This transcript is a summary of Dovi Frances’ keynote at Group 11 August 2021 LP Event
Hi everyone. Dovi Frances here, General Partner at Group 11.
Consider this somewhat of an executive summary of many thought pieces I have released over the past few years along with our Chief Futurist Officer Roxane Googin, which by the way I invite you to read on our website or my Medium page.
Let us begin.
If you visit any dictionary of biology, you will find a clear separation between a fundamental and a realized niche. A fundamental niche is where species can live in a utopian world without competition, predators, or outside threats.
A realized niche is where the species actually live. Notably, a realized niche is often smaller than the fundamental niche.
This is how I structured my narrative for our meeting today. On the one hand, I would like to offer you our fundamental and utopian view of the future of FinTech; and on the other hand, I would like to offer you a realized / realistic guidance for the near future considering some of the emerging trends we are seeing in the market.
Fundamentally, I could not feel more strongly about the future of financial technology. I started my journey in financial services working for Deutsche Bank over 13 years ago. At that time Deutsche was a force to be reckoned with. The bank traded at an enterprise value of close to $200BN dollars. Its US Headquarters on 60 Wall Street were heavily guarded, with walls covered in expensive marble and gold. Its CEO Joseph Ackerman, was believed to be the closest thing to god. Well, second only to his clients’ fax machine, that is.
Fast forward thirteen years and, today, Deutsche Bank is trading at about 10th of its 2008 market cap; yet another signal for the looming demise of the traditional financial services sector as we know it.
It has taken almost two decades, but now all the pieces of the puzzle are starting to fall into place . The vast generational shift and wealth transfer we have been talking about since some of you first invested with us a decade ago are now evident to all. Baby boomers retire while Gen Zers and Millennials are taking over the marketplace. Affordable and connected smart-phones have penetrated rapidly and now dominate even emerging markets. Regulators have paved the way for FinTech companies to collaborate and ultimately take over established financial institutions.
Further, technology is also in a place where it’s ready to tackle the immense challenges of revolutionizing the financial services industry.
I would like to remind all of you what our underwriting “secret sauce” is all about. There are three primary criteria that are fundamental to our underwriting — First, the target company has to be cloud-based. Second — it has to use Artificial Intelligence to process vast data stores and provide intelligent service. And third — it has to have a very friendly user inter-face, also known as a slick app.
These characteristics together feed off one another to absolutely obliterate legacy players that rely, often, on manual operations or even manual problem solving.
The acceleration in digital transformation following the COVID-19 pandemic also unveiled the naked truth about those legacy service providers who are simply ill-equipped to provide an adequate service to a new generation taking over the workforce by storm.
This, however, begs the question whether we still have room to grow or have we already saturated the market with FinTech solutions?
About 20% of the global Unicorn list is comprised of FinTech and FinTech adjacent companies. This sums up to about $0.5TN in cumulative market cap.
Now, look at the established publicly traded financial services players out there and sum up their market cap. What you get is $15TN. Interestingly, over 60% of those companies are more than 50 years old. Some companies there are actually more than 100 years old.
Wells Fargo, for example, is trading today at a market cap of about $200BN. Bank of America is trading at a market cap of about $350BN. Just between these two, you will find a TOTAL cumulative market cap of ALL FinTech insurgents.
Think about it!
Wells Fargo, founded in 1852, on all of its 80K branches, 270K employees, rigid 9–5 working hours, credit processes taken from the days of Ancient Rome, awful customer service that “delights” its clients with a -2 Net Promoter Score (NPS), and Bank of America that only competes with being worse with a -24 NPS, are together worth as much as all of global FinTech.
I can keep talking about AIG, Citi, Morgan Stanley, Synchrony, and hundreds more. But, you get the idea.
Importantly, this list of vendors has generally been seen by Millennials and Generations Zers as having been complicit in the 2008 financial crisis that was so devastating to many they knew. They are actively looking for alternatives and COVID has only accelerated that trend.
We believe that we are now at a historic inflection point as we see strong drivers on both the supply side and demand side. We continue to see opportunities in payments, insurtech, wealthtech, capital market tech, online lending, real estate, compliance, regulations-related segments. We are in the midst of an all-out war and all of these incumbents are ‘dead men walking.’ In the next decade, the giants we know today will be devoured by FinTech and replaced by many of our portfolio companies.
Now, I want you think about something: established financial players have taken more than 100 years to get to $15TN in cumulative market cap. Insurgents, financial technology players, have taken a few years to get to $0.5TN in cumulative market cap.
Now, it might look to you like the delta between the two is going to take us a long time, but don’t think about things in a linear fashion, think about it in an exponential fashion. That’s how technology operates.
Over the next decade, we are going to crush financial services players. And that means that a cumulative market cap of fintech players is going to reach and then exceed the current market cap of established financial players.
Now — you remember my analogy from earlier, the biology analogy.
So what about our Realized Niche?
We have to keep an open eye on what’s happening in the markets not because we are investing in publicly traded companies that have a Beta, but rather because public market sentiment does impact the fundraising environment in the private markets, and we don’t want to be caught off guard with our portfolio companies not having sufficient capital to be able to ride out any storm.
The market, however, is getting too hot and it concerns me enough that I want us to address it today.
Let me tell you a story: A few days ago I spoke with a young VC who was touting his performance and the couple of recent unicorns he had invested in “back in the day” last year.
Following that meeting, I intended to write about how crazy it is that we now have 785 tech unicorns with a cumulative market value of $2.5TN. So much that almost all VCs, even mediocre ones, are starting to look like heroes.
I then forgot about it, and when I came to revisit the draft, in anticipation for our meeting today, I noticed that the number has grown to over 800 tech unicorns.
Isn’t it crazy?
Well, I think it is safe to assume that the valuation of roughly 40% of the companies in the unicorn list is unwarranted. It is driven mostly by investors who are making bold bets at sometimes as high as 100X ARR in companies that have yet to prove their unit economics, strength of c-suite, product-market fit, etc.
Every investor with capital can crown a company a unicorn. With over 3,000 VC funds globally and thousands of other Family Offices, Institutional Investors etc. who have varied degrees of discretion, talent, wisdom, and experience — Anyone with a pulse can essentially crown a unicorn nowadays.
Having said that, there is one fundamental and undeniable truth we should all bear in mind at these frothy times.
I will use another analogy here — Just because a few lakes, ponds, and swamps in the ecosystem are contaminated, it does not mean that the ocean is not blue.
While financial engineering in the form of pumping valuations bringing companies into the unicorn club or SPACing companies that should not be alive, let alone public, is here to stay for the foreseeable future, let us not forget that at the end of the day the guards are changing and that the brightest minds in the world are working to improve almost all financial products and processes we know today.
Credit is bound to change — We must replace the backward-looking and asset-based “pawnshop” mentality of today’s finance that favors the already rich. Instead, we should extend credit to where it is actually needed via an intelligent and forward-looking cash flow-based credit system for all.
In an intelligent credit environment, good borrowers will not need to seek (or beg) for capital but rather capital will seek borrowers based on big data that is now available to be easily extracted. Even beggars are entitled to some credit as they do have some income, don’t they? Extending credit to where it can actually be creatively applied is like applying oxygen to our economy. It also becomes a self-reinforcing cycle whereby newly successful small businesses borrow even more to grow their new operations.
Debit is also bound to change — As labor changes, so will the banking system be redefined from the ground up to offer an inherently lower cost, lower risk, and more customer-centric offering; and move from a siloed bank product type of approach to a broader customer services approach.
Insurance is bound to change.
Real Estate is bound to change.
Currency is bound to change.
Credit Scoring is bound to change.
Trading Securities is bound to change. And the list goes on and on and on. It holds within it multi-TN dollars opportunities that are for the taking.
I can sit with you and talk about it forever.
It has taken us a decade to get there, but Group 11 is positioned with the experience and the deal flow to keep seizing upon and capitalizing on the macro trends I have shared with you today.
How big can it get, you may ask?
The answer is that I truly believe that over the next decade, Group 11 can become the nation’s largest and best performing FinTech investor.
We keep as sharp an eye on fundamental trends as we do on realized trends and- as such — We will continue to invest in early stage, cutting edge FinTech companies that answer to our thesis, we will continue backing our existing portfolio companies up to the point where we no longer believe there is additional 10X to grow.
It was a great pleasure to have so many of you join us remotely, and I really hope that next year, we can all meet in person.
You can watch my video speaking about it here.