Fighting for Their Financial Freedom: Millennials Reinventing FinTech

One of the more enlightening sessions at this year’s Money 20/20 payment industry conference (9,000+ attendees) featured new findings from a Foundation Capital survey on Millennials and Financial Services. The survey found that U.S. Millennials as a generalized group (those born between 1984 to 1997) are financially stuck – they have bank accounts, but are swimming in student debt and thus have no money to spend on investments and the extras after food and rent. Not surprisingly, most Millennials do not believe that what savings they have – mandatory Social Security contributions – will actually materialize for them in retirement.
And as indicated by such emerging social constructs as the post-college group house, Millennials are essentially stuck in the bottom tiers of the needs pyramid — not only can’t they save for big purchases, but they are also postponing milestone life events such as getting a place of one’s own, marriage and family.
Ergo you could say that millennials – even more so than the capitalist generation before them (i.e. the wolves of Wall Street) – are obsessed with money. And how it holds them back.
At the same time, Millennials are very facile with their mobile financial apps and rely heavily on them for financial information, services and purchase decisioning. They may have big brand bank accounts, but to them the brick and mortar branch, the ATM, even physical money– are becoming less relevant.
All the above lays the groundwork for continued massive disruption in financial services as Millennials fixate and act on their [lack of] money obsession and the status quo education and financial systems that have literally left them living in their parents’ basements.
And thus driven by the financially disenfranchised (but still optimistic) Millennials, a new FinTech Renaissance is emerging. From alternative methods of lending like SoFi ($1 billion capital raised in Sept. 2015 to help consumers refinance their student loans) to services focused on helping consumers to understand and take control of their credit scores (Credit Karma raised $175 million in June 2015), to bitcoin and other cryptocurrency technology that represent a new payment rail and partial replacement for fiat ($1 billion+ investment in 2015 with blockchain development companies like Chain raising $30 million), Millennials are taking down – or at least making less relevant — the traditional financial power structure one sector at a time.
Over the course of the next year, we’ll take a look at some of the emerging financial services disruptors and trends coming out of Y-Combinator and other incubators and launchpads such as Draper FinTech Connection and Plug and Play’s Fintech Accelerator.

Patent trolls hurt R&D say scholars in letter to Congress

“Be careful about changing patent law — it could harm innovation,” is a favorite talking point for those who oppose plans to reform to America’s troubled patent system. But what if the opposite is true? What if it’s the status quo, in which patent trolls sock productive companies with abusive lawsuits, that is hurting innovation?

That’s the position of more than 50 law professors and economists, who submitted a letter to Congress, encouraging elected officials to do something about the current mess. In one striking passage, the academics suggest patent trolls (also known as PAE’s) are wreaking havoc on both R&D and venture capital investing:

“An econometric analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that extensive lawsuits caused small firms to sharply reduce R&D spending; and yet another found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending,” said the letter (the cited studies can be found in the letter below).

Such a finding stands in sharp contrast to the patent troll lobby, which argues that the current system is effective for promoting innovation. That system often involves investors and lawyers teaming up to create shell companies that acquire old patents, and then threatening lawsuits against hundreds or thousands against businesses.

This model is effective because patent trolls exploit an economic asymmetry in which patent lawsuits are relatively cheap to file, but extremely expensive to defend, which prompts companies to simply pay the trolls to go away.

The trolls can also strike it rich by seeking out favorable jurisdictions like East Texas, where juries last month granted a $533 million verdict against Apple, and another for $16 million to a troll who claims to own Bluetooth.

The scholars’ letter calls the wisdom of this system into further question. Its signatories include economists and some of the country’s most prominent intellectual property scholars, including Mark Lemley of Stanford University, Pamela Samuelson of University of California, Berkeley and Robert Cook-Deegan of Duke University.

The letter comes at a time when Congress is attempting patent reform for the third time in five years. The previous two attempts floundered, despite bipartisan support, after trial lawyers and other special interest groups pressured former Senate Majority Leader Harry Reid (D-Nv) to scuttle key bills.

Supporters of the measure are optimistic that the third time will be the charm. A source familiar with the process predicts reform will gain momentum if Sen. Chuck Schumer (D-NY), a long-time patent troll opponent, supports a reform bill that is expected to be introduced this month by Sen. John Cornyn (R-Tx). Rep. Bob Goodlatte (R-Va) already introduced such a bill in the House of Representatives in February. The White House is in favor of patent reform as well.

Here’s the letter from the scholars, which was circulated by Jim Bessen and Mike Meurer of Boston University, and Brian Love of Santa Clara, in order to refute suggestions there is no empirical evidence about flaws in the patent system:

IP Scholars’ Letter to Congress

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Y Combinator doubles down on hardware startups with new resources

Citing a growing number of investments in hardware companies, Y Combinator announced today it will integrate two prototyping labs and expert hardware partners into its startup accelerator.

Y Combinator will build a small electronics shop in Mountain View, but the bulk of hardware work will happen at Autodesk’s Pier 9 space. Pier 9 is home to millions of dollars worth of equipment for metalworking, woodworking, 3D printing and even biochemistry.

Just one room in the massive Pier 9 prototypnig space.

Just one room in the massive Pier 9 prototyping space.

The accelerator’s startups will work out of Pier 9 with the help of Bolt, a venture capital firm that specializes in product design and manufacturing. Other prototyping studios and past Y Combinator startups are offering up further expertise, service discounts and equipment.

Hardware startups must take a more arduous path than new software companies, as it is a long and expensive process to go from idea to prototype to product. Hardware accelerators like Highway1 and Lemnos Labs have cropped up in the Bay Area in recent years to provide startups with basic tools and help them locate resources and factories in China.

As the internet of things begins to meld hardware and software and Silicon Valley grows more interested in more challenging “moonshots,” formerly software-centric accelerators like Y Combinator are taking notice. President Sam Altman wrote in a blog post that Y Combinator will be putting out requests for more hardware startups.

“We don’t shy away from expensive hardware,” he wrote, citing Y Combinator’s investments in startups like UPower, which focuses on nuclear fission. “We’re happy to see all sorts of hardware companies, but we especially like the ones that are fundamentally new ideas that Kickstarter might not support.”

This is the year we find out whether new media can scale or not

Investment funds and traditional media entities have poured hundreds of millions of dollars into new-media entities like Vice, BuzzFeed, Vox and Business Insider over the past six months, but will these risky bets on the future of media pay off?

Robotics funding is off to a hot start in 2015

Robotics hardware startups have already raised more than $51.9 million in 2015 thus far, bolstered by home robotics startup Jibo’s $25.3 million Series A round Tuesday.

That’s chump change for a lot of industries, but not for robotics companies, which have traditionally seen much lower investment rates. Google X engineer Travis Deyle’s annual semi-scientific tally put venture funding for robot companies at around $341.3 million in 2014. That’s up significantly from $250.7 million in 2013.

While home robots like Jibo are playing a part in the trend, drones are also a major factor, drawing in $105 million in 2014 by Deyle’s count. They are still here in 2015; Skydio and Galileo grabbed $3 million and an undisclosed amount, respectively, in their seed rounds this month.

That $51.9 million figure also includes Rethink Robotics, which raised a $26.6 million Series D. Unlike Jibo’s home assistant bot, Rethink Robotics’ Baxter robot is best known for its work in labs and factories, where it can be quickly trained to take over repetitive tasks from humans.

The increased interest in consumer-level robots might be due in part to crowdfunding sites, where novel hardware often turns into a blockbuster campaign. Personal Robot, a home assistant much like Jibo, is in the middle of a campaign that has raised well over $100,000. And there is no question it will be another big year for crowdfunded drones.

Ringly scores $5.1M for future wearables and collaborations

Ringly, which makes a line of connected rings, has raised $5.1M in Series A funding led by Andreessen Horowitz with participation from High Line Ventures and Silas Capital. The funds will help the New York City-based startup expand beyond offering connected rings and enable collaborations to bring its technology to other brands. It will also expand its research and development efforts to pack more sensors and sense into the tiny form factors that wearables demand.

This round brings the company’s total investment to $6.1 million and includes previous investors such as First Round Capital, Social+Capital, Mesa+, BBV and PCH. The company was created in 2013 to build a connected ring that would let women know when their phones were ringing or they had text messages while keeping their phones in their bags. It’s a common problem, but most of the solutions were bulky or ugly.

For example, I wear a Pebble watch, but it’s not something that goes well with a little black dress or even a cute tank and pair of strappy heels for a night on the town. Ringly is one of the first devices I’ve seen that gets the fashion and the tech right, by cramming in a tiny Bluetooth radio, a microcontroller, and LED and motor to offer some haptic feedback into a tiny package that fits behind a large stone in a cocktail ring. It wasn’t easy.

It’s that same package of tiny tech that Ringly CEO Christina Mercando says the company will be looking at bringing to other designs and perhaps other companies in the coming year. “We are looking at new styles and form factors using the existing technology,” she said. “The tech is so interesting and we’ll be adding new features from the software side to help you stay more connected.”

She said that Ringly will “definitely” be collaborating with other designers and brands over the coming year, but it won’t be as a white label technology package, rather as a more formal collaboration that will include the Ringly brand. So maybe we’ll see a Tory Burch for Ringly design or something a bit more fun. David Yurman appreciates a chunky hunk of jewelry.

Finally, the money will also go toward R&D for new products that will require new sensors and hardware that will open up new product possibilities for 2016. Given the plethora of new sensors and what people are trying to do with them, this could be amazing or a huge letdown. I’m going to hope for amazing since Mercando spent her time designing a ring while it seems most other companies were out there designing a smart watch.

It’s not that the market doesn’t need a smart watch, but it’s so clear that when it comes to wearables that the market will need infinite variety, and Mercando seems ready to think about form factors that others are ignoring. With plans to integrate her tech into more places and different devices, Mercando’s view of wearables is one where the technology slips seamlessly into fashion as opposed to trying to make technology the fashion. For the mainstream audience, that’s the approach I’d bet on for the long term.

For more on Ringly, check out Mercando discussing how she built the device at our Structure Connect event from October in the video below:

https://www.youtube.com/watch?v=Q5fDy4tzgHY

The improving VC picture

Over the past few quarters I’ve been wondering if we’re seeing a renaissance in venture capital and whether now was actually an ideal time for LPs to be allocating to VC as an asset class.

The arguments in favor of allocating now to VC revolve around the fact that in 2013 we saw net outflows from venture capital with VCs investing $29.4 billion in startups while only raising $16.9 billion for their own funds. And looking back beyond 2013, the last year VCs brought in more than $20 billion into VC as an asset class was 2008. Was it possible that VC was rightsizing?

Rightsizing would mean that less money was chasing the same amount of startups, creating more attractive valuations and returning more value to venture capitalists. While it’s hard to know how favorable capital markets will be in 7-10 years when today’s money will try to exit, the past few years of public market frothiness has shown that it is possible to make plenty of money with public exits. It’s also put some pressure on LPs to chase better returns in the form of venture capital, particularly as many pension funds face high expectations to fund pension obligations for retiring baby boomers.

For the present, public market successes have latter stage VC investors balking at the valuations being presented to them, particularly since it’s getting easier for public market funds to try and get into investments pre-IPO. At the same time the environment sends a basic message that VC continues to have potential as an asset class.

Any way you slice it 2014 is looking like a great rebound for VC allocation. After pulling in almost $18 billion in the first two quarters, Q3 locked up another $6 billion. The $23.7 billion in dollar commitments to venture capital is already bigger than any year in the last five and has the potential to be in the ballpark of the fundraising years of 2005 to 2007 which averaged $30 billion in inflows to VC. The number of new funds, defined as the first fund at a newly established firm, reached 70 through Q3, already 9 more than last year.

It’s no secret that cleantech venture capital has been hard to come by both because of larger issues in VC fundraising as well as the bankruptcies that dotted 2009-2012. But the perspective is different today in a SolarCity/Tesla world.

While Bloomberg New Energy Finance’s global investment in clean energy figures have been down since a 2011 high of 317 billion to about 251 billion last year, Q3 was up year over year at $55 billion versus $49 billion for new investments being made in clean energy. Overall, 2014 is tracking ahead of 2013, a sign that clean energy investing has stabilized. Q3 also saw a pair of successful solar IPOs in the form of solar project operator TerraForm and rooftop solar installer Vivint, both being helped along by the incredible post IPO performance of SolarCity.

And if hot public markets are driving some of the renewed interest in venture capital, that’s unlikely to change in the next few years. A number of solid IPOs remain on deck—Dropbox, Pinterest, and Airbnb to name a few. While inflated valuations of these startups are likely to create some lackluster post IPO performance, VCs will still benefit from the relative liquidity of public markets and send the signal to LPs allocating that there’s still money to be made in VC. And with the rise of capital light, digital green investing, I expect some of that money will be available for innovations that create resource efficiency.

Deutsche Telekom launches new venture arm with $620M available to fund startups

Germany’s Deutsche Telekom has launched an enormous venture capital fund, totalling €500 million ($621 million) over five years, that’s aimed at newer startups and more mature companies. The fund will be run by a new company called Deutsche Telekom Capital Partners (DTCP) rather than the telco’s existing T-Venture arm, which will still retain responsibility for follow-up investments in its hundred-or-so existing portfolio startups, but will be otherwise closed to new investments. DTCP will have a “special focus” on German startups, and will launch in early 2015. People love to whine about the lack of startup funding in Europe, but in truth the last couple years have seen billions of euros put on the table to support local scenes.