October 6, 2020
PUBLISHED BY Wildcat Venture Partners
Invention and innovation have a powerful grip on our collective imagination, and in venture capital there is a front-row seat to the exciting ideas and companies looking to solve massive unsolved problems.
This view into what’s next, what the future could bring and where the real value and opportunities lie is what we’re covering in today’s episode.
An area where Wildcat sees that trapped value is in the financial services space, which Bryan Stolle, General Partner at Wildcat, defines as “anything to do with money. And anything around money. So credit payments, the flow of money, you know, money in, money at rest, money out, investing in everything in and around money.”
Trends, Transformations and Aligning to True Customer Needs
Innovation in this space has traditionally been hindered due to the regulatory conditions particularly for large financial institutions.
Over time, banks have also lost that human connection with their customers and are now managing this relationship through various risk-management assessments like FICO scores that don’t accurately reflect a customer’s financial wherewithal.
As a result, customers are viewed as a number. Further, banks are focused on improving this existing approach, instead of completely rethinking the experience to fit their customer needs. This mindset is a difficult one to change.
The real opportunity is to be able to understand the customer in a way that wasn’t possible before, which is one of the real promises of technologies such as artificial intelligence and machine learning. And one such example is Kabbage, where they transformed small business lending from underwriting the business owner to underwriting the creditworthiness of the actual business. Their goal of truly understanding their customer, and learning how to best serve them, led to that critical insight that an owner’s poor personal credit score does not reflect the performance of their business. In fact, the business could be doing well because of all the investment the owner has made.
Wildcat looks for opportunities where technology allows you to do something the right way that wasn’t possible before the technology existed. And they can see that occurring where intermediaries exist, as Bill indicated in Episode 2. It’s these historical anomalies in which primary stakeholders lose and intermediaries win because of that structure that make it ripe for disruption.
FinTech commonly has these intermediaries or agent models where technology can take the complexity out, restructure the dynamics and substantially reduce transaction costs by eliminating unnecessary roles or arcane processes. That’s the trapped value opportunity and it’s already seen with companies like E-trade and now Robinhood.
InsurTech is a specific area that Wildcat invests in as the myriad of layers – the carriers, agents, brokers, and sub-brokers – make it ripe for disruption. Insurance has been expensive because everyone in this chain gets their cut. Historically there hasn’t been an efficient or effective operation for information flow and risk assessments to align to the right type of coverage.
In addition to Insurtech, another trend Bryan sees is the increasing role of blockchain as it relates to financial transactions such as validation, security and fraud prevention.
COVID – Accelerating Existing Behavioral Changes Online
COVID has inevitably altered the way people shop, buy, and ultimately pay, all of which has had an impact on the financial services space.
It’s been an accelerant, as Bryan likes to call it, on a number of different businesses and technologies, particularly on the e-commerce side which in turn has had an downstream effect on consumer behaviors. And with these digital payment behaviors likely to stay, there is a growing need for account verification and fraud management. This gives way to opportunities such as secure payments, account security and the optimization of how people shop through supply-chain and logistics transformations.
Staying Connected to Trapped Value Opportunities
Having a defined thesis around Fintech enables Wildcat to create that focus and discipline when it comes to identifying and then connecting to the right opportunities that will deliver traction. This ability to clearly convey where they are ‘drilling’, and what they are looking for, subsequently enables their network to be effective connectors based on their investment strategy.
This, coupled with their own research, analysis and ongoing learnings with the companies they are involved in, paints a multi-dimensional yet thorough picture of where market disruption and category creation can occur.
Bryan reminds us that in venture, investing in areas that are hot can be a riskier game, contrary to what many believe. So sticking with the specific thesis areas in which they have a deep expertise means they are best equipped to reach their goal of creating companies with long term sustainable value.
Traction and Trapped Value is produced by Flywheel Associates