10 Thoughts as 2020 Comes to an End

In May we wrote about COVID-19 as a societal accelerant, the implications for Cloud vs. Land Jobs, Content Consumption, Digital Banking, Domestication of Supply Chains, eCommerce vs. Physical Retail, Educational Disruption, Precision Wellness, Remote Work, Telemedicine, and more.

As we turn the page into 2021 we think it’s important to ask what demand was pulled forward and cyclical vs. what demand was permanent and structural. There’s only so many Netflix, Disney+, or Peloton subscriptions a household can use, while the migration to the cloud for mission critical software such as Azure, AWS, CRWD, DDOG, NET, OKTA, TWLO, etc… doesn’t show any signs of reversion.

Through this lens we wanted to highlight 10 trends we’re paying attention to across FinTech broadly that we believe are relevant for ’21 as themes where net new demand appears structural not cyclical, alongside some broader market themes we believe are at inflection points:

· Alternative Assets / Financialization of Everything

· B2B API Enabled Infrastructure

· Crypto Crossing the Institutional Chasm

· FinTech M&A / Exits

· InsurTech

· Open Source Content Creation

· Payments

· Public Market Investing

· SPAC’s

· Vertical SaaS

Alternative Assets / Financialization of Everything

This is a trend that we’ve written about at length, most notably in our post from July entitled The Financialization of Everything.

In 2020 we saw the continued growth of what we call “Alternative Alternative Asset” marketplaces such as platforms like Rally with 120 IPO’s this year across collectible cars, memorabilia, watches + luxury good, comics + literature, and wine + whisky. On Christmas day they were able to sell out a $300,000 complete collection of the 1990’s Bulls championship rings in less than 2.5 minutes to 695 investors; something that would have taken weeks just 18 months ago. Rally has operated like a true marketplace with a handful of time sensitive M&A (e.g. Jordan cards during The Last Dance), shareholders voting down a deal only to see the price rally (e.g., Pokemon Cards), and fairly predictable investor behavior/ trading patterns around the various trading windows, showing the maturation of the platform and in turn the “asset class.”

We’re starting to see data providers come into the space such as Atlan Insights which has an Asset Table across marketplaces that totals $104M in market cap. While still small, we wouldn’t be surprised to see that number 5–10x next year as investors start to see uncorrelated return profiles, and secondary trading becomes more mainstream, while asset sales provide for the ultimate liquidity event.

In 2021 we expect to see a handful of funds prop up dedicated to the space, a la 2016–2017 for crypto, the continued build out of infrastructure around secondary trading, custody, data & analytics, authentication & provenance services, as well as content creation / story telling.

In addition to the broadly defined collectable space, there has been enhanced innovation / financialization around existing / new asset classes such as Diamonds, HELOC’s, Income Sharing Agreements (“ISA’s”), Patents, Receivable Financing, Recurring Revenue, Reward Points, and Royalties amongst others.

For each asset class there will be abilities to create software to streamline the process for both buyers & sellers, market infrastructure for secondarily trading, and enhanced distribution channels to both the institutional & retail end-markets (where appropriate). Similar to the collectables space 2021 will likely be the year you start to see new funds / financing vehicles raised in order to have direct access to this asset class.

In this area we’re most closely watching companies like Pipe for recurring revenue which we wrote about here, Edly for ISA’s, Figure for HELOC’s, Bakkt for Reward Points, and Royalty Exchange for Royalties.

Finally, in addition to the long tail of “Alternative Alternative” assets if we look at traditional alternatives such as limited partnership interests in Hedge Funds’s, Private Equity Vehicles, Venture Funds, or single asset exposure to private companies, private credit, RE, etc… 2020 was a continued year of growth for these platforms, which will have much greater interest / liquidity in 2021 given the broader macro environment.

· LP Interests- Companies like Artivest, CAIS, and iCapital initially looked to “democratize” access to alternatives largely in the form of LP interests. They created master feeder fund structures reducing minimum check sizes down from $1-$5M to $100K-$500K and distributing this product into thousands of RIA’s, with trillions of AUM. As a result of demand from their end-clients they are starting to offer a broader suite of products including single assets. We think these firms will start to be viewed as compelling distribution channels for a variety of products & they could be in prime position to be active participants in the growing secondary LP market.

· Private Company Shares- In 2004 Barry Silbert founded SecondMarket to provide liquidity for restricted securities in public companies. In 2008 they got into auction-rate securities, bankruptcy claims, LP interests, structured products, whole loans, private company stock, and ultimately Bitcoin. Prior to the FB / TWTR IPO Second Market saw peak interest / volume and this in part led to the acquisition by NASDAQ in 2015. Since that time firms like SharesPost, Forge, EquityZen have all tried to “crack the code” with Carta launching CartaX in early ’21. The concept of liquidity used to be taboo, and then there was growing acceptance for founder liquidity but what about the rest of startup employees? As there’s increased demand for access to growth companies, as cross-over funds continue to grow AuM, and as liquidity events are occurring earlier than they have in recent history, at least momentarily as a result of SPAC’s (more on that below), a properly functioning private market will need to continue to evolve.

o In 2021 we think you see the maturation of these markets that more closely emulate public markets (sans a continuous secondary trading environment); with a focus not only on founder liquidity but broader employee liquidity options.

· Real Estate- Fractional real estate platforms were among some of the first to democratize access to alternatives and get funded with companies like Cadre, CrowdStreet, and PeerStreet placing billions of dollars of both equity & debt capital. We think you start to see consolidation in this space, while also viewing the horizontal expansion into new asset classes.

As these platforms scale from hundreds of millions of dollars of annual issuance to billions, to tens of billions the maturation process around issuance, distribution, and secondary trading will continue to evolve, as will the diversity of buy side participants.

One area that’s been notably absent from this is evolution of Fixed Income investing. While there have been a number attempts at the “electronification” of the Fixed Income market we’ve seen a handful of companies like YieldX, built to democratize access to the ~$22.5T U.S. bond market. Prior to the latest round of monetary easing, Neobanks were all competing with “high interest” savings accounts as a tool for customer acquisition. In 2021 we expect to see the first handful offer a hybrid account allowing direct fixed income exposure to FinTech firms, Credit Unions, and RIA clients.

Over the next 12–18 months we expect to see one or more of these platforms offered as an investment option on other FinTech platforms such as modern age brokerage accounts (e.g., eToro or Robinhood) or digital wallets.

B2B API Enabled Infrastructure

Infrastructure takes a long time to build & commercialize, and an even longer time to build / commercialize properly (although every year those time tables have compressed somewhat). When done properly you have the ability to build mission critical businesses that can compound predictably year-over-year; look no further than FISV predictably compounding EPS 15–20% per annum, 50+ years after its founding. We wrote about this when looking at Visa’s deal for Plaid back in January, and a number of times have highlighted incumbents such as FISV, FIS, JKHY, MA, V, MSCI, SPGI, FDS, TRI, Bloomberg, ICE, NDAQ, BKI, etc… and their market share / dominance & outperformance vs. the broader market over the trailing 3 / 5 / 10 years.

Last month Charley Ma tweeted that it feels like we are in the beginning of the next wave of infrastructure to create the new FinTech stack and he highlighted a few companies as “contenders for the 2020 stack” across Banking as a Service, Issuing, Brokerage, KYC/KYB, ACH Risk, and Credit Cards.

We agree with this, and given the Visa / Plaid deal, Mastercard / Finicity deal, we’ve seen an incredibly robust funding environment for these companies, many of whom have been head down building over the past 12–36 months.

In 2021 we expect to see a handful of these companies become “household” names (in those few households that care about all of this) along the likes of Twillio, Stripe, and Plaid. We think the combination will allow for new products we haven’t envisioned yet, and allow SaaS companies to offer more robust functionality out of the box (more on that below). We also anticipate a breakthrough in “Self-Driving Money” or “Autonomous Finance” with the first B2C app going viral as a result of being able to integrate into best in class partners on the back-end. Finally given the sheer number of players funded in the “Banking as a Service” / “Middleware” space we expect to see consolidation from larger FinTech companies that want to internalize this functionality, as well as amongst the B2B players to try to add deeper expertise across a different part of the stack.

Crypto Crossing the Institutional Chasm

In the last two and a half weeks Microstrategy completed an upsized $650M convertible bond offering with the intent to buy BTC (and then purchased the BTC), Mass Mutual with its $235B general investment account purchased $100M of BTC, Ruffer Management, a $27B asset manager bought $745M of BTC or ~2.5% of their portfolio, Jefferies recommends a 5% position in BTC to long-only pension funds, Guggenheim’s CIO provided a $400K price target for BTC, OneRiver, a macro manager backed by Alan Howard bought $650M+ of BTC with the intent to get to $1.0B in 1Q, FinCen rules came out that put BTC largely at parity with cash for MSB’s / banks, and Coinbase filed a confidential S1. From 2009-present this two-week period would have been the best year for Crypto from an “institutional adoption” standpoint but it all happened in December.

During the first quarter of the year, the macro headlines relating to COVID-19 & the implications on fiscal / monetary policy took priority over any micro headlines for BTC. But in 2Q onward as we saw unprecedented levels of money printing from global CB’s & governments, a number of “micro” BTC specific catalysts took hold including the 3rd Bitcoin halving, renowned macro investors such as Paul Tudor Jones & Stanley Druckenmiller disclosing BTC positions, with other investors like Rick Rieder drawing the parallel to digital gold, record future & option volume on the CME, quant funds like Renaissance amending their ADV to include the ability to buy / sell BTC, new on-ramps with SQ’s Cash App increasing volume & PayPal launching the ability to buy / sell, Fidelity launching a number of products, and countless other HF’s begin to disclose positions, all serving as material tailwinds for BTC; many of which we wrote about back in June. Incumbent Financial Institutions such as Goldman Sachs, and BlackRock have made a series of hires dedicated to the space, which are presumably preempting product launches to allow institutional market participants to take institutional counterparty risk; beyond direct CME access.

BTC has a made a series of new ATH’s thus far in December crossing a $500B market cap for the first time. It now has sufficient enough liquidity where MSTR can make a $650M purchase over the course of a few days without materially impacting the price (which would have been unfathomable just 12 months ago). With some of the most prominent macro investors comparing BTC to Gold, and first moving funds starting to build starter positions, it feels as if BTC has crossed the institutional chasm, with CIO’s and PM’s globally having to think about where (if at all) BTC fits within the confines of an institutional portfolio. Two to three years ago there were a number of conversations about family offices & hedge fund managers owning BTC personally, but claiming it was too risky to include in a fund; in 2020 that narrative changed, likely for the good. The last time BTC hit these levels it was a retail driven frenzy, with limited institutional adoption / support, and the infrastructure wasn’t in place to support it, if the interest was there. This time the rally is being driven by very different market participants, with larger balance sheets, all the while inflation has been cut in half, and realized volatility hovers in the 50–80% range, putting it on par with a high beta tech stock.

In 2021 we expect to see a continuation of the institutional adoption with more macro Hedge Funds, Insurance companies, pensions, and Sovereign Wealth Funds, disclosing positions. The record retail volume has not gone unnoticed by incumbent brokers and we think you’ll see E*Trade, Ameritrade, and / or Fidelity, look to offer the ability to buy & sell directly, which will really finalize the “retail” on-ramps. On the institutional side we think you’ll see a handful of bulge bracket banks offer products this year helping to complete the “institutional onboarding.”

FinTech M&A / Exits

2020 was a year of FinTech M&A with Visa kicking things off in January with a $5.3B acquisition of Plaid (which the DOJ has since filed an antitrust lawsuit to block, providing us a look at some internal documents during discovery that we spoke about here).

There was a time not that long ago where FinTech skeptics pointed to a lack of exits as an indication that the space was “overhyped” or receiving too much funding; despite the fact that financial services account for ~20% of global GDP. Tough to argue with that after what was a very busy 2020 including notable deals such as:

Notable FinTech M&A Deals in 2020

· MS/ETFC- $13.0B (February)

· ICE/Ellie Mae- $11.0B (August)

· INTU/Credit Karma- $7.1B (February)

· ROP/Vertafore- $5.35B (August)

· V/Plaid- $5.3B (January)

· IPOB/Opendoor- $4.8B (September)

· Sofi/Galileo- $1.2B (April)

· FTAC/Paya Inc.- $1.2B (August)

· Empower Retirement/Personal Capital- $1.0B (June)

· MA/Finicity- $935M (June)

· AXP/Kabbage- $850M (August)

· INSU/Metromile- $842M (November)

· TP ICAP/Liquidnet- $700M (October)

· WorldRemit / Sendwave- $500M (August)

· Alliance Data / Bread- $450M (October)

· LSPD/ShopKeep — $440M (November)

· FIS/Virtus Partners- $410M (January)

· Z1P/QuadPay- $269M (June)

· Stripe/Paystack- $200M (October)

· Forge/SharesPost- $160M (May)

· ENVA/ONDK- $122M (July)

As we turn the page to 2021 we’d expect this trend to both continue and accelerate as FinTech 1.0 companies are now of the size & scale to conduct M&A themselves, while those few public companies (E.g., SQ, PYPL, SHOP) have performed nearly as well as any sub-sector in the market providing them a strong currency from which to be acquisitive. We wouldn’t be surprised to see more deals like SoFi / Galileo with B2C companies making infrastructure acquisitions to either vertically integrate or diversify their revenue streams. Some of the largest neobanks like Chime may be on the offensive to make small tuck-in acquisitions to internalize key functionality that they currently outsource, ahead of an anticipated IPO.

In 2021 we’d expect to see a number of companies go public via an IPO, SPAC, or direct listing including Affirm (which would have been a 2020 event if not for “market conditions”), Chime, Coinbase, eToro, Marqeta, N26, Oscar, Stripe, and SoFi, all of which have been rumored in the press. Stripe has been amongst the most active FinTech investors both domestically & in emerging markets, we expect that to continue in ’21 with them making a handful of tuck in acquisitions. This will cause other incumbents (e.g., PYPL / SQ) to become more active while some of the larger challengers (e.g., Chime, Robinhood, SoFi) may look to start their own corporate venture capital efforts.

Legacy FinTech firms have grown via a series of M&A over the past 50+ years, in order to have sufficient size, scale, diversity & depth of product offerings. These companies are amongst the most acquisitive of any sub-sector and we don’t expect this new generation to behave any differently.

InsurTech

In 2020 we saw the IPO of Lemonade (“LMND”), which has been incredibly well received by the public markets (defying any laws of fundamentals) up 682% from the IPO price in July, and the SPAC acquisition of Metromile from INAQ up ~50% from trust value. While the term “InsurTech” has been used over the past ~10 years it feels like this is another trend on the verge of inflection as a result of the convergence of embedded finance enabling incumbent / vendor cooperation. The ability to buy home owners insurance when obtaining a mortgage, or renters insurance while applying for a lease, or pay as you go auto insurance etc… should all become table stakes in the coming year.

We think there continues to be opportunities to augment the underwriting process through the incorporation of new data sources and the application of machine learning. While we’re starting to see companies connect to real time data sources for receivable factoring, and SMB lending, there’s still just a mid-single digit percentage of SMB insurance that has been digitally underwritten, which is a significant white space opportunity someone will capitalize on in the coming years.

As we talk about software eating the world & the digitization of everything the importance of Cyber Insurance has never been more critical. With the continued explosion of the Gig Economy / 1099 workers, and the acute pressure felt by the unemployment crisis as a result of COVID-19 the concept of health insurance being unbundled from the workplace is also gaining traction.

In 2021 we think you see more breakouts across the various categories of InsurTech & a handful of large partnerships announced between Top 10 incumbents & B2B enablers with a focus on delivery, data, and claims processing. We think you see the continued growth of parametric insurance and consolidation with the largest InsurTech companies acquiring smaller ones for either vertical or horizontal expansion purposes; as this space undergoes its own “rebundling” trend that the Neobanks have started over the past 24+ months.

Open Source Content Creation

2020 felt like the year that open source content creation came into the main stream as it pertains to FinTech and public / private investing. Firms like Cathie Wood’s Ark Invest raised $10’s of billions of dollars, while sending out daily trade reconciliations from their public ETF’s, and open sourcing company specific models & research. They provide you every tool to follow their thesis yourself without paying fees, yet people still do because of the brand they’ve been able to develop through learning in public. Brad Gerstner’s of Altimeter Capital, started to urge his analysts & PM’s to become more active in open discourse on Twitter. Hedge Fund investors like Dan Loeb & Steve Cohen actively joined discussions for the first time after being notoriously private, FinTwit bought the dip with vengeance, r/WallStreetBets became a destination institutional investors had to check for “sentiment purposes” when stocks were moving and no one knew why, platforms like StockTwits saw record high metrics across the board, institutional funds were tracking every move in Robinhood ownership data, and every day it felt as if a new Podcast / Substack was launched.

The growth in Podcasts / Substacks / Twitter engagement had implications of financial instruments themselves helping to fuel the SPAC boom, the run up in innovation names, and the creation of new vehicles such as rolling funds, and an explosion in the Solo / Founder GP model.

People like Patrick O’Shaughnessy use their platform / reach to ask open-ended questions & crowd source interesting ideas from some of the world’s foremost experts in a related topic. There are FinTwit Substack accounts with higher quality & more differentiated work than most Sell-Side analysts. These use cases were tough to picture even just 24 months ago.

When capital is a commodity (like it is today) it’s critical to differentiate based upon something else. For some private market investors there’s a long history of success which brings with it strong signaling power to the rest of the market & follow on investors (e.g., Sequoia). For some they bring large platform teams / network connectivity to accelerate business development opportunities. For those starting out, or looking to stand out, one of the best ways to get in front of aspiring entrepreneurs / founders is with original & differentiated content that offers unique insights spurring ideas, questions, and innovation; and it’s free. Content creation & distribution evens the playing field between a $5M Solo GP fund and multi-billion-dollar full life cycle investment platforms; which is part of the reason we believe you’ve seen such exponential growth in the former.

We’re in the early days of the monetization of this from the content creator side and we would expect to see that accelerate over the next year; with innovation around podcasting specifically. The newsletter / Substack started the unbundling process, but we wouldn’t be surprised if you start to see some rebundling occur across a variety of common themes to cross-sell to new audiences.

In 2021 we expect to see further innovation around content curation, discovery, monetization, and creation across audio, print, and even video formats. This will drive further innovations for public & private investors to think about how they build authenticity, their brand, trust, as well as driving new product offerings themselves.

Payments

Digital Payments are pervasive throughout Asia & becoming more so in Europe but have lagged significantly in the US. This has long been the holy grail of FinTech even before it was referred to as such (e.g., Xoom / PayPal) and for good reason as global payments revenue is expected to reach ~$3.0T in the coming years. Companies like MA / V have built some of the most impressive businesses over the past 50 years, with EBITDA margins north of 60–70% and NI margins north of 45–50% respectively; they serve effectively as a tax or royalty on global spending.

COVID-19 shut down physical bank branches, had many worried about dealing with physical cash, and accelerated the need to modernize payment infrastructure domestically & migrate towards digital payments. Firms like PYPL & SQ are making a big push into the physical world partnering with middleware companies to integrate into a variety of PoS systems while offering discounts and enhanced for the benefits of merchants / customers alike.

In 2021 we expect to see a big pickup in digital payments across Apple Pay, Google Pay, PYPL & SQ in an omnichannel fashion both in person / online, with continued innovation out of V/MA. Payments will be one of the first “embedded finance” functionalities included in the Vertical SaaS basket. We also expect to see online advertising methods used in person via enhanced targeting techniques through these natively digital wallets with rewards points / merchant discounts accessible at the PoS.

Public Market Investing

2020 has seen more retail investor interest in public markets than any time since the tech bubble with firms like Robinhood & eToro adding millions of users year-to-date. For years we have seen the market bifurcate into two camps (i) Passive / Indexing & (ii) Quant; with capital outflows from active management and retail investors. This changed in a big way this year with new brokerage accounts setting record highs, alongside, the number of trades, trading volume, and option volume across the brokerage landscape.

B2B infrastructure provider DriveWealth began publishing a quarterly “Global Retail Trends” report and in their 3Q piece noted that “3Q hit new record highs in account openings, number of trades and volume traded, outperforming market growth in the quarter.” A few notable stats from that report:

· Retail investors make up ~20% of the market’s overall daily volume

· A 22% quarterly increase in account openings was largely driven by investors under the age of 30

· Embedded finance is changing market dynamics, with over 32% of their orders being placed outside of market hours, showing retail investors are not day trading or trying to time the market.

We think the DIY investor is here to stay with Millennials & Gen Z showing a desire to be more active in their investment decisions. We believe this leads to a continuation of communities like StockTwits, FinTwit, and r/WallStreebets with more curated options such as Value Investors Club & SumZero continuing to grow. This will create opportunities for new companies across content creation & product origination / distribution. We expect to see more companies built towards this “Prosumer” investor including a more modern CNBC / Bloomberg equivalent.

SPAC’s

2020 was the year of the SPAC, as GS estimates ~$70B was raised via SPAC IPO issuance as of Dec 10th, with nearly ~1/2 of that coming after Labor Day. There is ~$60B of dry powder outstanding with unannounced deals with means there’s some ~$300B of M&A activity that needs to be completed over the next 24 months. This means 2021–2022 will be the years of SPAC M&A. This has a dramatic implication & ripple effect for mid-to-late stage venture companies that could accelerate their time to a liquidity event for founders, employees, and investors.

In 2021 we think you continue to see an acceleration of funding timelines for venture backed companies, and an acceleration of the maturation process of later stage companies, with boards pushing for them to go through the process of getting audited financials, hiring CFO’s / COO’s that would do well facing public market investors, sooner than they previously would otherwise, to be prepared in case an offer comes about over the next 12–24 months.

Just like IPO’s, and VC funding rounds there will be some good & many bad SPAC transactions, with high quality sponsors able to differentiate themselves based on structuring, alignment, and value add. Knowing that there is some ~$300B of potential M&A dry powder likely creates a lower “funding barrier” for some middling growth companies that might not otherwise have been able to attract proper growth equity previously which will have implications for the VC fund raising market.

This will have an impact on the return profile of some 2011–2016 vintage venture funds and likely see a continuation of the blurring of the lines between public & private markets, with cross over funds reaching earlier & earlier in a company’s life cycle, as well as new “full-life-cycle” investors.

Source: GS

Vertical SaaS + Embedded Finance

Vertical SaaS continues to be a focal point for enterprise investors as these “niche” end market opportunities continue to scale beyond the size previously imagined. Look no further than Thoma Bravo’s $10.2B acquisition of RealPage last week. Real Page was founded in 1998, and went public in 2010 offering a full-service property management platform inclusive of renter portals, site management, expense management, and financial analysis for building and property owners. When RealPage IPO’ed ~10 years ago they raised $135M at a ~$750M valuation, at that time you’d be hard pressed to find anyone who would have underwritten a $10B+ buyout from the top enterprise PE firm 10 years later as the market opportunity was seen as too “niche.”

We’re in the early innings of the convergence of FinTech & Vertical SaaS, which helps make these market opportunities significantly larger, which we wrote about back in August. There are a number of cross-sell opportunities across:

· Banking as a Service

· Insurance

· Lending

· Payroll / Benefits

· Payments

Given the explosion of B2B infrastructure providers (alluded to earlier) it’s never been easier for a SaaS company to embed this sort of functionality. All of this helps companies to lower CAC, increase LTV, while unlocking new verticals / TAM.

In 2021 we expect to see both new & mature Vertical SaaS companies increase their focus on embedding financial service functionality, while unicorns are created on both the infrastructure provider & client side. Just as the migration to the cloud enabled for cheaper startup costs & in turn more startups, we think the process of embedding financial services will have an equally profound effect on the growth of these end markets and capital allocated to the space.

Bottom Line

A year ago few were talking about the potential of a global pandemic (despite early signs from China), and even if they were, even less would have predicted the corresponding effects on the public and private markets. It’s likely as we sit here a year from now, the world will once again have been totally unpredictable, but this is what we’re focused on, in the narrow world of FinTech as the calendar turns towards 2021.

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