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First Principles of Investing in Fintech

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First Principles of Investing in Fintech

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There’s $7 trillion of market cap for U.S. based financial institutions. In most major industries, the “challenger” technology company is now the most dominant — Facebook, at $540bn, is the most valuable media company, and Amazon is 3x the size of Walmart, at close to $1tn in market value.

This has not yet happened in finance. Despite strong technology players like Stripe, Square, PayPal, and Robinhood, traditional banks are still dominant.

With a regulatory environment that favors smaller companies, digital infrastructure that enables data portability, personalized data and machine learning, and increased trust and user preference for mobile-first products, digital-native financial institutions will have a foot-hold to get started and eventually consolidate financial services.

To invest in this space, we started with a simple question from first principles: what is finance? Our answer:

Infrastructure to exchange resources with unknown people and businesses.
Each word of this sentence represents hundreds of billions of dollars of legacy infrastructure that are being replaced by software. At Greylock, we partner with entrepreneurs who are building category-defining fintech companies such as Coinbase, Blend, PayJoy, Opportun, and Ribbon.

Below is a deck about the characteristics we look for in fintech companies and where we believe outlier companies will be created. If you are an entrepreneur in the space or have any feedback on the deck, please reach out to me at seth (at) greylock (dot) com or LinkedIn.

There’s $7 trillion of market cap for U.S. based financial institutions. In most major industries, the “challenger” technology company is now the most dominant — Facebook, at $540bn, is the most valuable media company, and Amazon is 3x the size of Walmart, at close to $1tn in market value.

This has not yet happened in finance. Despite strong technology players like Stripe, Square, PayPal, and Robinhood, traditional banks are still dominant.

With a regulatory environment that favors smaller companies, digital infrastructure that enables data portability, personalized data and machine learning, and increased trust and user preference for mobile-first products, digital-native financial institutions will have a foot-hold to get started and eventually consolidate financial services.

To invest in this space, we started with a simple question from first principles: what is finance? Our answer:

Infrastructure to exchange resources with unknown people and businesses.
Each word of this sentence represents hundreds of billions of dollars of legacy infrastructure that are being replaced by software. At Greylock, we partner with entrepreneurs who are building category-defining fintech companies such as Coinbase, Blend, PayJoy, Opportun, and Ribbon.

Below is a deck about the characteristics we look for in fintech companies and where we believe outlier companies will be created. If you are an entrepreneur in the space or have any feedback on the deck, please reach out to me at seth (at) greylock (dot) com or LinkedIn.

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First Principles of Investing in Fintech

  1. 1. First Principles Of Investing In Fintech
  2. 2. Infrastructure to exchange resources with unknown people and businesses What Is Finance?
  3. 3. What This Used To Mean Infrastructure to exchange resources with unknown people
  4. 4. What This Means Today Infrastructure to exchange resources with unknown people What This Means Today Infrastructure to exchange resources with unknown people
  5. 5. This Is A Problem Uniquely Suited For Software Infrastructure to exchange resources with unknown people • Scalable with 0 marginal cost • Ubiquitous • Everything is a security • Global & secure • Personalized • Predictive • Bias-free
  6. 6. Payments Infrastructure to exchange resources with unknown people OLD NEW • Instant, 0/low fee • Trustless systems
  7. 7. Insurance Infrastructure to exchange resources with unknown people OLD NEW Broker Underwriter+ ML Personalized Data
  8. 8. Lending Infrastructure to exchange resources with unknown people OLD NEW
  9. 9. FINTECH EVOLUTION: WHERE ARE WE?
  10. 10. Incumbents Still Dominant In Financial Services Incumbents Challengers Commerce Consumer Products (Cameras) Entertainment Transportation Financial Services Emerging Source: KPCB
  11. 11. PHASE 1 Acquire customers PHASE 2 Remove friction PHASE 3 Use data to better allocate capital PHASE 4 Digital-first experiences ILS FinTech Evolution O P P O R T U N I T Y
  12. 12. There Are Trillions Of Dollars Up For Grabs $7 TRILLION U . S . P U B L I C F I N A N C I A L I N S T I T U T I O N S PAYPAL$136B 25 U.S. UNICORNS$81B Source: KPCB, Capital IQ, Goldman Sachs, Fidelity. Public companies include financial services from the S&P 500 including banks, capital markets, consumer finance, financial services, insurance, REITs and mortgage finance. “Unicorns” include 25 private fintech companies based in the U.S worth >$1 billion.
  13. 13. Outlier Unicorns Have Similar Characteristics $2.0bn $1.1bn As of Q1 ‘17 $1.6bn $2.7bn $1.7bn $2.7bn Source: Goldman Sachs, Pitchbook
  14. 14. And We’re Looking For The Next One 1. Distribution advantage 2. Software as a core competitive advantage 3. Operate at the infrastructure layer or positioned to own the full-stack customer relationship 4. Reasonable capital intensity
  15. 15. WHAT WOULD AN OUTLIER COMPANY LOOK LIKE?
  16. 16. What Would A $50bn+ Company Look Like Theme Incumbents Greylock Portfolio Infrastructure for financial system Visa ($371bn) Blend Own the full-stack customer relationship Wells Fargo ($205bn) Ribbon Proprietary data to make better decisions FICO ($9b) PayJoy Marketplace with liquidity to buy & sell ICE ($48b) Coinbase Creation of new asset class J.P. Morgan ($356b) 1 2 3 4 5
  17. 17. Re-consolidation in The West: The Opportunity2 Traditional Banks with Traditional Services Startups Challenge by Filling in The Gaps It’s Already Happening in The East Source: KPCB
  18. 18. High Frequency Low Frequency Deep Relationship w/ Customer Light Relationship w/ Customer Where Should You Start?2 O P P O R T U N I T Y
  19. 19. Infrastructure to exchange resources with unknown people and businesses What Is Finance? If you’re re-inventing any of these words with software, I want to meet you.

Notes de l'éditeur

  • Excited to explain fintech to one of the founders of paypal

    Data Light
    How are approach to fintech is differentiated?
    Investments that haven’t worked out?
    JM feedback
    Are we being too selective relative to our peer set?
    Any on this list that we regret passing on?
    Growth for Plaid, Opendoor?
    Belief in entrepreneur on Act 2
    Blind spots
    Financial background
    Fear of capital intensity
    Monopoly style business vs. large TAM
    Sad we passed on or missed?
    Nova credit – too hard
    Tala & Branch – large, lucrative
    Divvy – good team
    Mynd --
    Khosla & AH – bigger swings around capital intensity
    Too focused on differentiation & moat in the face of massive TAMs
    SM – too long
    Cut a lot of early section
    Characteristics we look at, companies we’re tracking
    What are the points of real engagement
    What are we wrong on?
    Capital intensive vs. not?
    Spend more time on this one
    Fintech portfolio for our top competitors, last 3 years
    Money into a few companies what are they & why? Like Coinbase
    Source Kleiner
    Send it out ahead of time
    10 seconds per slide
    2 points on each slide, 10-20 second
    Framework upfront
    To re-enforce our framework, valuation in public markets
    Conditions for over ride
    Massive market
    Consumer traction
    CAC/LTV
    Back-up primary investors
    Interesting vs. not interesting
    Of the companies we’ve looked at what are the business metrics?
    5-20M in revenue vs. 20M+
    Portfolios of competitors – companies that are working
  • Starting with a definition of finance -- People and businesses
  • Clunky POS systems, the New York Stock Exchange trading resources like the USD & stock certificates and tools like FICO and actuarial table to compensate for risk of interacting with unknown people

    Brick & mortar branches
    Clunky POS terminals
    Exchanging resources like the USD & stock certificates
    Spreadsheets to generalize risk of unknown people


    On-premise servers
    Brick & mortar distribution
    POS terminals & marketplaces & exchanges
    Resources – USD & stock certificates
    The way you solved for unknown people through credit bureaus and actuarial tables  not percise or personalized


    Known/unknown people and companies??
  • This entire world is now being re-built digitally
    With new resources like digital currencies
    Solving for unknown people with personalized Data

    Non-physical world based version of everything that preceded
    Servers in the cloud
    Phone in everyone’s pocket
    Payments with one line of code & new exchanges to buy & sell
    Expanding the definition of resources to include digital currencies and previously alternative assets
    Unknown people are becoming known through data + ML
  • So, this is clearly a problem well suited for software
  • Huge value creation across all layers of payments, especially where there’s historical high friction and fees like int’l remittances

    What does this look like by vertical

    Every aspect of payment systems are being re-built digitally

    A lot of value is being created by owning each one of these key pieces in the digital world from payments to digital currencies

    Excess fees taken by middlemen are going away

    In payments, you went from clunky POS terminals, cash and credit
    Developer tools & mobile payments for people and businesses

    Instant, 0/low fee
    Trustless systems
  • Brokers & underwriters are becoming digital

    Actuarial tables are being replaced or agumenting with sensors, drones and data from your phone to personally underwrite risk


    Brick and mortar brokers, paper binders, large underwriters with actuarial tables

    Full-stack, direct to consumer, digital w. personalized & on-demand risk.
  • Lending moving away from brick and mortar branches with paper loans to platforms like blend and affirm

    Data for underwriting is becoming more precise & accessible

    across mortgages, payday loans & POS financing, brick and mortar banks with high fees and slow processes

    Digital, instant, convenient and personalized

    Personalized data opens up a new wave of personalization and access
  • Many other categories digital player has become dominant, this hasen’t happened yet in finance
  • Opportunity across all three of these phases


    This is a timeline of where we are in the fintech evolution

    Started with aggregation websites like bankrate that served as lead-gen to traditional finance companies

    It evolved into making analog processes digital, taking out the friction with web flow vs. paper

    Moved to using data science to make better decisions

    And has evolved into unlocking opportunities that never existed before like digital currencies and alternative asset clases backed by data
  • PayPal: 115bn
    Square: $32bn
    Stripe: $20bn
    Affirm: 1.7bn
    Coinbase: 8bn
    Robinhood: 6bn
    Ant Finacial: 150bn
  • Two real outliers – ant financial which owns the customer in China and you have Stripe which owns digital infrastructure
    AvidXchange – accounts payable – b2b payments
    Symphony -- messaging
  • Many of this has informed the characteristics of what we find attractive we’ve shared before –

    Buckets 3 & 4 is where we can challenge our thinking
  • Look at our portfolio, Coinbase created a marketplace to buy & sell crypto, PayJoy data play in emerging markets and Ribbon own the customer relationship starting with a home purchase

    There are 5 categories of huge winners in this new world

    Own the full-stack customer (WeChat & Ant Financial) & add-on services

    Proprietary access to data to either deliver a better product directly or be a necessary point of reference for others
  • Breadth, depth, frequency & trust
  • Starting with a definition of finance -- People and businesses

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