Fintech Finance – This party is not like 1999 Jonathan Bentley At InvestCloud, our primary focus is developing compelling functional applets for our financial cloud platform. However, we remain cognizant of updates within the realm of investing as well as the dynamic world of start-up and early stage funding. Our continued interest in this area allows us to follow the signals on the appetite for innovation and the prospects for future economic growth so that we can accommodate the needs of our clients, investment managers and advisors. Due to recent accelerating activity in this space, along with higher valuations, additional funding and the growing number of unicorns, many have begun to compare the start-up landscape to the tech bubble of 1998-2000. Selling Eyeballs The tech bubble of 1998-2000 proved how fantastically inflated valuations can become, and history may drive concern on the start-up landscape today. However, revenue and earnings evaluations are a significant difference between these two periods. “Counting eyeballs” is a term coined by advertisers to determine how many people will see an ad in a given location. A large portion of the money raised during the tech bubble was driven by the potential to sell eyeballs. Companies saw their valuations increase, not only pre-profit, but also pre-revenue. Taking a closer look, this is no longer the case today. Andreessen Horowitz, one of the leading technology venture investors in the United States, recently released a presentation evaluating the technology space today. In today’s space, we are seeing profits driving returns. Consumers are spending increasing amounts of time online, and more importantly, they are spending more money online. The industry has evolved from selling eyeballs to relying on true cash flow, profits and revenue. We Have Built it and They Have Come. In 1999, global Internet users were just under 400 million. By 2014 that number had grown 7 times more, amounting to over 3 billion. Over that time, not only has the number of users grown dramatically, the share of wallet claimed by e-commerce has grown as well. At $12 billion, e-commerce spending in 1999 amounted to $30 in annual spending per user. By 2014, spending had risen 25 times to $304 billion, and per user spending has more than tripled to just over $100 per user. In short, the market is now real, not just a promise, and with e-commerce still only 6% of US retail revenue, the room for further growth is enormous. Valuation Mitigation The market is undoubtedly growing, but it does not preclude the overvaluing of companies. Today’s numbers are conservative compared to 1999. In terms of the aggregate numbers, tech funding last year at $48 billion was only two thirds of the $71 billion invested in 1999. Divide those figures by the number of Internet users in each respective period and you have a per user investment of $177 in 1999, dropping to just $16 per user in 2014. Another window into this same question is funding as a percent of tech GDP. At 10.8% in 1999, it was 4 times the 2014 figure of 2.6%. In terms of valuation, adjusted for inflation, the S&P IT index in 1999 was selling at 39 times forward PE, and in 2014 it was selling at 16
times, less than half the number during the bubble. This is comparable to the more normative tech valuations in the early 1990’s, before the Internet boom began. Lastly, the IPO market trends have caused many to claim inflation in the space. Although 2015 is off to a brisk pace, the 53 tech IPOs in 2014 was just 15% of the 371 tech companies that went public in 1999. Also instructive is the age of these companies. In 1999, 50% of funding went to companies less than 2 years old. Today, 80% of funding is going to companies greater than 3 years old. Having an interesting model is no longer adequate. Successful companies must have proven revenue, as well. Future-proofing Your Firm The progress of financial technology shows how important it is for firms to be prepared for ongoing change. With the emergence of the cloud delivery model and the scope of integrated data, applications and processes will open up some very disruptive opportunities for firms that are forward thinking. The Robo-advisor, for example, can be considered a friend or foe. At InvestCloud, we believe the future is only a problem if it is ignored. Instead, logic and processes that drive these platforms can offer efficient extensions to advice delivery. Most importantly, firms must find the right partner to help develop this hybrid approach. It is important to choose a technology partner that is built for evolution and adaptation. Only with a true cloud vendor, such as InvestCloud, where a multi-tenanted architecture allows for maintenance on a weekly platform wide upgrade cycle, will organizations be able to practically keep pace with the rate of technological change, pushing forward into the digital revolution the industry is now experiencing. If you would like to review the slides from the Andreessen Horowitz presentation you can find it at the following link. If you would like more information on InvestCloud and how we can help “future-proof” you business, contact us at 888-800-0188 or visit us at www.investcloud.com Jonathan Bentley leads InvestCloud’s content development and management division. From helping advisors better craft and deliver their stories to curating customized advisor RSS site feeds, Jonathan’s team is critical to InvestCloud’s bespoke design and site management services. Jonathan was previously founder and CEO of LightPort Inc., which merged, with InvestCloud in 2013. Previously a practicing RIA, Jonathan was involved in developing web portals for more than 500 advisors and money managers while working at LightPort. data warehousing 3.0 data warehouse 3.0 data warehouse client portals client communications financial client portals