity and the API stack built on top (India stack).

Embedded financial services are poised to change where and how financial services are bought, becoming better engrained as a feature of a product and consumed at the point of use. (Taking the opportunity to plug this excellent report on the future of fintech referenced above).

So what does the future look like? One thing is for certain: the next ten years of fintech will look nothing like the last ten. But I believe they will be no less exciting.

What do you think?

Interesting discussions

Where does venture performance come from? Is it better to invest in consumer or enterprise startups? Good report that dives into the question. “Venture is a game of power laws – meaning only a small percentage of returns is responsible for a large percentage of overall return value, either for a specific fund or the industry as a whole.” Both enterprise and consumer startups follow this pattern. But from a return standpoint, grossly over-simplifying, consumer outcomes are rarer but bigger. Enterprise hits are more consistent.

In a world of market downturns, how will the venture model evolve? Some new players may emerge, including in distressed investing. “These investors target startups that have raised funding but aren't hitting the necessary growth targets to receive further capital, let alone become a unicorn or achieve a high-profile public listing.” The timing may be apt: “Traditional VCs need to constantly evaluate their portfolio companies to focus on those with the best potential to deliver outsize returns. With the downturn and the fact that some investors are facing a cash shortage themselves.”

How should emerging GPs execute and scale fundraising? Good long-form read on “the non-obvious” playbook. “Somebody should write a book like Jason Calacanis’ Angels, but for LPs.” Good piece that dives into the topic.

Was excited to keynote the One Region Annual luncheon. Have a look here for a video.

Why is blitzscaling challenging in frontier (and every) market? Good deep dive into Airlift’s story in Pakistan: “Airlift’s quick-commerce strategy was heavily influenced by the concept of “blitzscaling”, a strategy…which advocates for hyper-fast growth while accepting the chaos that ensues. “ This is not in of itself the challenge if the business model works. in this case, “the company’s aggressive expansion strategy amplified the operational flaws… and dug a deeper hole in the company’s finances. While the company had managed to raise and sell the vision during the notoriously prolific 2021 venture capital market, matters would get thornier as the market corrected.”

In a world that favors camels (startups that are built on sustainable unit economics), how do high-burning companies transition? Good discussion with tactical and practical strategies to cutting burn, shift to higher quality revenue and raise different types of capital.

The US payment network is one of the most expensive in the world. How did it get this way? “Credit cards are insanely profitable, roughly four and a half times more lucrative for the lender than any other form of credit. If you add up the two main streams of revenue, this industry generates up to $257 billion in revenue every year, which is about $780 for every man, woman and child.” The payment networks are ripe for disruption, but also hard to displace. “The American payments system is deeply concentrated, beset with unfair practices designed to sustain market power and hide true prices.”

Startups can disrupt monopolies like the payment networks. But they can also create new ones. Looking at a rent optimization software for example, “in one neighborhood in Seattle, ProPublica found, 70% of apartments were overseen by just 10 property managers, every single one of which used pricing software sold by RealPage. To arrive at a recommended rent, the software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge…The software’s design and growing reach have raised questions among real estate and legal experts about whether RealPage has birthed a new kind of cartel that allows the nation’s largest landlords to indirectly coordinate pricing, potentially in violation of federal law.” We will need to contend with these shifts.

In previous editions we explored the role of ESG investing. The debate rages on. “Wall Street has been hard at work on a rebrand. Gone is the ‘Greed is good’ swagger that embodied its culture in the 1980s. ‘Greed and good’ may best summarize its messaging today as it seeks to combine high profits with lofty intentions.” ESG measurement has been viewed as a tool to integrate social impact into capital allocation decisions. But does it work? “On the face of it, E.S.G. investing could be transformative, which is why it’s one of the hottest trends in the world of investing. After all, allocating more capital to companies that do good helps them grow faster and lower their cost of capital, creating an incentive for all companies to be more socially and environmentally conscious. But the reality is less inspiring. Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world.” For a longer segment, John Oliver dives in.

To venture capital or not venture capital?

A question founders often ask is whether they should they take venture capital. There are trade-offs. Taking VC puts you down a certain path, a different definition of success by stakeholders, and a different pace. One of the best movies I’ve seen about this choice trade-off was not in venture, but in cooking.

Do you know who started the French Laundry?

I thought I did, but it wasn’t Thomas Keller.

Check out this excellent mini-documentary that tackles this question, and many others about the tradeoffs of ambition, family, scale, team and others.

Book of the month

This month I read The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources.

As Foreign Policy reviews it “there’s a motherlode about the people who literally created the world we live in now by trading the modern equivalents of tin, whether oil, coal, or cobalt. If you have the slightest interest in how the modern world was made, by whom, at what price, and at what profit, this is the book for you.”

But it’s not all rosy. “Take Marc Rich, the trader who made a killing in the 1970s before becoming a tax fugitive. Blas and Farchy describe how his firm dominated shady dealings with rogue regimes, physically connecting the people who had things like oil with the people who needed it. When his eponymous firm became too toxic—U.S. banks wouldn’t touch him—his underlings formed a new company, Glencore, which played an outsized role in the new economy and, naturally, in the book.”

[99%Tech]

Trick or treat: Is fintech dead? To venture…