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Karl Antle
Karl Antle
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Why Venture Capital Has The Hots For Financial Services

The Finance Technology 2.0 model is based on automation and technology rather than relying on people and manual processes.

Karl Antle, ValueStream Labs
Karl Antle, ValueStream Labs

In the past few years, we have seen an explosion of venture capital investment into Financial Services (if you want to see data around dollar inflow into the sector, check out this CB Insights report).

Although there has always been investment into Financial Services at some level, the types of companies receiving funding has changed. Payment technology has always received a relatively healthy dose of VC investment and has many notable successes to point to as a result (e.g. Dwolla, Square). Now, though, we are starting to see investment into a much broader range of financial industries, including wealth management, capital markets, and insurance.

VCs have often been accused of demonstrating a herd mentality when it comes to investing in new sectors. Based on a thesis, one firm decides to invest in a sector. When one of their investments begins to gain traction, the sector slowly becomes "hot" with associates hunting for opportunities to put dollars to work. Although this herd mentality may be true, the Financial Services landscape is changing in a way that is making the industry much more VC-friendly.

For a long time, Financial Services was a human services industry: well paid individuals performing bespoke tasks and leveraging tightly held relationships to drive sales. But these sorts of people-driven businesses are notoriously difficult investments. They don’t scale, their value and clients leave with employees, and most of the revenue goes out the door just to retain employees. There’s a reason most law firms, consulting firms, and investment banks have been self-funded partnerships.

It's obvious why the payments space has always received its due attention from VC – it’s an industry based on technology, not people. Technology scales, technology can’t leave the company (unless you sell it), and technology doesn’t negotiate for a higher bonus.

Finance is undergoing an unprecedented shift, as technology stacks replace complex services traditionally performed by humans, and relationship-based business models are giving way to lower-cost electronic and web-based platforms. Payments is no longer the only sector within Financial Services catching the eye of venture capital—and we’re already seeing notable successes pop up outside of the payments world:

Lending Club is automating the previously highly manual underwriting process for personal loans, Betterment and Motif are creating self service models to allow consumers to construct their own portfolio strategy vs. relying on a financial advisor, and Estimize (a VSL company) is supplementing manual sell side research analysis with crowdsourced data (which is proving more accurate).

Below is a table that sums up the Finance 1.0 vs. Finance 2.0 business models and demonstrates how these new platforms are highly attractive to venture investment. Needless to say, these new business models are what we look for at ValueStream.

Venture Capital Finance 2.0 ModelVenture Capital Finance 2.0 Model

Have any thoughts on how the Financial Services industry has changed? Feel free to share below in the comments and reach out to us on Twitter at @FinTechNY.

Editor's Note: This article originally appeared here.

About The Author: Karl Antle is a Partner at ValueStream Labs. A highly adaptable technology enthusiast, Karl has global experience in Business Development, Corporate Finance, Strategy, and Operations specializing in technology enabled Financial Services businesses. Karl was a Principal in Oliver Wyman's Financial Services and PE/VC groups for over 7 years where he provided strategic and financial advisory for over $300MM in debt and equity transactions for major financial institutions across North America, Europe, the Middle East and Asia.

Karl Antle is a Partner at ValueStream Labs. A highly adaptable technology enthusiast, Karl has global experience in Business Development, Corporate Finance, Strategy, and Operations specializing in technology enabled Financial Services businesses. Karl was a Principal in ... View Full Bio
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Greg MacSweeney
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Greg MacSweeney,
User Rank: Apprentice
3/28/2014 | 11:34:25 AM
re: Why Venture Capital Has The Hots For Financial Services
It's very interesting to see how the VC model for new fintech startups has changed. It maps nicely with what is happening in other verticals when it comes to new technologies...everything is very automated, web based and focused on a particular "problem" that needs to be addressed.
KBurger
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KBurger,
User Rank: Author
3/18/2014 | 3:22:14 PM
re: Why Venture Capital Has The Hots For Financial Services
Good point and history (e.g., subprime mortgage crisis) certainly illustrates the flaws and risks of product-led sales efforts. Thanks for the feedback -- and the good news is that we will be migrating in a couple of months to a new commenting platform with better notifications!
KarlA144
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KarlA144,
User Rank: Author
3/17/2014 | 11:14:53 PM
re: Why Venture Capital Has The Hots For Financial Services
Hi Kathy - sorry for not responding, Disqus doesn't tell me when someone comments on WS&T. You make a very good point about customer vs. product centricity - though I think customer centricity can live within a product framework (e.g. how a good relationship manager covers a client with a broad range of products). The problems start when a firm has a product led sales effort (e.g. I am an mutual fund manager, you should buy these mutual funds because X,Y,Z) - Karl
KBurger
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KBurger,
User Rank: Author
2/26/2014 | 7:29:10 PM
re: Why Venture Capital Has The Hots For Financial Services
I have been noticing this trend for a few years & so it was interesting to read Karl's analysis. One question I have about the differences between the Finance 1.0 and 2.0 models -- selling product vs service. I can see this is the case especially around things like usage-based insurance or mobile remote deposit capture -- but isn't that potentially at odds with the ongoing efforts of financial services firms to adopt a customer-centric vs a product-centric orientation? Or maybe it's that the customer-centricity enables more insight into which products to sell.
IvySchmerken
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IvySchmerken,
User Rank: Author
2/25/2014 | 4:47:09 PM
re: Why Venture Capital Has The Hots For Financial Services
Interesting to learn why VCs are keen to invest in financial services tech companies. As you explain, those that are more automated and rely less on humans to perform complex tasks are more scalable. We are also seeing startups like Estimize, Motif and Betterment, tackle complex tasks - like earnings estimates, thematic investment and investing in diversified portfolios of stock and bond ETFs in a way that's accessible to more people and simplify the process. Beyond the economics of using cloud and scalability, they are also improving earnings data and wealth management, which is also why they are attracting venture capital.
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