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Quantum leaps

Part 5: Doing it waaaaaaaaaay better

"When funding new products, a good rule of thumb is that the new product must be at least 10 times better than the old way of doing the same thing or customers will stay with what they have.”

I suspect Mr Horowitz has learnt the hard way. Anybody who has launched, or invested in, a genuinely great product that is better than anything out there yet fails to be adopted by the masses will know painfully well that the hardest thing is to try and change human behaviour. 

Any behavioural economist will be able to give you the reason: status quo bias. It has served humans well to stick to what they know rather than risk change, so we have evolved this way. A product might be better but it has to be waaaaaaaay better if someone is going to ditch their current alternative. Think about leaving Facebook and joing a new alternative - you’d need to spend a lot of time setting it up, inviting friends, etc and you don’t know if it’s going to be much better - and it certainly won’t be unless your friends are on it anyway. The opportunity costs are high.

Banks know this, and they leverage it. 

This gets on our tits. We know that yet we still put up with it. Everybody gets screwed over by their bank on a micro level and on a macro level. They cause a global crisis, we bail them out and they’re still up to their old tricks - yet we stay with them. 

Status quo bias is strong.

But technology can completely change things. Not improve what currently exists but replace it with something completely different: the Google ethos of 10x better, not 10% better.

I think this is why venture capitalists are so excited about blockchain - it has the potential to completely revolutionise the current way of doing things. To completely smash the status quo.

Horse  -->  Car

Bowl  -->  Washing machine

Pigeon  -->  Phone

Phone  -->  Smartphone

OK, so those were fairly silly examples but you get my point. Technology changes our lives. The economic value is that it makes our life easier, saving us time and money, and in doing so it makes the world more efficient - thereby freeing up our time and money to be redirected at other things. 

Technology works when the opportunity cost is worth it.

With this in mind let’s think about what’s going on out there.

This came from my previous post (or for a fuller list see this). These companies are adding value to the customer in some way, for example: 

Reducing costs: FX, brokers

Better rates: Savings, P2P

Personalised: Wealth management

Access: Crowdfunding

Information: Analytics

Communication: Blockchain

But the thing is there hasn’t been that many really big investments in fintech despite the hype. Why might that be?

Well, let’s think why you would invest venture capital - to make a whopping great return. And really you’re only going to get that return if your investment IPO’s or is bought. For the latter, the exisiting players are the buyers so you have to have something they want. These guys aren’t afraid to spend money, but they’re not going to buy something that doesn’t fit with them and if you look at the fintech businesses out there the trend is for bypassing the banks and serving direct to customers. That makes it harder to make a strategic investment. Also, we are only really seeing the first proper wave of activity and we know the buyers don’t like to move quickly, but rather wait and pay a premium.

So that leaves the IPO. To get to the IPO stage takes time, and when you’re consumer-facing means you’ve got to be doing something very well. You’ve got to be game-changing, and that’s not always as obvious as it might sound.

If you clicked on the link to Ben Horowitz’s note on Transferwise you would have read the full quote:

"When funding new products, a good rule of thumb is that the new product must be at least 10 times better than the old way of doing the same thing or customers will stay with what they have. It’s an easy concept to understand, but sometimes a difficult one to quantify. Not so with TransferWise: A typical FX transaction costs a consumer 5% and TransferWise profitably charges 10 times less for the exact same transaction. Ten times better indeed. In addition, the customer experience is amazing, yielding an 80% NPS score, which is unheard of in financial services.”

He explains clearly the 10x thing being quantified. That is what investors try and work out.

Now with that in mind think about some fintech companies you know and try and quantify the step change they bring. Unless they are making quantum leaps in the end-benefit for the customer (see the mario picture) then it is likely that the opportunity cost for switching is too high. Things that will do well is where there is a huge time or cost saving, or where access to previously unobtainable markets is granted. Redesigning the user experience, a strategy that has worked well in other areas, doesn’t sit so well with finance: customer acquisition in the finance space is notoriously competitive (because the prize is great and customer loyalty for some reason is high) so advertising costs are monumental - not good for startups, only the gorillas will make those returns. Remember - the clock is ticking; as I explained in my previous post if it is just digitalizing what the banks do already then that window will close very quickly.

The other problem is that websites and apps is they are pretty complicated to get right, even for seasoned professionals. From the outside you’d think they’d be easy but you’d be very much mistaken. Countless projects have never got off the ground because the guys behind them can’t do the tech. In my opinion if you can not do it in-house you’re buggered. Unless you’ve got lots of cash to burn you simply can not iterate quickly enough as circumstances change meaning it’s never good enough. 

Finance is complicated too, so mix the two and you’ve got the perfect ingredients for a shit storm.

I’ve been to so many events in the last year where you meet very clever people, all straight out of banks where they are taught they are the best of the best of the best with their heads so far up their own arses the idea of failure is just something that happens to mere mortals. They are all doing ‘the next Nutmeg’ or something like that, and I’m sure that they are more than qualified on the finance side to nail a business like that, but the problem is they won’t be able to if they can’t build the technology. You can’t get an agency to build it, they won’t have a clue what you’re asking for. 

If you don’t have the platform you don’t have anything. It’s as simple as that.

Successful investments will be in technology-led teams who can execute, but with experienced financial expertise guiding them.

They will only be in companies with quantifiable game-changing value adds, or hitherto unseen technology such as blockchain. It will not be in those just redesigning what already exists, those ships have already sailed. 

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Part 1   :   Part 2    :   Part 3   :   Part 4   :   Part 5
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