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You don't get to cheat just because you like to win -- on WeWork, Politics, and Fintech
Hi Fintech futurists --
In the long take this week, I recap the industry temperature across my last 10 industry conferences (from SIBOS to DeFi). A realization bubbles up about stagnation in Fintech innovation and the gradual maxing out of the private venture markets. What happens when private and public valuations do not interoperate? What happens when the financial world is like WeWork, Trump, and Brexit? And what path takes us individually out of the labyrinth?
The latest short takes on the Fintech bundles, Crypto and Blockchain, Artificial Intelligence, and Augmented and Virtual Reality are below. Thanks for reading and let me know your thoughts by email or in the comments! Last but not least, these opinions are personal (or maybe made by a robot) and do not reflect any views of ConsenSys or other parties.
This last month has been quite the trip. I've bounced around ten different conferences, ranging from small entrepreneurial affairs to gigantic, industry-wide banking battlegrounds. While not a statistically significant sample, having several dozen conversations across the industry can give you the temperature on where we are in the economic and innovation cycle. And while it's been nice to refresh the slides and kick-off a story telling tour, dad-jokes included, there is also a change in the air. WeWork, Uber, Trump, Brexit, Facebook. There is explosive powder below the deck, and we are playing with matches.
Feelings and emotions at industry events matter. The narrative at the more traditional conferences is that Fintech innovation is just incremental improvement, and that blockchain has struggled to bring production-level quality software and stand up new networks. This isn't strictly true -- see komgo, SIX, or any of the public chains themselves -- but the overall observation does stand. Much of Fintech has been channeled into corporate venture arms, and much of blockchain has been trapped in the proof-of-concept stage, disallowed from causing economic damage to existing business.
To me, this is like denigrating Real Player for how it was always buffering, and not understanding that the future of the Web was to become video. Bandwidth, ad networks, and HTML standards were missing, but the concept was right. Similarly, if considering existing capital markets value chains, we all know that post-trade capital markets should be faster and more efficient, mutual funds should be packaged through shared workflows and token baskets, collateral can be managed with a single engine. The SIBOS crowd knows this too, but the road to get there will take a meaningful amount of time. And it is unlikely such a road can be taken only on the private, permissioned networks that do not inter-operate with the public ones.
At events like RoboInvesting and Lendit, the core European Fintech events for somewhat mature themes like digital lending and roboadvice, the new entrants I saw were vendors selling technology integration services. Not high-risk companies with fresh ideas for the world, but rather practical companies trying to make things "real". This implies to me that the audience for these conferences has shifted from early stage pioneers, to large bank decision makers growing their innovation programs. In other words, nothing dangerous is going on here.
The data for Fintech funding somewhat aligns with these observations. I'll pull in a few sources below for variety, but generally we are seeing a little bit less activity this year than last year. There is no Ant Financial to shake things up, only emerging decay across the markets (which I'll shortly address). Payments and Lending continue to power the funding engine, with VCs like Andreessen see lending as the key to the heart of the consumer. Of course! It is easy to give money away when it is cheap -- and once gone, it is hard to earn it back.
The most imaginative stuff in finance is happening in the DeFi markets. Take for example the launch of the Actus Protocol, aimed at making composable, programmable financial instruments. Or the recent launch of Lira by eToro, an open competitor to DAML that can allow for the writing of any financial instrument on Ethereum. Or the API library of Defire, a connective tissue for the current set of protocols issuing loans or managing money through DAOs. As another theme, I also like what is happening with mixed reality and insurance claims assessment (see the Short Takes section), but that is more middle office than manufacturing. And making manufacturing free is as close to being dangerous as you can get.
The Reality Check
It is 2019, not 2009. As a financial industry, we cannot pretend that tech companies have not entered finance. They have, and they are winning. How do you access your bank account, if I may ask? By having artificial intelligence scan your face and open up the iOS or Android operating systems on your phones, with finance as a feature. How do you pay? Through Google, Apple, PayPal, Stripe, or some other tech company connecting modern commerce with Visa or Mastercard rails. How do you lend, borrow, or invest? Who hosts that data? Who underwrites your loan? Whose machine learning software is being used? Who is necessary?
It is 2019, not 2009. As Fintechs, we cannot pitch innovation and cost-cutting without understanding that people have been doing this for decades. How many times must venture investors write Series A, B, C, D, E checks into early stage companies on the premise that something or other is better optimized 20%? The time for incremental change as disruption has passed. Fintechs are not underdogs; they are asset allocation bets arbitraging the pricing differential in the venture markets and public financial markets. You fund your company on 10x revenue, you buy your revenue at 5X EBITDA. How long will this arbitrage go on? How many dimes can entrepreneurs pick up before the game runs out?
There is friction and then there is fall from grace. WeWork's unbridled rise upwards in the private markets has met the flames of the public market sun. The former CEO had taken every advantage available -- from controlling the board through a high-voting share class, to a variety of self-dealing via real estate assets and intellectual property, to an external messaging that has become too much even for a company burning billions of dollars. Such advantages are not personal exceptions, they are structural outcomes. When demand from venture outstrips available opportunities, hyper-competitive behavior remains unexamined for quality and rewarded for results. The ends justify the means.
So why then is WeWork able to fire Adam Neumann, cut his top 20 lieutenants, and start to deconstruct the business into something that more resembles a functional company? Because it is dead otherwise, burning cash with wings on fire. Super-organisms must survive, even if it means lopping off their own appendages. The distribution of gains from company building matters. Markets can clear at a number of different equilibria, but that does not imply those equilibria are equally Pareto efficient. Markets shouldn't clear in favor only of Adam Neumann. This is especially true as we make public and private equity increasingly interoperable.
Fred Wilson, arguably one of the most influential venture capitalists of our generation, just penned a post suggesting the venture industry stop chasing unicorns and instead look at company profitability as a metric. To go public today is to lose 50% of your private valuation. Why? Because the public markets are making their allergy to things like WeWork known, and that means nobody gets paid. Early employees do not get paid. Venture capitalists do not get paid. Asset allocators working at pensions funds do not get paid. And you can forget about the pensioners.
I would make the same argument around the Trump impeachment inquiry related to the use of Executive power to undermine a political opponent, or Boris Johnson's loss in the UK Supreme Court after trying to shut down the Parliament to achieve a hard Brexit. Yes, short term tactics can be incredibly successful. But we live in a long term world, powered by the scientific method and a global infrastructure for information transparency. You don't get to cheat just because you like to win.
The World Economy and its stock markets also like to win. Have they been cheating all this time too? Consider: Negative Rates, Designed as a Short-Term Jolt, Have Become an Addiction, or What could tip the bond market equilibrium? Central bank interest rate policy has been designed to create the impression of growth, and it worked. But now we are backed into a corner where fragility is baked into the system, and the safety buffer has been boiled away. We are staring down a trade war, massive geopolitical risk, and exhausted private and public equity markets. What can you, a single person do? The answer is right there, in front of you.
Build something real and share it. Find the truth and say it. Turn down the volume from the world, and turn up the volume from your True North.
Featured Interviews, Podcasts, and Conferences
Blockchain Insider. Had a great time with Todd McDonald of R3, Thomas Zeeb of SIX exchanges, and Simon Taylor of 11FS discussing the latest blockchain developments.
Digital Asset Strategy Summit, I've joined the speaking faculty at this great event for asset allocation and financial advisors docused on blockchain based assets, October 20-21st in Dallas. If you are interested in attending, let me know by email as I have limited passes. Only asset managers, pension funds, registered investment advisors, and family offices please.
#ItzOnWealthTech Ep 25: How Software is Eating Banking with Lex Sokolin, ConsenSys. A fun conversation with Craig Iskowitz, covering everything from digital wealth, to artificial intelligence, to blockchain based assets and the evolution of banking. Highly recommended!
BlackRock-backed robo-adviser taps into banks. Rebundling is also happening with roboadvisors that are owned by incumbents. Scalable Capital, in the UK, is partnering up with Raisin, the French savings interest maximizer, to offer a broader suite of products. Will be interesting if asset managers inadvertently cross-sell deposits.
Ally's all-digital managed portfolio offering does the basics well at a low cost. Just recently, Ally launched a digital wealth manager with the usual set of functionality at 30 bps; and yet some think there are not enough assets in the space -- Robo-Advisors 2019: Still Waiting for the Revolution. I think it depends how you count, from $200 million to $1 trillion (if you include Financial Engines and Merrill Edge).
Mastercard Launches Digital Sales Platform For Farmers. Anything that looks like a financial network aimed at farming and the underbanked is very interesting, especially as it reminds me of what made the Chinese Fintechs powerful in the early days -- figuring out how to help farmers in rural China.
Crypto is offered through SoFi Digital Assets, LLC. SoFi had started as a student lender, but now offers every flavor of the financial product ice-cream, from roboadvisors, to insurtech, to now crypto trading. It is structured like the offering in Robinhood and Revolut -- i.e., closed internally -- but very positive for their user footprint.
Introducing the DeFi Score — an open-source methodology to evaluate code and financial risk in DeFi lending. Self plug here, as ConsenSys launched an open industry initiative to measure risk in the decentralized finance space. Core attributes are smart contract risk, financial risk, and regulatory exposure. And any others you can think up. Join the Telegram!
First Week of Bakkt: Slow Start Unlikely to Dampen Long-Term Prospects. The launch of Bakkt, while a good step forward for infrastructure, has had a negative impact on the crypto capital markets, because institutional interest was low. I am fairly convicted now that "traditional finance entering crypto" is a destructive meme.
Boston-based enterprise machine learning platform DataRobot announced a $206 million Series E investment round led by Sapphire Ventures; bringing its total funding to $431 million. In what may be the best example of selling pickaxes rather than doing the mining, DataRobot enables other to deploy and test machine learning models in a SaaS model. Insurance use cases are numerous.
Artificial intelligence can improve sales by four times compared to some human employees. Worst of both worlds. A study of 6,000 people showed that when prospects did not know they were purchasing from a chatbot, the chatbot was an order of magnitude more effective than a human salesperson. When the prospect knew the chatbot was a chatbot, they discriminated against it and the conversion rate plummeted.
How Twitter’s negligence results in nefarious actors distorting the public debate. Do you feel like the political winds are moving against Justin Trudeau? If yes, Twitter propaganda bots and their networks are largely to blame.
Vehicle subscription app Fair.com announced a $500 million revolving credit facility that will allow drivers nationwide to access a rideshare-ready Fair car. This is a weird application of financial product to IoT. Imagine you want to provide transportation services but you don't own a car. Uber isn't a Taxi company, per se, and won't give you one. So instead you go to Fair, and pay to lease one, which comes bundled with insurance by the hour.
Travelers partners with Hover for 3-D modeling in claims. This is a recurring theme. People take pictures of damage with cellphones, machine vision startups stitch those photos together into 3D models and claims assessors become 90% more efficient. Makes sense that digitizing the physical world is helping the insurers of the physical world. Actuaries are data scientists.
Snapchat Doubles Down on AR Billboards to Promote Snap Originals Series. Snap installs attention holes in the physical environment. Also, Facebook In Development Of AR Glasses, Announces Plan To Map The Entire World. I like the ambition to create an augmented reality layer across the world, and I assume it will be covered with advertising. Google has already built Google Earth and integrated it into Maps. Will be interested to see how all these digital twin worlds will differ.