this week i'm thinking about – #4 – UK challenger banks
Hey friends,
Happy Turkey Day! I’m writing a weekly blurb about 1) one thing I learned, and 2) one question I’m thinking about that’s broadly tech-related.
If you have thoughts, please do reply! I’ll paraphrase the best responses in the next newsletter. My goal is to start conversations with people thinking about similar things with different lenses. I'm trying this out with a small group of VIP friends, but if you know anyone who would be interested in the discussion, please do forward this along or have them subscribe here.
John
What I learned about: UK challenger banks
A theme I expect will be woefully recurring in my newsletter is other countries’ ability to beat the US on new technologies. I’ve been following the UK / EU challenger banks since Q2 2017 – specifically Monzo, Revolut, and N26 – when it was much less clear which would pull ahead in terms of usage. Fast forward 18 months and Revolut seems to be dominating the pack, according to the DAU chart below.
When marketing spend on direct customer acquisition is the core driver of growth, fundraising ability is key: Revolut has raised ~$344M, Monzo has raised ~$262M ($150M of which was just 3 months ago), and N26 has raised ~$213M. Given the UK’s tech-friendliness towards financial services, I expect US consumer challenger bank adoption to lag by 3-5 years. That said, we’re seeing some indirect piecemeal approaches to next-gen banking that avoid stringent US banking license requirements: financial advisors (Cleo, Empower), cash-back apps (Ibotta, Dosh), and payday loans (Earnin, Dave) are a few examples. Will one of these players parlay their user base to become the dominant challenger bank in the US, or will it be a new player entirely?
What I’m wondering about: what industry dominates the next decade
Here are the $10B+ tech companies from the second internet era (founded from 2002 to 2015). Consumer internet clearly dominates. What industry will drive the next wave of $10B+ tech companies (started between 2016 and ~2025)? I have my hunches but curious to hear what you guys think. Another related question to ponder: was it obvious in 2002 that consumer internet would dominate the next 15 years of winners?
Top replies from last week’s edition (debt; unbundling labor marketplaces):
Josephine thinks debt is an underutilized source of capital for people who want to have lifestyle businesses with steady cash flow but don't want venture scale (equity becomes too expensive as a source of capital). “Enterprise B2B (often SaaS) companies usually have steady cash flow and so are able to take on venture debt with pretty solid terms. For companies whose revenues are less predictable, debt becomes a more unwieldy instrument.”
Harry pointed out the challenges behind using debt as leverage in venture capital, given VCs don’t have steady cash flows. We came up with a few potential workarounds to reduce risk to lenders, like having a higher collateral coverage ratio or only allowing portfolio companies above a certain valuation to be collateralized.
Ronak pointed out that any industry with a lot of back and forth or variation in the execution of the service could be driven by a better vertical experience – Houzz (interior design) and Buildzoom (general contractors) are prime examples.
What I’m reading
In-depth NYT piece on the surprising rise of China over the last few decades: The Land That Failed to Fail
AI fails (or succeeds?): Specification gaming examples for AI
The Information on the decline of white-collar crime (or at least prosecution) in Silicon Valley.