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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.

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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.

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