Solubility Rules of Fintech in Venture CapitalTags: B2B, B2C, East Coast, fintech, investment style, West Coast
from wikipedia => “Solubility is the property of a solid, liquid, or gaseous chemical substance called solute to dissolve in a solid, liquid, or gaseous solvent to form a solution of the solute in the solvent. The solubility of a substance fundamentally depends on the physical and chemical properties of the solute and solvent as well as on temperature, pressure and the pH of the solution. The extent of the solubility of a substance in a specific solvent is measured as the saturation concentration, where adding more solute does not increase the concentration of the solution and begin to precipitate the excess amount of solute… Under certain conditions, the equilibrium solubility can be exceeded to give a so-called supersaturated solution, which is metastable. Metastability of crystals can also lead to apparent differences in the amount of a chemical that dissolves depending on its crystalline form or particle size.
Solubility is not to be confused with the ability to dissolve or liquefy a substance, because the solution might occur not only because of dissolution but also because of a chemical reaction…”
Now that I have refreshed your memories to the level of high school chemistry let’s address the solubility of Fintech. Whereas, I refer to Fintech as the solute, Venture Capital as the solvent and the output of the investment process being the solution. As such the question we should ask ourselves is “Is Fintech soluble in Venture Capital?”
Answering this questions leads you to answer this more pointed question “Will the exposure of Fintech to the Venture Capital world produce superior investment returns?”
The more soluble Fintech is in Venture Capital, the greater the investment returns. The VC investor shooting for a supersaturated solution or a dragon like return! No solubility means poor investment returns.
I see four vectors of solubility.
1. Fin or Tech: Should the investor be more financial services inclined or more tech inclined. Ideally one needs to approach fintech investment with the right balance. Having said that a solid understanding of financial services, market structures, regulatory burdens, specific processes and work flows will always trump a solid understanding of pure technology. The trap to avoid IMHO is to believe that technology solutions that were applied and were successful in advertising, retail wholesale, consumer goods or services can be applied with little contextual understanding of the financial services industry. Do you vote for Fin or Tech for optimal solubility?
2. West Coast or East Coast: A typically US centric vector. The European equivalent would be London or Berlin (if one uses Berlin as a proxy for West Coast due to the business model of Rocket Internet and its clones). Think of it this way, East Coast investors will be in closer proximity to financial centers than their West Coast investors. There is a greater probability that fintech East Coast investors come from the financial services industry and/or have closer ties with corporates (banks, insurance companies, broker dealers) or consultants and solutions providers that sell to corporates. Proximity to the eco-system counts. Bathing in the middle of the eco-system counts even more. Do you vote for West or East Coast, London or Berlin for optimal solubility?
3. B2C or B2B: If there is one industry where B2B opportunities dwarf B2C opportunities from an investment point of view, it has to be the financial services industry. Direct to consumer distribution channel opportunities only scratch the surface of potential innovation, market share grab, market expansion and disruption. Plus, in an environment where regulation and proper licensing is a requirement to deliver throughout the value chain, little can be achieved, even from a disruption point of view without an incumbent financial institution’s participation. Face it B2B is where the action is in fintech. Further, B2B models tend to follow linear growth paths in the beginning, mature slower and hit network effects later in their life cycles. Such properties are anathema to B2C investors who seek explosive growth soon, fast and furiously – not that I am pointing fingers at West Coast VCs here, but still, they tend to love their B2C network effects and growth models and view B2B models with a tad of impatience. Several East Coast fintech VCs I know are core B2B investors to the bone and there is a reason for that. Do you vote for B2C or B2B for optimal solubility?
4. Front end distribution or middleware and back end: This is a tough one. My gut reaction is middleware and back end is where the action is in fintech. That choice does not leave me ecstatic though. Plenty of fat and meat in front end solutions. I am not sure there is much to pick on here as each is equally appealing to me.
If I choose Fin, East Coast, B2B, London, all West Coast VCs, Techies, B2C entrepreneurs and Berliners will hate my guts. Impressive end result!
If I choose Tech, West Coast, B2C, Berlin, all East Coast VCs, Fin people, B2B entrepreneurs and Londoners will wish me hell. Equally impressive end result!
I am inclined to chose the former, gingerly, with fingers crossed, whispering against the wind to remain confidential.
First, can you think of other vectors for Fintech solubility I missed?
Second, what is your poison of choice and who do you care to piss off?