Where Are the Disruptive Companies in Asset Management?

Where Are theDisruptive Companies in Asset Management?Notes from a ff Venture Capital Idea DinnerDavid Teten, Partner, ff Venture Capitalffvc.comblog: teten.com@dtetenNew York, NYinfo@teten.comAugust 15, 2011 http://www.flickr.com/photos/marieswartz/4228616284/sizes/z/in/photostream/

Two Types of Innovation Sustaining •  Improve performance of established products •  Meet demands of mainstream customers in major markets •  Vary in difficulty, cost, time, etc. •  Established firms Disruptive •  Generally underperform established products in mainstream markets •  Have new features that fringe / new customers value •  Cheaper, simpler, smaller, more convenient to use •  Entrant firms The Innovator’s Dilemma, by Clayton M. Christensen

Disruptive Technologies vs. Rational Investments •  Disruptive products are simpler and cheaper, and promise lower margins •  Disruptive technologies are first commercialized in emerging or insignificant markets •  Most profitable current customers are not interested in the product The Innovator’s Dilemma, by Clayton M. Christensen

Principles of Disruptive Innovation •  Companies depend on customers and investors for resources •  Small markets don’t solve the growth needs of large companies •  Markets that do not exist cannot be analyzed •  An organization’s capabilities define its disabilities •  Technology supply may not equal market demand The Innovator’s Dilemma, by Clayton M. Christensen

What Do Investors Value? i.e., What Jobs Does theInvestor Want Done?(Disruptive companies often emerge from startups thatfocus narrowly on one job.) •  Returns •  Investment team stability •  Relationships with other investors and investment teams •  Visibility •  Capital preservation •  Job security (of the investor) •  Tax minimization •  Social welfare •  Exposure to target sector (e.g. China, commodities) •  Networking

Macro Changes in the Global Economy Shaping the Environmentand Creating New Opportunities •  Capital shift to Asian, seeking growth –  Is the future growth already priced into the assets? •  Reduction of trust in US bond market •  Longer lifespans- greater need to increase payments from pension plans •  Transfer of wealth from baby boomers in US and Western Europe •  Tech Innovations, aka “the supercycle” –  SaaS, mobile, social media, DNA reading, big data analytics, mass customization •  Green tech •  Greater correlation between asset classes because of computer-linked trading

Examples of Asset Management Innovation (disruptive and sustaining) •  Securitization/investing in new asset classes (next slide) •  Index funds •  Credit default swaps •  Improving and centralizing the back office (Addepar) •  Crowdsourced financing (Indiegogo/Kiva/Kickstarter) •  Discount brokerages •  Principal-protected products •  Junk bonds •  Outsourcing of risk (e.g., Blackrock taking transaction risk onto its own books) •  Research industry: Expert Networks (Gerson Lehrman, Circle of Experts); web- scraping for private company analytics (Navon Partners, Privco) •  Quant hedge funds •  Private company markets •  ETFs •  Theme-specific investing (Motif Investing)

New Asset Classes in Which You Can Invest •  Domain names (Oversee.net, GoldNames) •  Human equity (e.g., equity-like student loan instruments such as MyRichUncle) •  Litigation (Law Finance) •  Patents (RPX, Intellectual Ventures) •  Receivables (ReceivablesXchange) •  Personal loans (LendingClub) •  Virtual Currencies –  In-game currency –  Facebook credits –  Frequent flyer miles –  Carbon credits

Appendix: Case Studies of Disruptive Technologies •  Personal computers vs. mainframes •  The disk drive industry •  Steel minimills •  Mechanical excavator industry •  Motorcycles •  Insulin •  Department and discount stores The Innovator’s Dilemma, by Clayton M. Christensen

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Where Are the Disruptive Companies in Asset Management?

by David Teten on Aug 29, 2011

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Where Are the Disruptive Companies in Asset Management? — Presentation Transcript