How Wall Street Should be Valuing FinTech
I recently read a thought-provoking article by Dealflow CEO, Steven Dresner, titled, “If you want crowdfunding to succeed, start by de-coupling ‘finance’ from ‘fin-tech.’” What I found most interesting was that the financial data veteran described technology as the “enabler” not the “end game.”
Was Dresner intimating that technology has now become the veins – as opposed to the heart – of a FinTech business?
Based on this thesis, I wonder whether Wall Street is not only mis-valuing FinTech businesses, but today’s technology companies in general.
When I started my financial career 23 years ago, technology was seen as a commodity – just like gold, oil and my all-time favorite, frozen concentrated orange juice.
Technology was not only expensive to develop, but it was costly to maintain. Even the most basic tools needed for a simple website were available only under a commercial license.
Because both hardware and software were so expensive, deep-pocketed enterprise buyers were technology’s primary consumers. Accordingly, launching an online business in the Internet’s olden days required significant capital.
Luckily for Internet pioneers, no shortage existed of cash chasing tech startups in the 1990s.
You probably don’t even remember Boo.com, a company CNET once described as one of the greatest dot-com busts in history. This particular dot-bomb squandered $188 million of investors’ capital, and within months was placed into receivership. Its core assets, software and technology, were purchased during the peak of the Internet bubble for $70 million, and were ultimately liquidated for just $372,500.
Ouch!
Indeed the world has dramatically changed in the last 15 years. Open source and cloud computing fundamentally transformed how technology is developed, utilized and priced.
Today, anyone can embrace his inner entrepreneur and be up and running with a WordPress site for about the price of two venti Starbucks lattes.
The cheaper and more readily available technologies become, the less value they retain. In a relatively short time, technology has evolved from a commodity to a part of life – like air.
Some financial professionals would argue that data has become the real commodity. NY-based venture capitalist Fred Wilson believes that “the new oil is going to be found in various places in the tech stack where software and data come together to produce a service that has high operating leverage at scale and is defensible by the network effects that the data provides.”
I have a much less complex perspective.
I believe that there are two distinct categories of technology companies. There are those very select few that invent technology and then there are the vast majority of businesses that exploit it. Most FinTech businesses fall into the latter category. Much like the lesson that Boo.com learned 15 years ago, a company’s technology – no matter how advanced they claim it is – is worthless without application.
Data creation is perhaps technology’s most valuable function. However, data that can readily be replicated holds little to no merit. In the same way that anyone can build a website, any two-bit coder can aggregate data.
More pertinent than technology knowhow, today’s FinTech winners require extensive financial acumen. Their value lies not in piece of software, but rather in the CEO’s vision, his execution, his grasp of how the financial services industry is evolving, and in the company’s ability to produce irreplicable data.
Dealflow is a FinTech leader that possesses all of these attributes. For this reason, I’m proud to highlight the company in my latest feature article published in the Alpha Pages. Click here to read about how Dealflow is not simply aggregating deal data, but how it is amassing the largest and most unique databank of alternative-asset investors.