Weekly Briefing No. 90 | VanGamazon, An IPO Market Rant and AI Battles

This week, the heat in fintech and innovation was matched only by the sweltering temperatures in New York. Here’s what raised our mercury levels:

Iron giant
  • Vanguard’s succession; The IPO market needs fixing
  • Elon Musk’s warning through a hypothetical trade
  • Generational product labeling; Robos get SRI religion; FICO fabulousness?
  • Comings and Goings: Transferwise’s Taavet Hinrikus
  • Company of Note: Silvernest

IN DEPTH

"VanGamazon" gets a new chief.

“Jeff Bezos has announced that he will be stepping down as CEO of Amazon at the end of 2017.”  Hasn’t happened, right? Well, we’d argue that the rough financial equivalent of that did happen recently. Specifically, we’re asserting that although Tim Buckley’s appointment next year to be the new CEO of Vanguard made news, it didn’t make enough news. Maybe it’s because Buckley intends to pursue a strategy similar to that of the company’s current CEO, Bill McNabb. But let’s look beyond the headline. Vanguard ─ or as we prefer to call it, “VanGamazon” ─ is a must-follow company for everyone interested in financial innovation, as it represents the single greatest deflationary force in financial services today. Vanguard’s obsessive focus on costs has not only upended traditional active management, but also has fueled demand for the innovations of countless start-ups whose solutions help asset managers become more efficient. But while Amazon now seems strongly positioned to dominate any market it enters (as long as antitrust regulators don’t come knocking), Buckley is likely to face a tougher challenge in maintaining Vanguard’s dominance. That’s because in the future, the king of passive may encounter headwinds, as we’re certain that other fund heads have visited shopping malls recently. They’ve seen the degree to which Amazon has obliterated its competition, and our bet is that they’re going to get more aggressive in a bid to prevent Buckley from becoming Bezos.

America’s leading banker’s recent rant about the country’s political dysfunction did more than call attention to an issue holding back the economy. It set the tone for a summer of rage, which will hopefully encourage other powerful voices to speak blunt economic truth. One relates to America’s broken IPO market. Yes, a decent number of deals are getting done, but consider the following: since 1998, the number of US publicly listed stocks has dropped by half, thanks to the fact that M&A and delistings have reduced supply way more than IPO activity has yielded new stocks. That’s a massive trend. Uber, WeWork, AirBnb and over 250 other unicorns may have become start-up celebrities on the $1 billion+ glam list. But unicornism is a sign of a market that has become so inhospitable that entering the land of quarterly reporting simply isn’t worth it for most newbies. Still, rather than being assigned a discount for their private status, many unicorns are instead handed a premium valuation, which serves to perpetuate a perverse cycle. The result is that when highly visible IPOs such as Snap hit the market, their shares are priced at inflated levels on day one, leading to more downside risk than upside. When IPO candidates see these trainwrecks, they decide to do a Series L private instead. So what will turn things around? Another halving of US public equities to a total of 1,900? We’re not sure, but perhaps taking note of Fidelity’s markdowns of private holdings (See below) and Blue Apron’s woeful debut may lead to introspection about how to refresh the new issue model. A signature Dimon rant could help too.

Is Elon Musk a fearmonger who doesn’t understand AI? Yes, if you believe smart folks like Francois Chollet of Google and Rodney Brooks of MIT, reacting to recent comments by Musk. Here’s one Musk comment that helped spark the reaction: “If you were a hedge fund or private equity fund and you said, ‘Well, all I want my AI to do is maximize the value of my portfolio,’ then the AI could decide, well, the best way to do that is to short consumer stocks, go long defense stocks, and start a war.” Chollet, Brooks and others were aghast at Musk’s crudeness. However, even brilliant AI experts can be susceptible to cognitive biases. And let’s not forget that many “standard” innovations can be unwound if things don’t go right. Google Glass, for example, can be reworked successfully. But what do you do if AI makes a deadly decision to maximize a trade? Cancel the massive short order on P&G? That might not be so easy if the algo is smarter than you.

The Hidden Cost of Liquidity

Sponsored by Fundrise

Most of us know that when it comes to investing, there’s no such thing as a free lunch. Unfortunately, many people forget that old adage and gravitate towards the most liquid securities when building their portfolios. Investors like the convenience and instantaneous liquidity afforded by owning assets in the stock market, but what some don’t realize is that they pay a huge premium for that convenience. That’s doubly true for the real estate exposure people seek by investing in publicly traded REITs. For investors who appreciate the ease of buying a traditional REIT but are interested in owning high-quality real estate assets without paying a high liquidity markup, Fundrise has developed a suite of products for the long-term investor looking for an attractive alternative.

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IN BRIEF

Looking through the product and marketing lens of Lenz.

esports

“Why are we still so fixated on the notion that we need to design technology for age (or other) groups?” That’s the question posed by financial services innovator Jimmie Lenz. In a thoughtful new piece for The FR, Lenz uses movies, gamer-age data and a New York Harley Davidson dealership to make the important point that technology solutions can often appeal to a wider demographic than companies realize.

Terms on insanity.

In the 18th century, the Quakers prohibited their members from profiting from the slave trade, and Methodism’s co-founder Reverend John Wesley spoke of the evils of the leather tanning industry. Clearly, a “socially responsible” investor needs to change along with the times. The six-year-old Sustainability Accounting Standards Board (SASB) is a good step in that ongoing evolution, as are this week’s moves by Betterment and Wealthfront and this year’s actions by Motif and OpenInvest to enable customers to align their investments with their values. Still, more work needs to be done to keep pace with our evolving tech-fueled economy. Should appropriate disclosures on consumer data and algorithm influencing be core SRI metrics? Or how about the impenetrability of terms of service agreements? See below, and bravo to Purple for making a serious point in a funny way.

FICO's flawed but fabulous rocket power.

The smart folks at PeerIQ pointed out an interesting dynamic relevant to the marketplace/online lending sector: consumers’ FICO scores are at an all-time high, despite rising delinquencies on auto, student and personal loans. See below for their take on what’s going on (hint: FICO’s got problems). Meanwhile, the stock of Equifax, which offers several FICO products, is crushing the S&P 500 this year and was featured recently on CNBC’s Mad Money. Maybe in a future post, PeerIQ can explain why FICO-fueled firms are doing so well if FICO scores are so flawed.

COMINGS AND GOINGS

Crown changes heads at one of London's biggest fintech firms.

Taavet Hinrikus will be stepping down as CEO of UK-based Transferwise, just months after he said he would relocate the company’s HQ to the EU mainland. While this fits the Brexit doomsday scenarios of fintech start-ups fleeing the UK, new financings by Receipt Bank, Soldo, Tide, Curve and Revolut demonstrate that Britannia remains fertile fintech ground.

COMPANY OF NOTE

Silvernest.

Silvernest

Silvernest is one of several home-sharing platforms connecting homeowners with roommates. But what’s distinctive about the Denver-based company is that it’s riding multiple powerful trends affecting the US economy. According to CEO and co-founder Wendi Burkhardt, the typical homeowner who posts a room for rent on Silvernest is a female baby boomer, often unmarried, who finds herself long on spare rooms and short on companions. Renters, meanwhile, average 40 years old and are looking for an economical place to live in desirable US areas. With 50% percent of baby boomers having saved less than $100,000 for retirement (PwC) and the cost of aging skyrocketing, it’s easy to see why an empty nester would wish to turn an extra room into an income source. The acute problems for a generation who didn’t grow up meeting people online, though, relate to the understandable concerns over renter trustworthiness and safety. Enter Silvernest, which emphasizes a background and diligence check as core to its offering. “Several studies by AARP show that living in isolation can be more hazardous to one’s health than smoking 15 cigarettes per day,” said Burkhardt. “With Silvernest, homeowners and renters can rest assured in knowing that parties can come together in a way that maximizes the security of all parties involved.”

Quote of the Week

“Never get into a wrestling match with a pig. You both get dirty, and the pig likes it.”

~ Senator John McCain