Editors Note: Gerard is a well regarded Angel Investor and thought leader in early-stage investing in Toronto, Canada. As a result this piece not only has interesting commentary on potential trends in 2015 from the conference he attended, but it also has interesting comparisons of the U.S. vs Canadian startup scene.
Having returned from The Future of Money and Technology, a FinTech conference in San Francisco, I had some thoughts on trends as we embark on 2015 for financing and growth of start-ups. There were clearly several trends in addition to Bitcoin and other cyber currencies that emerged in the various panels. In summary those trends are dominated by a focus on big data, regulatory changes in capital formation, an increase in investment by strategic investors or mainstream companies like Citi Ventures and the evolving collaborative consumption economy and the start-ups it is spawning like Instacart of which there are 387 listed for investment on Angel List.
Public Market vs. Private Market Investments
It is not clear that the budget-conscious consumer is interested in whether they are invested in or have access to Private Market Investments. It appears that private equity investments is a domain of high net worth individuals or investors that are particularly tech-savvy to the industry of the target investment. But there is not a significant percentage of investors waiting with baited breath for equity crowd-funding to invest their next year’s savings.
What does exist besides established VC firms in Silicon Valley is a number of Hollywood-style stars with money to burn who are interested in investing in tech. These investors do little due diligence, are individuals, and generally are passive investors who often bring their star studded name to the product but not much more. I have not observed many of these type investors in Canada. However on the other hand when Silicon Valley instant messaging startup Frankly announced going public in Canada it raised more than a few eyebrows. Canada offers a fast track to a public listing that the U.S. doesn’t provide for companies of similar size and Canada has considerably less red tape than the U.S. when it comes to listing public companies.
Data: Corporations desire to understand their customers
Financial services companies are most interested in learning the behaviour of their customers and clients alike. Capturing this data in the past has been left to the institution’s internal systems and has left the company with only a partial understanding of their customer, since most people are using multiple financial institutions.
Simple online banking is passé and the future of financial services technology lay in data, trading systems, security for cyber-currencies, etc. Since financial services has been one of the earlier industries to innovate, we are now completing the last digital mile in regards to the digitization of money. Smartphones are becoming an ATM in your pocket with various payment applications such as Starbucks and more recently Canadian Tire Money (I confess to being an early adopter).
Most financial services innovation is focused on improving customer experience or data collection. Little effort is being spent in innovation on the business of the financial services firms themselves in such areas as ALM (Asset Liability Management), securitization, credit management, risk capital or regulatory capital. Many of the other opportunities for financial services innovation are in credit and risk scoring, automated underwriting systems, decentralized lending, etc.
Consumer trends of Millennials and others with regards to financial services
Currently there are 25 million Americans and 2.5 billion people globally that are underbanked according to the World Bank. There are over 100 million Americans that live paycheck to paycheck. Here lies the biggest potential target group for startups to disrupt the financial services industry.
Consumers that currently don’t have access to traditional banking services that are moving to peer to peer lending services, pay as you go cards, and other collaborative consumption products for their financial service’s needs. There is a dramatic rise in the number of these peer to peer lending systems, which at their basic level are debt-based crowd-funding sites with no collateral.
It’s these customers that use high cost financial services such as Money Mart, Pay Day Loans, and various credit cards today and are looking for ways to reduce their dependency on the high service fee and interest rates charged by the lenders. The day is not too far away when consumers will view Walmart as a network and money will be transferred from one Walmart to another in different countries.
It’s not clear how the next generation will approach their long term savings for such things as retirement, their children’s education, etc. Their buying behavior had been for the most part demand driven. Notwithstanding services such as Mint.com and WealthSimple.com are gaining traction. Relationships in financial services are intact as interpersonal relationships and trust are ultimately important to consumers as after all we are dealing with people’s money. That being said, this interpersonal relationship can and will be delivered electronically as long as trust is maintained.
The millennial is looking for ease to transact with their friends quickly when they owe one another for movie night ticket or a pizza in the same way they have one touch ease in the other services they consume. Mint.com has observed a 15 per cent decrease in spending when an app is downloaded to a smart phone and utilized while at the same time there is a measured increase in financial literacy in its customers. Transparency and information in the customers’ hands is very powerful.
It is clear to me that there is a desire on behalf of start-ups and other technology providers to simplify API’s for data and payment systems. In 2013 there was over $3 billion invested in fin technology. It appears that participants in the space see the industry as a remaining lucrative opportunity for the next remaining billion dollar companies to be founded. The evolution of fin tech is moving from payment systems to investment management.
Currently used bank technology is antiquated when compared to more modern security and payment protocols. The financial institutions that innovated in the ’70s and ’80s are now straddled with legacy systems that require modernization and the adoption of a new financial services thought-process will be the catalyst that drags current bank technology into the next generation. Many banks and financial firms are launching value investment programs for strategic purposes such as MasterCard, Citi Ventures, Capital One, etc.
Talent: Good People are Hard to Find
To live in the San Francisco area there is definitely a high cost of living with similar apartments being almost double the rent prices seen in Toronto. To survive working with a start-up in the Valley your company must be well funded. It would be very difficult to bootstrap a company in the Valley the way it is often the case here in Toronto.
There is clearly a risk taking culture in Silicon Valley. I am not sure this is a result of the concentration of large tech companies in the area or the migration of talented workers; however, the truth is probably a healthy mix of the two.