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3 posts from March 2014

March 30, 2014

The Cloud Dividend

When the Cold War ended, President Bush (senior) used to talk about the peace dividend, the downstream economic benefit of reductions in defense spending.  Echoing these words, one of my CEOs declared to me the other day that last week's activity in the cloud may have been one of the most important weeks in technology history, but we won't realize it for many years to come.

At Flybridge, we have long believed that the advent of cloud computing is the most important force in technology in decades.  The entire Lean Start-Up movement and the recent proliferation of start-ups has been enabled by cheap computing power and storage.  When I was an entrepreneur starting my company, Upromise, we had to buy big Sun servers for millions of dollars to launch our fledging website.  Today, that same compute power is available to start-ups for a mere handful of dollars per hours.

Cloud computing

Historically, Amazon's cloud offering (Amazon Web Services, or AWS) had little competition and, as a result, some have observed that as amazing as the cloud has been for start-ups, cloud pricing has not dropped as aggressively as Moore's Law would have suggested it might.

But Google finally appears to be catching up in the ever-important cloud services area.  Last week, at its Cloud Platform Live conference,  Google slashed pricing on their cloud platforms over 50%.  

Then, a day later, at its AWS Summit, Amazon countered with its own radical price cuts from 36-65%.  Despite those price cuts, Google is still cheaper than AWS in many categories.  See the chart below, which GigaOm published, to show the comparison of the two offerings.


So why did my portfolio company CEO think this last week of price cuts was so historical?  Because cloud infrastructure is like fuel for startups.  As startup fuel prices go down, the downstream effect is powerful:  starting and scaling companies has gotten yet even cheaper.  With Google and Amazon battling it out, and IBM and Microsoft and others not far behind, this trend is only going to continue.

We have made a number of direct investments on companies circling around cloud infrastructure, startups like MongoDB, Stackdriver, Firebase and Apiary, to name a few.  But what last week's price wars demonstrate is that the entire technology ecosystem will reap indirect benefits as well.  The cloud is becoming a commodity, prices are going to zero, and technology companies around the world are celebrating.

March 27, 2014

Hogging the Credit - Why Software Is Eating Banking


When this 10s decade is over, we will look back and be amazed that a mere ten years prior, a few, absolutely massive financial institutions controlled the global banking industry.  Software is eating the world, as Marc Andreessen famously observed, and an industry like financial services -- whose service offering is essentially all information-based -- is particularly susceptible to the disruptive force of technology.  That disruptive force is particularly acute in the credit markets.

Consumer credit has long been a pretty sleepy industry.  For years, the same 5-10 or so banks have been the main issuers of credit cards and the same 4 associations have been the main brands and platforms.  But when the credit crisis hit, everything changed.  Due to market forces and government regulations, banks abandoned the lower end of the consumer market.  20% of US households are now considered underbanked, representing a massive market opportunity.  A further window of opportunity is the fact that credit cards are still charging 20% APR, yet interest rates are effectively zero.

Stepping into the vaccuum are new providers of consumer credit and broader banking services that are 100% virtual.  ZestFinance (a Flybridge portfolio company) and Wonga are among those providing consumer credit in the form of installment loans, with ZestFinance leveraging the magic of big data to do more sophisticated underwriting.  Lending Club and Prosper are showing the promise of peer-to-peer lending, issuing $2.4 billion in credit last year, a 3x increase over 2012.  Institutions are taking notice - one investor that I spoke to in a peer to peer lender shared with me that hedge funds are now flocking to the platform in search of higher rates.  ING - soon to be renamed Voya Financial - demonstrated that a bank could be constructed that serviced consumers over the Internet without traditional branches.  

At the same time, the proliferation of smart phones is allowing consumers to access money and conduct financial transactions with extraordinary convenience.  Why would those services and capabilities be only provided by traditional banks?  China's Alipay reports that they processed $150 billion in mobile transactions in 2013 - nearly 6x the $27 billion PayPal reported (not including the Venmo acquisition, which is bound to accelerate growth in 2014).  This intersection of mobile, convenience and new lending brands is going to substantially erode existing banking franchises in the years to come.  

The business lending market is no different.  In fact, innovation in business credit may be outpacing consumer credit.  Startups such as OnDeck Capital, Kabbage and Capital Access Network have each raised tens of millions of capital and are building large brands and franchises in servicing small businesses.  With their bloated bureaucracies and overhead, banks are not architected to service this market effectively - particularly as more and more small businesses are reachable over the Internet.  OnDeck recently reported a $77 million growth round and that it has acheived nearly $1 billion in loan volume.  Kabbage is rumored to be on the verge of reporting a similar monster round.  And Credit Karma, a credit management service for consumers, just announced an $85 million growth round.

A few weeks ago, Brand Finance released their annual survey of the 20 most valuable banking brands in the US.  Atop the list were the usual suspects:  Wells Fargo, Bank of America, Citi and Chase.  The market capitalization of these four banks is currently around $800 billion.  Will these same brand franchises be unassailable by 2020, or will a new cohort of brands emerge from this soup of startups and innovators?  I know what venture capitalists and entrepreneurs are betting on.

March 05, 2014

Fred Wilson Attends Harvard Business School

Every year for the last four years, Fred Wilson has been kind enough to come up from NYC and join my Harvard Business School class.  It is always entertaining, enlightening and fun.  As always, I asked the 80 students in the class to live tweet during the class in order to capture the interesting nuggets and take-aways (and exercise their social media muscles).  Below is a Storify of the tweet stream.

If you want to see how this year differed from previous years, go to: