Weekly Briefing No. 24 | Wake-up and Smell the Artificial Intelligence.

Artificial intelligence might be coming to asset management faster than you think. Read more on that and BCG’s views on digital insurance for small business. Also this week, we discuss marketplace lending, AirBnb as a “credit bureau,” an electricity trade via the blockchain and one start-up’s approach to selling data to Wall Street.

IN DEPTH


Wake-up and smell the artificial intelligence.

“Eventually the time will come that no human investment manager will be able to beat the computer.” These words were uttered last year by David Siegel, co-head of Two Sigma Investments, the $30 billion+ quant fund that returned 15% in its two flagship vehicles last year. This week, we were reminded of Siegel’s prediction upon meeting with a technologist who was still mesmerized by AlphaGo, Google’s artificial intelligence Go program that handily defeated Go master, Lee Sedol, last month. AlphaGo’s victory, which was full of “beautiful” moves, has been hailed as a major milestone in AI because most people (including Sedol) had predicted that Sedol would eat AlphaGo’s lunch. In fact, many AI experts thought it would take a decade or more for an AI program to beat a Go master like Sedol. The future came more quickly: of the five games played, Sedol managed just one victory, and that win only came about because of his shocking “wedge” play on Move 78, now known as the “Hand of God” move. In South Korea, Sedol has established himself as a national hero (how many Seoul pubs will be named Move 78?). But what does this AI advancement portend for the future of those who make their living picking stocks and bonds? What are the insights that will remain “unteachable” to an algorithm in ten or 15 years? As we read articles like this one, detailing the rise of AI assisted strategies at Nomura Securities and Goldman Sachs Asset Management, we find ourselves asking these questions — and wondering if some money managers possess Sedol’s one-time complacency.
 

BCG sees huge digital insurance opportunity.

A new report from The Boston Consulting Group is a must-read for anyone interested in the intersection of small business, millennials and digitally powered insurance. Our two favorite data points: 1) Half of the US companies that will be operating in 2018 don’t yet exist; and 2) Digital underwriting of small business insurance, which represented 4% of all small business policies underwritten in 2014, is projected to grow by a rate of 56% per year through 2018. For the insurance market (or just about any market), that’s an impressive growth rate/opportunity/thing to be worried about.
 
Check out BCG’s report here.


Marketplace lending’s mainstream needs to step up.

In conjunction with the recent indictment of a payday big-wig, Charles Hallinan, it has been revealed that a respected marketplace participant took Hallinan’s capital. A company should be free to put anyone it wants on its cap table; however, the newly christened Marketplace Lending Association (it’s about time) known as MLA, should take notice. The association was launched to promote the “responsible growth” of marketplace lending, and its website is full of admirable goals. As the MLA looks to grow its coalition and promote its voice in Washington, it should set strict standards for inclusion — even if it means turning away companies who, despite their regular appearances at marketplace lending conferences, are just old-fashioned payday lenders with well designed websites.

IN BRIEF
 
Will AirBnb become a credit bureau? “If Airbnb can figure out a way to make its user profiles immutable and universally readable, they could become a trusted form of digital identity, a bit like the profiles that credit bureaus create for individuals.” These words were recently uttered by Airbnb’s co-founder, Nathan Blecharczyk, in connection with an acquirehire the company made of some bitcoin and blockchain entrepreneurs. If Airbnb is really serious about using its data as some kind of universal rating system for individuals — a Fitch for folks — we hope that it spends a lot of time talking to regulators, consumer advocates and privacy experts. This kind of initiative should be developed carefully. Extremely carefully.
 
LPL picks Blackrock’s roboadvisor over an independent. Wealthfront and its cohorts of high-flying roboadvisors are likely taking note of FutureAdvisor’s newly inked deal to power a robosolution for LPL. As the largest organization of independent FAs in the US, LPL represents a big victory for Blackrock’s FutureAdvisor.
 
Two guys from Brooklyn cut a $14 deal. So what? Normally, a $14 deal of any sort wouldn’t make The FR. But in this case, the exchanged good was electricity and it was traded for $13.65 with the help of a green energy start-up named LO3 and Ethereum-powered blockchain company ConsenSys. That’s a big deal, even if the notional is barely enough to buy a pitcher of beer in many Brooklyn neighborhoods. Read more here.
 
A Dutch treat on valuation. Perhaps the whole tulip thing has left Dutch people culturally skeptical about valuations, but Adyen CEO, Pieter van der Does, makes good sense when he talks about the lengths companies will go to in order to secure unicorn status. His key point: half of all unicorns wouldn’t have that designation without the liquidation preferences they offer to investors.

Pssst, wanna buy some data? We enjoyed this quick read featuring Jeremy Baksht, Chief Revenue Officer of Estimize (when did Chief Revenue Officer and Chief Happiness Officer become acceptable titles?). Baksht’s job is to bring in clients at the earnings crowdsourcing platform. His approach to nurturing funds like Steve Cohen’s Point72 is a great blueprint for Enterprise fintechs.

The Fair-Haired Dumbbell Development is pushing real estate crowdfunding boundaries. That’s the real name of this Portland development that is being crowdfunded on Crowdstreet and masterminded by Guerrilla Development Company. Investors can get in for as little as $3,000 and have been guided to expect an 8 percent return. Real estate crowdfunding execs should watch this deal closely.

At last, a non-clichéd sports metaphor. Struggling to find a sports metaphor that will make your words sparkle? Try the one that Union Square Venture’s Fred Wilson managed to pull off in this thoughtful piece about Jordan Spieth’s meltdown at the Masters.

Company of note: QuanTemplate.
 
Reinsurance is a massive market that doesn’t generate as much attention in fintech circles as it probably should. That’s why we are highlighting QuanTemplate this week, which provides a web-based workflow platform for this very important corner of the Insurance industry.   
 
Comings and goings.
 
So far, not too many executives from KKR have departed for fintech. As such, we are taking note of the appointment of Sam Allen to run CompareAsiaGroup. Allen was previously a director in KKR’s portfolio operations team. CompareAsiaGroup — which is backed by Goldman Sachs — is a pan-Asian comparison site for a host of financial products.
 
Quote of the week.

“In matters of style, swim with the current; in matters of principle, stand like a rock.”
~ Thomas Jefferson (who was born 273 years ago this past Wednesday)