Blockchain is going to revolutionize financial services. Unless it won’t.
Too often, blockchain solutions for financial services are square pegs trying to fit in round holes, according to Andrew Parker, a partner at Spark Capital. While bitcoin and its underlying blockchain technology are interesting and maybe even revolutionary inventions, they don’t have a significant place in the industry.
Spark has placed some pretty good bets in fintech, having invested in some of the most successful startups across different sections of the ecosystem, including financial API provider Plaid, marketplace lender Orchard, installment payments company Affirm and robo-adviser Wealthfront.
Parker, who has been with Spark, spoke to us about where his attention is in fintech and why it’s important to focus on innovating for the customers’ sake and not for the sake of technological innovation.
Investors know not every idea out there will survive. What makes you want to invest in the next big fad versus the next big thing?
I strive to invest in enduring companies with big ideas that will thrive for many years to come. A common feature I see in fads is that, in hindsight, they look like technology for technology’s sake, as opposed to solving a pressing customer need. So, in evaluating an investment opportunity, I focus on the customer need first and then analyze technology solutions to address that need. I hope that approach keeps my focus on the next big thing.
What consumer-facing fintech trend is most exciting to you right now?
My favorite trend is the continued rise of the robo-advisers. It’s not new (in fact, it’s a decade old), but the evidence is overwhelmingly strong that retail investors are best off focusing on indexing, and I think robo-advisers offer an excellent product to help retail investors into the ideal indexing balance to meet their needs. The benefits that robo-advisers offer in automated rebalancing and tax-loss harvesting provide surplus gains that exceed the fees that they charge, and they save consumers the cognitive load of trying to pick the best index funds from the deluge of options Wall Street has created.
Is there one that’s particularly overhyped to you or has lost your attention?
I find the blockchain to be one of the most interesting inventions of the past few decades. It’s an incredibly elegant way for a group of counterparties who inherently do not trust each other to be able to collaborate and agree on a commonly accepted ledger of transactions together. And, Satoshi Nakamoto’s original bitcoin whitepaper that outlines the blockchain is delightfully readable and wonderful in its simplicity. But the trend that I find overhyped is using the blockchain to solve problems that don’t fit this general use case of a group of untrusting counterparties. The trend that has passed its prime is using the blockchain to solve problems that are more easily and efficiently solved using boring old open-source database software (often run and owned by a single party).
How has activity in the fintech ecosystem changed over the couple years, and how has that affected your work as an investor?
The past couple years have been pretty even in demand for investment in new fintech companies in my experience. Some subsets of the broader fintech market have had more highs and lows. For example, the scandals that led to the firing of LendingClub’s CEO last spring had ripple effects in the funding market for online alternative lending companies for a few months. But for the most part, I’d categorize the market over the past couple years as active, and investors are showing continued healthy interest in new fintech startups.
What’s the greatest lesson you’ve learned from a failed venture?
The greatest lesson I have learned, which has now affected my behavior as an investor going forward, is a need to hire proactively ahead of issues in the senior leadership team. I never have had the experience of saying, “Wow, I think we hired that finance or engineering lead too early.” But, I’ve found myself on the opposite end of that spectrum too many times. This lesson has led me to encourage senior hiring earlier than were previously my instincts.
What is the biggest mistake entrepreneurs make when pitching you?
The biggest mistake is failing to convey a really ambitious vision for the future. No company is ever perfect at the outset; they all have significant issues that must be overcome to become valuable. The big ambitious vision is how investors fall in love with a company in order to embrace the significant issues, overcome their doubts, and get on the train. The big ambitious vision is also the opportunity for a founder to show their passion for their mission, which can be very persuasive when done well.