When the pandemic hit a year ago, I tried to make sense of the broader economic outlook. A few one-dimensional implications seemed clear. To the extent possible, people would stay at home, for example. And thus, the way they work, shop, and socialize would change meaningfully. But trying to forecast what might result from the complex interaction of consumer psyche across various aspects of pandemic life, the reaction of ingenious entrepreneurs, the acceleration of long-term industry trends, the short-term impact of significant fiscal relief and monetary easing, the structural changes of the economy in response? Very difficult.
Take the macro-economic forecasts. A year ago, most observers wondered about the relative speed of recovery in what they thought was otherwise a fundamentally healthy economy. Would it be quick and V-shaped or prolonged and U-shaped? Turns out that debate focused on the wrong part of the alphabet. The massively differential impact of the pandemic and disruptions on various parts of the economy, at least in the U.S., have for now created a K-shaped evolution with some sectors booming while others are suffering. And because the underlying employment demographics are so different across sectors, women and minorities are hurting disproportionally with uncertain, long-term consequences.
Take the predictions on the underlying public health situation. There was some initial consensus that it would take several years to bring the virus under control. Over the last 12 months, we have been pleasantly surprised that vaccines, some with a previously unproven technology, were developed much faster than expected only to find out that manufacturing and distribution had become bottlenecks. Many countries, in particular in the Global South, were better able to control the virus than feared; many in the West have struggled more than expected. Partly as a result, the virus has been able to create mutations kicking off a pandemic health arms race with an unclear global outlook.
If we ever needed a lesson in humility around trying to point-forecast “what-will-be,” the past year provided one. Under the best of circumstances the future is uncertain, and events will unfold differently from what we thought. At the highest level, that’s why after many years of learning across private, public, and social sectors, I believe in purpose-driven entrepreneurship as a foundational starting point to making a difference. But against the backdrop of the last 12 months, it also seems more important than ever to be clear about the other assumptions underpinning our work, the point of view of what world we would like to see, the first principles-based reasoning in our investment decision making – and to be explicit and transparent about all those elements because we will otherwise not learn or hold ourselves accountable.
Empirically grounded beliefs
When we took the early-stage investment portfolio we had built at the Omidyar Network and set up our new firm, Flourish Ventures, two years ago, we tried to do all this. Our experience up to that point had strengthened our belief that people around the globe needed and would embrace new tools that help them capture opportunities, improve their day-to-day lives, and better manage the many risks they encounter. We had been affirmed in our in-going belief that tech-led innovation in particular at the front-end of financial services could reach far more people with more adequate services at far lower costs than the brick-and-mortar based incumbent financial industries. And we were confident that successful demonstration of these innovations could spur broader, positive sector change.
Fair Finance Principles
We knew that finance and technology were powerful tools that could do good but also do harm, for example, by introducing new, unacceptable biases in decision making. With the launch of Flourish, we thus published a set of high-level principles of what we thought constituted Fair Finance:
- Financial services should empower people to achieve their life goals.
- Business must be built on consumer trust and business trustworthiness.
- People should have meaningful control over how their financial data is being collected and used.
- The financial infrastructure should be open, low-cost, and drive competitive markets.
- Digitally native regulation should protect consumers and promote innovation.
These principles have guided our work ever since. Over the past 12 months, with governments around the world struggling to quickly reach the right families and small businesses with targeted pandemic relief payments, the views underlying our Fair Finance Principles have found greater resonance in the broader, public policy sphere.
Focus on positive change
As a venture firm with a sector-change aspiration we have been explicit on investment themes where we believe tech-led innovations could make meaningful and lasting differences. In advanced economies, we thought early on that the ubiquity of smart-phones and the emergence of new technology stacks would allow for a very different, retail transaction account experience and a chance for a new generation of start-ups to take on the sluggish incumbent industry that was serving customers badly with high minimum balance requirements and punitive overdraft fees. So, we invested across multiple countries in a series of challenger banks.
In emerging markets, we knew that the vast majority of small businesses and self-employed families operated under varying degrees of economic informality, but that their underlying activities were increasingly digitizing, and that these new channels and data flows allowed for credit and insurance underwriting that previously was simply not feasible. So, early-on, we backed start-up entrepreneurs who globally expanded digital credit and insurtech to customer segments previously unserved.
The sector-change aspirations embedded in our Fair Finance Principles guiding principles also excluded investment areas, however hot they might have been. Most prominently, we were uncomfortable with private cryptocurrencies. While we appreciated the power of the underlying decentralized, immutable ledger technology, it seemed that Bitcoin in particular was not suited to meaningfully improve payment systems’ functionality and the volatile nature of its asset value was not right for the vast majority of consumers.
Over the past 12 months, the pandemic has accelerated broader structural changes that were already underway. Tech platforms that are immediately helpful to people as they navigate work, commerce, and social connections under the new, difficult circumstances have become even more important. They are often better suited to deliver a number of retail financial services because they have higher user engagement and more granular data than standalone financial providers. We had conviction around the potential for beneficial, financial innovation in that space and have since made a series of new investments in platforms that help farmers, informal small businesses and gig economy workers increase and better manage their income. At the same time, non-traditional front ends need to still connect with the regulated infrastructure and balance sheets of the financial system. We therefore saw a similar opportunity to make a difference with new investments in B2B FinTech innovations that enable more non-financial companies to launch financial services products and help improve the effectiveness and safety of the broader system.
Sources of economic value
Innovation and start-up entrepreneurship are hard under the best of circumstances. The right team has to be in the right place at the right time. At the level of each investment, we ask ourselves additional questions on the fundamentals of the case: what meaningful customer need or aspiration is being addressed? Is it materially relevant and/or psychologically important enough for potential customers to act on? What is the source of the new economic value created relative to the status quo, and who pays for it? Is the new value created enough so that everyone — customers, providers, intermediaries — can sustainably be better off? Which incumbents might be losing out, and can the political economy of a possible backlash be managed?
It’s hard enough to get the boulder rolling. Any prospect of encountering a downward slope based on the best-possible assessment of such first-principles questions increases the likelihood of success. Our mandate gives us additional flexibility to support foundational research; for example, we published six reports in 2020 on the pandemic’s impact on gig workers. We’re additionally enabled to engage on policy aspects of the broader public, digital infrastructure that could help improve sector performance.
Learning what works
It’s been a year since the outset of the pandemic, two years since we launched Flourish, and more than five years since we started investing in the broader portfolio we manage today. In early stage investing, these are relatively short timeframes. For a long-term sector-change aspiration that bets on demonstration success and subsequent, broader industry adoption, it’s even earlier in the journey, but we start having a sense of what might be working and what might not.
The successful challenger banks in our portfolio now reach millions of customers with no-fee transaction account services. Our alternative credit innovators in emerging markets reach tens of thousands of smaller, informal SMEs outside of the traditional banking system. Our insurance innovators help millions of smallholder farmers in Africa still catch the same farming cycle in case of initial seed germination failure and they help reduce workplace accident rates for tens of thousands of logistics workers in the U.S. We have had a first set of successful portfolio exits, and we have had to reluctantly help close down ventures that did not work out. Our learnings are now informing next-gen start-ups and sector-change possibilities, often across geographic boundaries or regulatory jurisdictions.
We remain hopeful that our approach – combining empirically grounded, axiomatic beliefs and a strong point of view of what a fair retail financial system should look like with an investment discipline based on first principles – can make a unique, positive contribution as the world continues to evolve under great uncertainty. We are convinced that purpose and Fair Finance Principles matter more than ever.