For the past few years I have been renouncing any indication of a tech bubble and instead have been spewing the notion that we are in the midst of a Financial Revolution.
But now as the stock market crumbles, the IPO market dries up, as venture capitalists grow much more selective, as valuations of tech studs like LinkedIn are being slashed in half, and with FinTech leaders like Lending Club down over 65% since its public debut, a lot of people have been asking me whether my stance has changed.
The only suitable answer is yes and, well, no.
Despite these telltale signs of a collapsing bubble, I still maintain that we are in the early stages of a global FinTech revolution – one that is completely transforming the way people invest, borrow, lend, pay for goods and services and save for retirement. Hell, it is even reinventing forms of currency and altering our perceptions about financial institutions.
In fact, this revolution is completely reshaping the hierarchy of financial services. This is a reality that not many are ready to accept or even willing to concede. However, the more technology incites democracy, the closer the established financial behemoths come to losing their reigns. Soon, not even all of the lobbyists on the planet combined will have the power to save them.
This revolution is conceiving a new generation of tech-centric financial leaders that will eventually overtake many of today’s recognized financial institutions. Perhaps Google and/or Facebook will become the predominant financial services providers of the future. Or maybe a completely new FinTech star will appear out of nowhere and assume that leadership role. Time will soon tell.
As it turns out, technology companies are much more proficient at performing financial services. They are better at recommending securities. They are more effective at predicting credit defaults and ensuring timely loan payments. Furthermore, unlike the Wall Street establishment and brick and mortar banks, FinTech companies have not lost the respect and trust of the populace – especially the millennials. And, because the wealth is rapidly being transferred from baby boomers to millennials, financial services providers will not be able to survive without this younger demographic.
Additionally, as more and more businesses are capitalized through crowdfinance, dominant investment banks like Goldman Sachs will eventually lose their ability to dictate which company gets to be the next hot IPO. And as online lending continues to proliferate, traditional banking institutions like Citi won’t be able to control who receives loans and who doesn’t. In a new world order these aging titans will not have much influence – especially over our personal finances. Regardless of how much cash they have on their balance sheets, they won’t be able to buy themselves a different destiny or halt evolution.
I’ve had Wall Street veterans tell me that I am out of my mind and that the financial hierarchy will never change (I note that not one of these Wall Street veterans had used a payphone in over a decade or were commuting to work on a horse and buggy). Everything changes. In fact, change is the only thing in life that is guaranteed. However, it is not so easy to recognize disruption when it is occurring in your own industry. Record producers never foresaw the tremendous impact that file sharing would have on the music industry. Journalists never expected that internet bloggers could help drive print goliaths into bankruptcy. IBM never predicted that a little software company called Microsoft would one day eclipse it in market capitalization. Likewise, most financial services providers won’t acknowledge a financial revolution until it is too late.
But now for the $64 billion (inflation) dollar question: is it even possible for a bubble to burst within a revolution of this magnitude?
Why, yes. Yes, it can. And that is precisely what I believe is occurring at this incredible moment in time.
Despite the exits being locked, there is still a tremendous amount of money in search of innovation. Capital will find visionaries and fund new ideas. Investors will also continue to finance substantive businesses like those companies now being referred to as cockroaches. Biz Carson, an influential tech reporter at Business Insider, recently wrote a must-read article describing the venture capitalist’s transition from unicorns to cockroaches (see: ‘The Great Reset’: Venture capitalists and startups have shifted from greed to fear).
Unfortunately for some businesses (although fortunately for many of us investors), the bubble has burst for those tech businesses that are supported by hype rather than substance. Because of current market conditions, capital has simply dried up for these neverending story plays. Investors are no longer interested in hearing any more of their tales of eventual grandeur. They want to see revenues and solid costumer growth. As one investor so eloquently phrased it in Carson’s recent BI article, “If you haven’t built a real company, you’re dead.”
Allow me to sum it all up. Yes, there is a progressing and formidable FinTech revolution. Concurrently, a bubble had indeed brewed for those companies that thought they could merely capitalize on a hot FinTech trend without building sustainable business models. And, yes, that bubble is now bursting. In its wake, it is decimating those hyped FinTech companies that have failed to monetize its products, generate revenue or secure enough capital during the “FinTech frenzy window”. On the other hand, because the revolution remains underway, capital will still find its way to thriving FinTech companies and to a select niche of newly launched startups that are either breaking new ground in the FinTech space or are simply building a better mousetrap.
If you think about it, there really is no better environment for investors than the one that immediately follows a ruptured bubble during the course of a revolution. This is the time when the marketplace can most effectively expunge the garbage while clearing the way for the survivors to expand and for fresh innovations to blossom. I only wish we could have these market conditions all of the time.