By Bernard Lunn
Our fundamental thesis at Daily Fintech Advisers about business banking is “the smaller the better”. We think there is far bigger opportunity in small business than in big business and the opportunity that is “big enough to drive a truck through” is in really, really, really small business – the micro entrepreneur – for six reasons:
- Big likes to work with big. A Fortune 500 company feels a lot more comfortable working with another Fortune 500 company than with a startup. Of course startups do get to work with Fortune 500 companies (speaking from personal experience having done a lot of enterprise sales), but it is an uphill struggle. Startups selling to Fortune 500 have to deal with the fact that Fortune 500 want to commoditize them and crush their margins and they have the clout to do so.
- Innovation comes from the excluded. Big business is well served today. They respond well to incremental sustaining innovation, but they have no appetite for disruptive innovation because they do not believe that they have any need for disruptive innovation. By contrast, the micro entrepreneur has not been served well by banks. Banks view micro entrepreneurs as consumers and when you are building a business (v.s being employed) your finances look weak until you succeed. So micro entrepreneurs have a very real need for disruptive innovation in finance.
- The Internet has proved the Coase Theorem to be correct. Ronald Coase, an economist working during he Great Depression, created a theoretical model (Coase’s Theorem) to describe how companies grow. His theory was based on the difference between internal and external transaction costs. If the transaction cost was lower internally, then it made sense to organize that work internally. If the transaction cost was lower externally, then it made sense to organize that work externally.
Coase’s Theorem underlies countless management books and theories around reengineering, outsourcing, core competency, spinoffs, spinouts and so on. Coase was writing in the 1930s when the Internet was not even a gleam in the eye of the most far-sighted futurist. Therefore his work was purely theoretical for decades. Transactions were far cheaper to do internally, so managers wisely focused their energy towards vertical integration and scale.
This is similar to what happened to Einstein. It was decades before his theoretical work could be confirmed by scientific observation.
Today, the Internet makes it cheaper to organize work externally. This explains the success of “sharing economy networks” such as Uber and AirBnB as well as Alibaba. Coase’s Theorem is now being proved in practice.
Basically this makes it much easier to be a micro entrepreneur. So ventures that serve them also do well.
- Consumer marketing techniques work. Since the emergence of tech from the crash of March 2000, most of the innovation has been in consumer marketing techniques. These techniques can be applied to serving micro entrepreneurs.
- Micro entrepreneurs work in data rich networks. They sell products and services through Amazon and eBay and Etsy and Uber and AirBnb and… All of these networks offer data that can be mined.
- The movement of billions into a global middle class. Those billions are mostly micro entrepreneurs. A family farmer (not an agri business conglomerate) is a micro entrepreneur. So is a road-side stall selling air time minutes, food and M-Pesa cashing. They are connected to first generation immigrants in the West who are often also micro entrepreneurs.
We have covered the opportunity in working capital finance before. There are already some fairly mature ventures working this space. However the innovation keeps coming. In the last few weeks I have seen announcements from the following:
- Tesorio. They were part of the Y Combinator batch.
- Drip Capital. This is another one of the 13 Fintech ventures in the latest Y Combinator batch.
- Advanon. They pitched at the inaugural Swiss Fintech event last week.
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