FinTech: The Investment Postulate

Categories evolve in a predefined manner. 

The presence of desirable utility leads to the creation of a product. To capitalise on the R&D base, the firm requires access to distribution. The existence of multiple such homogenous products with access to similar distribution necessitates curation.

The service we avail also evolves with the category stage. We pay for access to the product, to access to information and lastly, to access to transformation. 

In financial investments, the problem gets compounded. Each instrument, at its core, is a collation of expected cash flows, discounted at its present value. Replication of a product is hence easy.

Think of a simple instrument like a bank loan. Enterprises needed access to growth capital, and people wanted to earn a return on idle money. Banks handled intermediation, including diligence, collection and compliance. 

Over time, the bank loan devolved into smaller tranches enabling wider distribution, called bonds/debentures. The last step in the cycle was the proliferation of debt mutual funds, which curate schemes and provide low-ticket access to (almost) all investors.

Technology has democratised distribution. The final play in all FinTech investments is hence curation. 

Each product is at a different stage in the cycle. We are too early for the convergence cycle, however. The introduction of new asset classes will continue for our evolving markets. 

Some examples from the ecosystem that I believe will be helpful for better understanding -

• Creation - small-ticket investments for renewable energy
• Distribution - fractional investments in commercial real estate
• Curation - sachet portfolio management services/curated product baskets

The interesting part is that most of these curation models continue to work on the 2/20 model. PE firms like KKR introduced the model for managing $B of AUM. Sachet asset managers, including lead angel investors, are working much harder for a much smaller outcome today, resulting in better results for novice investors that tag along.

What will disrupt this cycle? Likely, a PaaS business model that allows new-age OEMs/original asset owners to solicit investments using a standardised contract. 

Building a further layer of PMS on top is the long-term convergence. The democratisation of access to stratified family office services, I believe, may hold the key for long-term sustenance.

If you are building a product for democratising investments or would like to share ideas in the space, let us connect.

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Disclaimer: Views represented in this blog are personal and belong solely to the author and do not represent the views of Kalaari.