To anyone interested: there were some big fintech deals this week, so I decided to use them as an opportunity to collate some of my thoughts on the current state of capital markets for fintech. Please send thoughts and feedback, or share with others, if compelled. I’ll be diving deeper into everything fintech related in the coming weeks.
Links to the specific deals are at the bottom, but the two big themes here were consolidation (unsurprising) and market confidence in B2B fintech solutions (perhaps more surprising). In terms of consolidation, we are seeing both vertical (GS) and horizontal (iCapital & Forge) integration, although the story is very different across the two. The former (vertical) raises a question of whether the established players can continue to grow as other segments of financial services face headwinds. The latter cases (horizontal) raise the question of whether these specific fintech segments have a clear path to profitability at all.
Goldman's Quest for (More) Greatness
Goldman's purchase of Folio is consistent with their broader strategy of entering and acquiring new businesses on the retail side of the industry since the launch of Marcus in 2016 (see: United Capital and Clarity Money for two good examples). Expect this trend to continue as news broke today that Goldman may be looking to merge with a consumer facing institution as they continue to realize that their core business of investment banking may be running out of room to grow.
The "Democratization" Of Private Investment
On the flip side of Goldman's quest to become a full service behemoth is the horizontal consolidation in the nichier fintech space with everyone's favorite buzzword: the "democratization" of private investment.
While iCapital and Forge both made major land grabs to expand retail access to private investments, they did so on very different sides of the map.
The “Rich” Get... Access to Two and Twenty
For iCapital, the purchase of Artivest puts them in almost complete control over the toll roads between wealth managers and alternative investments. Having won almost every major deal on the demand side of the marketplace (Morgan Stanley, UBS, the list goes on) the last remaining question seems to be whether or not the business can be scaled with technology to a point of profitability. This market is theirs to lose.
Sippin’ On Private Stock
For Forge, the path to brokering private shares at scale is still fraught with challenges. Their two biggest competitors, NASDAQ and Carta, have deeper pockets and big strategic advantages.
It is obvious, but despite their challenges to gain traction, NASDAQ (arguably the first ever "fintech" firm) is the operational expert here. It is not clear to me that any player in this space can use technology to create a sustainable competitive advantage over them at point of sale.
On the other hand, Carta, who recently laid off 16% of its workforce citing Covid-19, has taken an indirect approach to enter this market by creating ledgers of individual private ownership via their core product: cap table management software. And while this doesn’t guarantee them success in the business of transacting the shares, it gives them the harder side of this marketplace to build: a scalable supply of sellers. Having interacted with Carta as both an enterprise buyer and now user in the last year, I do believe this company is building something special and would bet that they will emerge as the long term winner in this market. If only there was an easy way to buy their shares...
Either way, I would expect to see another transaction in this space in the next 1-2 years. I predict that Forge or EquityZen (its closest comparable) will be purchased by a large incumbent looking to establish itself in the space (ahem, Goldman). This will give the acquirer access to a high margin business line and, perhaps more valuable, thousands of newly liquid individuals to target with private banking services.
The Specific Deals
Goldman Sachs bought fintech custodian Folio adding to their growing list of acquisitions in the fintech & wealth management
iCapital Network acquired Artivest, their top competitor. These interesting B2B marketplaces match alternative investment providers (Hedge Funds, Private Equity, etc.) with wealth managers (Morgan Stanley, UBS, etc.) to allow financial advisors to sell those investment products to their clients at minimums they would not be able to receive directly from the fund.
Forge and Sharespost, two large players in the private securities space are merging. Notable competitors in this space include Carta, Nasdaq, and EquityZen, none of which seem to have found a scalable solution for transacting private company stock.
Sequoia Capital invested $14.5M in the Series A round Vise, a B2B fintech firm building a financial advisor platform that customizes portfolios for wealthy clients. This deal is particularly near and dear to my heart, but is too long to cover in detail here today.