First Principles of Investing in FinTech

There’s $7 trillion of market cap for U.S. based financial institutions. In most major industries, the “challenger” technology company is now the most dominant — Facebook, at $540bn, is the most valuable media company, and Amazon is 3x the size of Walmart, at close to $1tn in market value.

This has not yet happened in finance. Despite strong technology players like Stripe, Square, PayPal, and Robinhood, traditional banks are still dominant.

With a regulatory environment that favors smaller companies, digital infrastructure that enables data portability, personalized data and machine learning, and increased trust and user preference for mobile-first products, digital-native financial institutions will have a foot-hold to get started and eventually consolidate financial services.

To invest in this space, we started with a simple question from first principles: what is finance? Our answer:

Infrastructure to exchange resources with unknown people and businesses.

Each word of this sentence represents hundreds of billions of dollars of legacy infrastructure that are being replaced by software. At Greylock, we partner with entrepreneurs who are building category-defining fintech companies such as Coinbase, Blend, PayJoy, Opportun, and Ribbon.

Below is a deck about the characteristics we look for in fintech companies and where we believe outlier companies will be created. You can also find this deck on Slideshare. If you’re building something in the space, please let me know.

In most major industries today the “challenger” technology company is now the dominant player. This has yet to happen in finance

As with other waves of technology, fintech started with simple “lead gen” websites and has evolved into creating new experiences like selling a house with the click of a button and most recently evolved into digital native experiences

The opportunity is enormous

We believe an outlier company will fall into one of these five categories

Which technology companies will begin to re-consolidate in the West?

One of the biggest debates is who is going to “own the customer relationship”. This is a space previously occupied by retail banks. In the East (including China, Japan, and Korea), there are 3–4 highly consolidated digital players that do everything from payments to savings to lending.

While the West (including US, Europe, LatAm) will never achieve that level of consolidation, there is an opportunity for break-out companies to begin consolidating the disparate services provided by individual companies today. The question is, who will win?

If you are an entrepreneur in the space or have any feedback on the deck, please reach out to me at seth (at) greylock (dot) com or LinkedIn.