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Reinventing Financial Services
European Straits #121
I’m just back from China. It was a long trip! Thus I’ll share what I learned in a longer piece to be published in the coming weeks. In the meantime, you can still have a look at the reading list I shared in last week’s issue. Here it is: .
Another thing: The video where I speak about my book Hedge as part of the Talks at Google series is now online. You can view it here: HEDGE | Talks at Google. If you like it, share it 🤗!
The future of financial services
When it comes to financial markets and technology, last week was marked by two resounding events.
The first was Uber going public. Like other tech IPOs in the past years, it came with a lot of controversies that are typical of the clash between entrepreneurial tech companies and the stock market. The former need leeway over the long term to be able to compete in an economy that rewards endless risk-taking and constant innovation. But the stock market imposes a pressure that forces weak executives to embrace a quarter-to-quarter style of leadership and ultimately makes their company less competitive.
This contradiction is what triggered the other event: the Long-Term Stock Exchange, an ambitious project led by The Lean Startup author Eric Ries and backed by Andreessen Horowitz, has obtained the green light from financial regulators and could soon become Silicon Valley’s favorite stock exchange. Its purpose is to generate liquidity for early investors without having to switch to an anti-entrepreneurial, shorter-term approach to business. Maybe Uber should have waited for the LTSE to be up and running?
Of course, it all goes well beyond Uber. What’s interesting here is that we’re witnessing an acceleration in upgrading the financial services industry for a more entrepreneurial economy. Even apart from the LTSE moving forward, there have been more and more signs that this is indeed happening.
The most resounding was the announcement by Andreessen Horowitz (a16z) that they’ll renounce the regulatory exemptions they have long enjoyed as a venture capital firm to become a so-called registered investment advisor. From now on, the firm will be more constrained in its proceedings and communications with the public; there is now very little a16z-produced content without a formal disclaimer—incl. tweetstorms! But it will also have more room to deploy capital in deals that are capped or forbidden for traditional VC firms, like investing in crypto-assets or buying shares of a public company.
The same Andreessen Horowitz also launched a new fund “aimed at great new companies that are just hitting escape velocity, and that may need a more venture-like mindset to support their further company building and scaling”. The underlying thesis (labeled “late-stage venture”) is simple: Tech companies need to remain entrepreneurial (that is, agile and innovative) for a longer time during the growth phase. And so the old idea that there’s a time for radical innovation and then there’s a time for growth is now somewhat outdated. Even late-stage firms need to be backed by entrepreneur-friendly investors now. And that’s because entrepreneurship has become the preferred competitive advantage in today’s world.
Meanwhile, some venture capitalists have been exploring diversification in terms of asset classes. The highest profile in that field has been Chamath Palihapitiya’s Social Capital. The firm went through significant turmoil recently, with the departure of several partners and a transformation into a holding company that invests from its own balance sheet. But Palihapitiya remains focused on his goal, namely growing a portfolio that is diversified across asset classes, from venture capital to a hedge fund to a publicly traded shell company that will use the money it raised to acquire a privately held tech company, thereby taking the target company public. It will be interesting to see how this all evolves in the future.
Another interesting development is the rise of VC-inspired products for less scalable businesses. The trend has been inspired by Mark Jacobsen, Tim O’Reilly and Bryce Roberts’s Indie.vc, “a new investment category designed to support founders with a focus on customers, revenue and profitability”. Here’s what I wrote on that topic a few weeks ago: .
At the other extreme is the development of mega-funds like SoftBank’s Vision Fund (a $100B fund) and Sequoia Capital China (which currently has billions under management). When they launched, those projects were met with a dose of skepticism, as many venture capitalists prefer to see their business as a craft best done at a small scale and close proximity. But the rise of mega-funds now looks like a predictable development in a world eaten by software. Tech companies are becoming mainstream, dominating large markets in industries that are both more tangible and more regulated. It’s no wonder why bold investors have spotted the opportunity to deploy vast amounts and capital.
By the way, institutional investors hungry for returns have observed all these trends from afar for quite some time. As a result, they have grown impatient and are now seeking to bypass feeble and conservative asset managers and deploy capital in innovative ways in the rising asset class that are tech companies. I wrote an issue of this newsletter on the topic: .
Investment strategies, too, are going through a radical upgrade, with prominent investors learning to understand what makes the digital economy so different—and realizing that it radically displaces value creation. Here’s what I wrote on the topic a few weeks ago: .
Finally, there’s the designing of banking products to fit the needs of tech companies. Silicon Valley Bank has been a leader in that field, and I can’t wait to see more banks focusing on the specific needs of tech companies. At some point all businesses will be tech companies, and the way banks (or tech giants, or private equity firms) provide them with support and capital will radically change as a result.
This long-term trend of investment banks of the future growing out of today’s venture capital firms is all related to the shift to an economy driven by increasing returns to scale. As once written by W. Brian Arthur, “Modern economies have become divided into two interrelated, intertwined parts—two worlds of business—corresponding to two types of returns [diminishing returns and increasing returns to scale]. The two worlds have different economics. They differ in behavior, style, and culture. They call for different management techniques, different strategies, different codes of government regulation. They call for different understandings”. Thus we shouldn’t be surprised that the unprecedented importance of increasing returns to scale also calls for a different way of providing capital to businesses.
By the way, this isn’t the first time business finance has had to be reinvented to account for a different approach to production, consumption, and growing successful companies. As I’ve written many times, we have to remember that about a century ago someone somehow invented the discounted cash flow method to value businesses that didn’t have valuable tangible assets on their balance sheets. Here’s what Charles D. Ellis wrote about it in The Partnership, a book about the history of Goldman Sachs:
“Henry Goldman showed his creativity in finance: he developed the pathbreaking concept that mercantile companies, such as wholesalers and retailers—having meager assets to serve as collateral for mortgage loans, the traditional foundation for any public financing of corporations—deserved and could obtain a market value for their business franchise with consumers: their earning power.”
Is there a Henry Goldman for the Entrepreneurial Age? Maybe it’s Marc Andreessen, Chamath Palihapitiya, Bryan Roberts, or Masayoshi Son! (To be continued.)
💰 My colleague Pietro Invernizzi has been talking with startup founders to get the story behind how they raised their Series A round, with Tessian as the first featured company. It's all part of the education underlying The Family AAA, helping founders to raise a great Series A with top investors: How they raised Series A: Tessian.
💪 A startup isn’t just a side project or a new company; it’s a mission aimed at finding a scalable, repeatable, and profitable business model with product-market fit (with thanks to Steve Blank and Marc Andreessen). My cofounder Oussama Ammar wrote about what that means for young entrepreneurs and how that affects your mindset during the first few months of your startup’s existence. What should you do during your startup’s first 100 days.
🗺️ Constellations brings together an intimate gathering of corporate players, consultants and startup experts from The Family, our global network, and our startup portfolio. If you're interested in strategic evolutions within a particular industry and want to best position yourself on the market, reach out to my colleague Maxime Blondel for tickets for you and/or your employees. (It’s in 🇫🇷 and in Paris.)
👩 A few months ago, we launched Goldup, a 5-week program dedicated to helping women start their own online businesses. The first session was held in Berlin, and it went so well that now we're spreading it across Europe! My cofounder Alice Zagury opens things up for a session in Paris here: Goldup Paris Is On.
📘And finally, our self-publishing arm, The Family Stories, has a new book coming out: Oussama’s Anyone Can Become an Entrepreneur. It’s a fun, inspiring read on the ambition and mindset that startup entrepreneurs need to take on as they launch their companies. And with original illustrations from our swag team, it’s a great gift for anyone interested in what it really looks like behind the curtains of the startup world! Preorders are open right here.
Here’s a selection of articles about reinventing financial services for the Entrepreneurial Age:
The IPO is dying. Marc Andreessen explains why (Timothy B. Lee, Vox, June 2014)
Do Banks Still Have a Future? (Laetitia Vitaud and me, The Family Papers, 2015)
Silicon Valley’s Hometown Bank Booms, But Risks Are on Horizon (Susan Pulliam, Telis Demos and Douglas MacMillan, The Wall Street Journal, December 2015)
Silicon Valley's Audacious Plan to Create a New Stock Exchange (Ellen Huet and Brad Stone, Bloomberg, June 2016)
The New Berkshire Hathaway You Haven’t Noticed (Yet) (Oussama Ammar and me, The Family Papers, July 2016)
11 Notes on Goldman Sachs (me, The Family Papers, 2017)
SoftBank Looks to Invade Wall Street’s Turf (Landon Thomas Jr., The New York Times, March 2018)
How the biggest private equity firms became the new banks (Mark Vandevelde, The Financial Times, September 2018)
An Evolve-or-Die Moment for the World's Great Investors (Adam Seessel, Fortune, November 2018)
Andreessen Horowitz isn’t alone in leaving behind VC as we know it—and more company is coming (Connie Loizos, TechCrunch, April 2019)
Warm regards (from Paris, France),