For those of you who are fellow fintech junkies you know that the past few months have been the equivalent of “conference hell”.  I actually think the conferences serve a fantastic purpose, but now that the circuit is over one of the observations that many of us have shared with each other is that a very small and common set of concerns were discussed regardless of venue or format.  I thought I’d focus this post on a question that I was asked at each and every panel I served on, each and every conversation I had with Investors and each and every pitch I heard from Entrepreneurs.

The question: Is there room for the next wave of lending platforms to succeed?

It’s an interesting question that’s quite simple to answer at a high level but requires a bit of finesse to understand.  The answer lies in a historical observation:

Name any era and any lending product and you’ll find a few dominant incumbents that share fairly similar business models, products and experiences.  Some eras are defined by stability where the dominant players trade market share back and forth, but in some eras a small handful of innovators emerge that nip at the heels of the incumbents.  The innovators can easily be identified because they aggressively shout from the rooftops about the benefits of their product/service and have business models based on unproven but supposedly armor piercing insights that threaten to change the landscape.  The innovators are sub-scale and under-capitalized but are almost always growing so fast that they appear to be out of control.  Hyper growth + unproven business models + a bit of grandstanding = Polarizing opinions from industry experts.

But over time the growth rate catches up with each and every business in one of two ways: Either the business model implodes because the model wasn’t real (Fool’s Gold) or the business model’s fundamental premise is proven to be correct (Sutter’s Mill).  And if it’s the latter, by the time the answer is “known”, the business is typically approaching scale, still growing rapidly, and attracting massive amounts of talent and capital.

With infusions of talent and capital and business models with truly armor piercing insights, these new businesses are destined to double and double and double again until they’re the same size and scale of the major incumbents.  But the discovery of Sutter’s Mill inevitably attracts another wave of start-ups that try to capitalize on the new insights and business models with the addition of tiny tweaks and enhancements.  Just like the 300,000 “miner 49ers” that flocked to California in 1849 and ended up destitute, the second wave of “innovation” is fundamentally challenged by the simple fact that the good land has already been taken.  The first movers with new/better business models that are able to attract talent and capital are set up to win.  This is worth repeating in a slightly different way: Getting there first matters.

Why?  The second wave of innovation has to find room in an ecosystem that is occupied by the incumbents and the now well capitalized, at scale organizations that are nimble and chock full of talent.  A “slightly better” model won’t cut it in this environment, and history will show that the second wave of innovation is typically marginal when looked at in the rear view mirror.

So what does this mean for the current lending ecosystem?  It means that once a new insight has been introduced to the marketplace and proven to be “real”, it’s only a matter of time before the game is over and the winners have been crowned.  Would you want to be offering a personal loan product in today’s environment when you have to compete against both the Banks and organizations like Avant, Prosper and Lending Club which collectively have raised billions of dollars of debt and equity?  Would you want to offer a student loan refinance product when you have to compete against both Sallie Mae and organizations like SoFi, LendKey and Common Bond which have also raised billions of dollars of capital and stacked with some of the best financial engineers on the planet?   Unless a new insight emerges that could become the foundation for a vastly superior model, the best a second wave start-up could hope to build is a small, profitable, niche business.  This isn’t a bad outcome if a business is built with this destination in mind, but it’s a terrible outcome if a business has burned through a lot of capital and is hoping to create significant enterprise value for its investors.

What it also means is that for any emerging business model one has to determine if:

1) The model is based on a truly disruptive insight that could become the foundation of a wave of innovation

2) Is it 1848 or 1849 (i.e. – has Sutter’s Mill already been discovered)?

If the answer to the second question is “1848” then back the best management team you can find and worry about how to best manage what will likely become a hyper-growth business that’s surrounded by skeptics and haters and naysayers.

But if the answer is “1849” then invest your money backing the infrastructure companies serving the emerging winners (and destined losers).


  1. The amount of funds raised by consumer lending FT companies is huge! I can’t believe SoFi and the others.

    I’m right here in SF and consult with Motif and Personal Capital (in the past for two years) and the unbridled enthusiasm is amazing.

    Good thing nobody has to make a profit. Thank goodness for loose VCs!



  2. Very interesting and I think it ties nicely with BCG’s “Your strategy needs a strategy” palette: in this predictable and malleable area, being first matters. (visionary strategy) I’d love to hear your thoughts on the other fintech verticals – are they all similar to the personal loans space, or do you think others need a different approach? (Checking/savings, auto loans, credit cards, mortgages, auto/home/life/health insurance, debt solutions, brokerage/robo-advisory, small business loans, student loans)


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s