How to attack an industry
Break down an industry by sectors.
Ex. Use big data to attack the financial industry. The financial industry can be broken down into Consumer and Institution(Enterprise) spaces. Under consumer, we have wallets, payment, crowdfunding, real estate, personal wealth management, classic banking, lending and credit, mortgage, insurance etc. Under enterprise, we have sales & trading, hedge fund tech, portfolio management, business intelligence, market data platform, alternative data, clearance and settlement, AML/KYC, risk compliance etc.
Find the sector(s) with the least resistance.
Ex. In consumer space, the biggest resistance is distribution/adoption. As Alex Rampell from Andreessen Horowitz puts it, the battle is between incumbent’s innovation and startup’s distribution. It’s very hard to ask people to trust your startup with real money, so the path of least resistance is lending. This is one of the reasons that personal loans is the first consumer Fintech sector that broke out. Within personal loans, the path of least resistance is “Henry”, the Hungry and Not Yet Rich, people. Traditional institutions focus on people that are already rich, but not the poors that have a high potential of becoming rich — such as college students majoring in STEM. This is how SOFI became a $8B company in less than 7 years.
Find out how big the reward is.
This one is obvious. Startup is an “if…then…” game. If you beat the resistance and succeed, how big is the reward? Winning a $100M market is probably not very exciting.
Figure out the expansion plan to other sectors.
Ex. Every consumer Fintech company wants to be Wells Fargo. Nobody says “we just want to be a student loan refinance company” — that’s just too small for startups. After beating through the path of least resistance, the next step is to figure out the expansion/domination plan.
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Every business wants barriers of entry. New technologies tend to break old barriers of entry. For instance, Walmart built strong barriers of entry against other stores by low prices and large merchandise collection that comes with economy of scale. But internet came along and broke this barrier by achieving those same 2 things, to a greater degree, with low operating cost and democratizing merchandise sources. When this barrier is broken down, there is a war. When there is a war, startups have opportunities. Hence Amazon.
Some sectors of Finance have barriers of entries that existing technology cannot take down, one of which is capital. A trading or asset management fund operates tens of hundreds of billions of dollars, so a small percent in profit still represents meaningful profit. It’s very hard for a startup to get the same meaningful revenue even it can get the trade signals right multiple times more than the traditional firm, because there are several orders of magnitude difference in amount of cash. So a startup with $100M to trade needs to be 1000x more accurate than a traditional fund with $100B AUM to make the same amount of money. Given the substantial amount of domain knowledge involved in trading, it’s unlikely that any one startup can beat traditional funds by 3 orders of magnitude.
Therefore, we probably won’t see S&T funds being replaced anytime soon. As of 2017, most Fintech analytics companies fall under the “alternative data” category and serves, not replaces, traditional financial institutions.