On August 1st, I joined Core Innovation Capital as a General Partner following six years as a technology operator and 25 years as an investor and investment banker. What drew me into finance and technology and ultimately led me to Core is a fascination with the capacity of businesses and technology to have a massive scale impact on people’s lives. Along those lines, the below quote from David Packard has long served as an inspiration.
“I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile, they make a contribution to society”
It is great to be reunited with old friends and collaborators as a new member of the Core team. I first met my Partners Arjan Schütte and Susan Ehrlich as well as Core Advisor Jennifer Tescher when Arjan was raising the debut Core investment fund almost 15 years ago. While with Omidyar Network, I served as an anchor investor for that fund.
Since joining Core I have had a chance to re-engage in the “fintech for good” community after an extended hiatus. In doing so, I wanted to share my initial reflections on how the current environment compares with my earlier experience in the field from my time with Omidyar Network and Omidyar Technology Ventures.
Financial health: The song remains the same… though the drumbeat grows louder
15 years ago, in 2008, I began digging into the data on the financial profiles of low, moderate income and middle income households and small businesses. The data was illuminating… and alarming. My reaction was akin to that of actor Roy Schieder in the movie Jaws when his character, stunned by seeing the monstrous shark for the first time, says to Quint: “You’re going to need a bigger boat.”
Today, more than half of Americans live paycheck to paycheck, 401k withdrawals surged during Covid (and not for retirement purposes), and small businesses continue to struggle to access credit. These are only a few indicators that for many financial stability is under pressure and financial access remains constrained. Seeing the updated data versus 15 years ago, the trendline is disheartening. The metrics are stagnant at best. In certain cases they are worse having been impacted by the dual stresses of the Great Recession and Covid.
Moreover, financial health problems loom even larger today than they did 15 years ago as many more Americans now live outside of W-2 employment (and as 1099 workers must manage their own healthcare and retirement savings), interest rates are at 20 year highs, home affordability is at 20 year lows, and we now have millions more people either in retirement or soon approaching retirement who have insufficient savings.
The financial health problem is so massive that no doubt we will need a bigger boat to tackle the problem. This problem is also a huge startup opportunity. It means that entrepreneurs building businesses that foster stronger individual and family financial profiles should experience solid demand for their services.
AI is a game changer
AI may hold the keys to addressing what have been some of the more difficult to address challenges to financial health. For example, one of the pinnacles of financial empowerment is financial management, in other words financial planning, budgeting, and orchestration of one’s cash inflows, outflows, and financing and savings needs. 15 years ago, developing a mass market solution for financial management that could be delivered at a reasonable cost was a tough nut to crack. The reason? Because we all live complex and varied lives it proved challenging to provide appropriately tailored and easy to use solutions without relying on meaningful human intervention, and this translated into a high cost.
Today, AI offers the promise of eliminating this trade-off of cost versus customization. With AI it may be possible to deliver radical personalization of financial management on an automated basis. Using AI it may be possible to provide to anyone at a low cost the equivalent of a “household CFO” on their phone and in their pocket.
Financial management is only one example of where AI might prove a game changer within financial services. Solutions leveraging AI will eventually enable us to offload a broad range of nuisance responsibilities and planning obligations and position us for making smarter and more informed decisions across our finances, healthcare, and life planning in general.
In addition to powering a next generation of customer-facing financial services applications, AI will become pervasive in the operations of a new class of startups allowing these companies to grow with lower financial and human capital intensity. AI will prompt a reconsideration of the amount of talent required within every business function: Engineering, Marketing, Finance… All will apply AI powered technologies to automate tasks, develop data-informed insights, and take automated action on these insights. In doing so, AI will produce operational efficiencies that are 10x what we imagine possible today thereby lowering barriers for building startups much as did Amazon Web Services more than 15 years ago. As a result the pace of tech startup formation and scaling will continue to accelerate.
Regulatory guardrails that balance risk and reward are essential for allowing innovation to flourish
Emerging technologies like AI tend to have a bright side and a shadow side. That’s just the way it is. For that reason it can be a challenge to determine the appropriate regulatory regime for solutions that emerge at the intersection of financial services and technology. One approach is to put in place less stringent governance structures at inception to afford ample room for innovation to incubate, take root and flourish while at the same time bounding downside risks within reasonable ranges of tolerance. As once emerging solutions eventually mature the regulatory regime can be tuned and tightened.
Such a flexible and balanced approach to regulation is not a new concept. Approximately 15 years ago, the enlightened regulators in Kenya and the Philippines instituted this model to position groundbreaking e-money companies, such as Kenya’s M-Pesa and the Philippines’ GCash, for success (and to ensure that these solutions would not be overly constrained so as to die on the vine). Ten years ago, learning from interviews with the Kenyan and Philippine financial services regulators responsible for oversight of these platforms, my then colleague Pearl Chan and I wrote about what we termed a “lean” approach to regulation (alluding to the then popular book, The Lean Startup). You can find here the resulting blog that Pearl and I published in Forbes.com 10 years ago.
With the rise of AI and crypto we are again encountering important questions about the appropriate bounds of regulatory oversight for emerging solutions at the intersection of finance and technology (and in some cases there are even questions about which governmental entity ought to be the primary regulatory body). Much is at stake in terms of how these questions are resolved. In developing a framework for regulatory oversight, it is important we achieve a thoughtful balance between protecting consumers and making room for the private sector to do what it does best: innovate to develop and distribute new and improved goods and services. Given this context, I believe that the consideration of a “lean” approach to regulation may be even more relevant today than it was 15 years ago.
Broad based “ownership” in the economy has declined. Solutions that support new opportunities for ownership are as important now as ever
For the past 15 years, along with the rise of the sharing economy, many celebrated the flexibility and lower capital intensity of renting. Leasing a car, renting a home, forgoing owning a vehicle to rely on rideshares. While being a renter has its advantages, owning has its benefits as well. Owning can offer more predictable expenses, greater control over one’s destiny, and the psychological boost that accompanies having a stake in the game… and folks who have a stake in the game feel more empowered and engaged and they are more likely to be community-minded citizens.
Unfortunately it seems like the opportunity to own things like a home or a car is becoming more remote. Interest rates are at 20 year highs, home affordability at 20 year lows. Inflation in the most critical household purchases, food, fuel, education… well it has gone through the roof and meaningfully outstripped wage growth.
I’m excited about companies like Afford and Arrived that Core is backing. These companies are helping to reduce the friction for ownership. Afford makes it easy for people to access down payment support under existing home loan programs (because when it’s difficult, fewer people access the programs). Arrived allows folks with as little as $100 investment to become fractional owners in real estate properties.
That said, models that increase broad-based ownership in the economy can be viewed in a larger sense. For example there are relatively new types of corporate entities, such as Public Benefit Corporations (“PBCs”), that enable boards of directors to take into account a much broader set of considerations (and constituencies) in making corporate decisions, rather than focusing on shareholder interests alone. 10 years ago the PBC idea was fledgling and a curiosity; today 30 states authorize benefit corporations and the number of PBCs in the U.S. exceeds 3,000. Beyond PBCs there are other new and exciting ideas and frameworks for enabling broader participation in the benefits of ownership. More to come on that in a future blog…
Looking forward…
Reflecting on today versus 15 years ago I recall the Mark Twain quote, “history never repeats itself but it does often rhyme”. I see many parallels between the financial health challenges across the two periods. While many of the problems today appear even more daunting than they did back then, the technologies and resources at the disposal of entrepreneurs have never been greater or more robust. So much so that I believe we are on the leading edge of a new fintech revolution; and this revolution will find ways to address even some of the most difficult and thorniest financial problems.
It is a privilege to work in venture and to have a front row seat to the show for the next generation of fintech solutions that will build upon AI, crypto, open banking and more. I am looking forward to partnering with founders and making bold bets on new businesses in these areas.
As an investor-partner, my interest is not in being a passive passenger, along for the ride as if I were coasting in a motorcycle sidecar. Rather I think about being the stoker on a tandem bicycle. No doubt the entrepreneurs are the primary actuators and always will be in the driver’s seat. That said, I am eager to find ways to turn the crank a few times in support of these incredible people as they work their magic and conjure up new ventures that hold the promise of delivering both positive impact and financial returns on a massive scale.
Onward!
