Picks for 2017, wait shouldn’t it be picks for 2025?

 

It is that time of the year when VCs are asked about what sectors are they betting on in 2017? It’s become a game of “hot or not” for the last few years. Sectors seem to change as frequent as the years if not seasons. Food tech was hot a couple of years ago, no one seems to mention it anymore. AI and chat bots are probably still hot.

Investing cycle in venture is typically 10 years. The first 2-3 years is when the investments are made, over the next 5-6 years they are nurtured and then it’s time for exit and returning the money to the limited partners. To make stellar returns the portfolio companies and the sector they address need to be attractive even at the time of exit. The VC not only has the job to catch the wave during the investment, but also must be foresighted to see if a sector will continue to be hot over the next 8 years. That is the difference between a fad and a trend. A short-term capital can ride a fad and make money, but patient capital like venture needs to catch a trend. The difference between fad and trend – Vietnamese food in India may be a fad, but healthy eating is a trend.

Founders have an even tougher choice to make. The path to fad is easy – it is the talk of the town and can attract talent and capital. The path to follow a trend is relatively tougher and needs a greater understanding between the partners building the company – founders and investors. The investors must understand the upside of a trend and continue supporting the team. The founders must believe in frugality to sustain the company for the years until the start of significant cash flows from the business.

For investors, the choice can mean better returns. A fad usually has irrational investor interest and valuation. A trend could be more attractive investment, but would require greater analysis and connecting the dots.

So, shouldn’t the question for the investors be – what is your prediction for major trends in 2025?

 

 

 

 

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Fintech: more than just hype

We in India are experiencing a shift in the way we are paying our bills, buying insurance, investing our savings and borrowing. Tech led companies are offering us better alternatives at lower cost and more convenience.

What are the macro trends that are driving these changes?

Millennials are thinking differently about financial services

A recent survey by CBInsights found that 79% of millennials in the US view their relationship with their banks as transactional and 59% think the financial products are not even targeted at them. Around 2/5 of India’s population is in the working age group of 20-35 years and like their counterparts in the US, do not relate to the traditional financial institutions and their products. These mobile first customers want convenience and personalization.

Incumbents underserving the consumers

Like in most other sectors, the Indian consumers are underserved by the existing financial service providers. Only 14% of individuals save at a financial institution, not a surprise considering that gold is still the preferred asset of investment. Even worse, only 6% of borrowed from a financial institution. We continue to be a cash economy with only 1 in 5 having a debit card.

Government pushing for financial inclusion and digital economy

The government is pushing for financial inclusion with programs like Jan Dhan Yojana, UID / Aadhar and Unified Payments Interface (UPI). A recent paper claims that with Aadhar decision making on loans would be done in 15 seconds and virtual credit cards will be issued instantaneously. Over 200M bank accounts were opened under the Jan Dhan Yojana bringing a large section of the population under the banking and digital umbrella.

Tech players are innovating

The tech players are re-imagining the role of tech from being an enabler to a disrupter in delivering financial products. With credit scores being new in India, tech enables the use of social and transactional data to evaluate credit risk for millions of new to credit customers. It has lowered the friction of making online payments through wallets and seamless payment gateways.

Where are the opportunities?

Creating new markets

As the economy becomes less reliant on cash and moves towards a digital economy, there is a lot of transactional data which can be used for assessing credit worthiness of a consumer or a business.  Companies like CapitalFloat and LendingKart use digitized credit risk processes to disburse business loans in record time. New to credit customers like people in their first job, who would have never got a traditional bank to loan them for a durable purchase, have access to personal finance from companies’ tech lenders like Finomena and Krazybee.

Virtual EMI cards, which are now a payment option on popular ecommerce sites, are pre-approved personal loans for buying from ecommerce sites. NBFCs like Bajaj finance and new age tech players like FastBanking are among the growing number of virtual EMI card providers enabling a large population to get financing for their online purchases.

Disintermediating the traditional bank

Banks have traditionally been the one stop shop for all our financial needs, but they have been very inefficient and discriminatory. Small savers never got the personal finance advice that the HNIs got. But this is changing with personal finance platforms like MoneyView and Slonkit that provide tools to everyone to set savings target and effectively manage the use of credit cards. Personal asset management companies like Scripbox and FundsIndia have democratized the portfolio management services that were earlier exclusive to HNIs. They have simple intuitive mobile apps that makes it easy for a new to investing consumer to save and track investments.

There is a huge disparity between what the savers get for their deposits and what the borrowers pay for their loans in India. This is bound to change as P2P platforms like Faircent take off. It has already taken off in western markets like the UK where over 50K people have cumulatively lent GBP 1.4B to businesses on FundingCircle.

Online brokering

Not long ago, getting a quote for insurance, loans and credit cards involved a visit to a few neighborhood bank branches. Consumers were still not guaranteed the best deal. Platforms like policybazaar, bankbazaar and deal4loans have made it possible to get a comparison and buy insurance and loans almost instantaneously.

Lowering the friction in a transaction

Payment gateways have made the process of completing an online transaction seamless. The governments push for ‘Digital India’ is proving to be a huge boon for the gateways. Wallets, with preloaded money that can be spent at participating online and offline merchants have become ubiquitous. It is not only the backbone for most ecommerce transactions today, but also provides solutions like remittances and transfers.

Conclusion

Tech companies seem to be best placed to offer financial services to the large young underserved population that is mobile first and on the internet. It is happening already with apple, google and amazon making big bets on fintech. The next set of large financial companies will be tech startups that serve this large innate demand of the new consumers.