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FinTech gives rise to the next-generation–an inherited human network

2015.4.22

FinTech has suddenly been getting a lot of attention recently. This is the second in a series of three articles seeking to expose its true nature.
The first article was an overview of the FinTech industry in Japan and abroad, using actual data and case studies.
This second article will focus on the individuals behind FinTech to further delve into the background of its progress.


The human network behind the rise of FinTech

As argued in the final section of the previous article, the government, major corporations, and venture capital funds must cooperate for Japan’s FinTech industry to thrive.

The FinTech industry outside Japan, particularly in the U.S., is characterized by a close relationship between the government, major corporations, and venture capital firms. Innovations that emerge from FinTech startups have been successfully incorporated into the financial system as social infrastructure.

What is behind this success?
Human network in the U.S. FinTech industry

The chart above shows some of the connections in the U.S. FinTech industry.
Actually, behind the industry’s success is a vast network of shareholders that cuts across various sectors.
Let’s see how these personal ties have contributed to the rise of FinTech.


“PayPal Mafia” is everywhere

Former PayPal executives often play a leading role in the establishment of revolutionary services that are transforming the world. These people include Elon Musk, founder of Tesla Motors and Space X; Reid Garrett Hoffman, co-founder of LinkedIn; and Chad Harry, one of the founders of YouTube.

Even though they may not receive much attention in Japan, former PayPal executives are also active in the FinTech industry.
・It seems obvious that these people would exert a strong influence on FinTech, as PayPal is a prototype of the FinTech business.

Bill Harris, CEO of Personal Capital and introduced in a previous article, also comes from PayPal.
Harris has previously served as CEO of PayPal and as CEO of Intuit, a developer of accounting systems, although this is not well known in Japan. In fact, Harris is a leader of the FinTech world.
Harris founded Personal Capital after 25 years of experience and preparation in the FinTech industry.
・Personal Capital,  which ranked 17th in Disruptor 50, provides investment management and advisory services for wealthy clients.
・For reference: Clip showing Bill Harris talking about his experience at PayPal and Intuit
And don’t forget Max Levchin, who was once known as a “consigliere” (an adviser to the Mafia).
Max Levchin is a co-founder and former CTO of PayPal. He is also known as the founder and CEO of Slide, which was acquired by Google for $182 million.
Levchin, after selling Slide, established Affirm, an online settlement solution company.
・Affirm is a FinTech startup known for its mobile services that allow users to settle payments with two clicks. The company wants to build a next-generation payment settlement network.
・For reference:Article based on an interview with Max Levchin about Affirm
Google Wallet once made a stir by entering the mobile payment business. However, not many people know that former PayPal officials were behind Google Wallet. Osama Bedier and Stephanie Tilenius, who developed Google Wallet, are former PayPal directors. They were in a position to know PayPal’s mobile strategy, and that’s how they created Google Wallet’s strategy.
Stripe, discussed in the previous article, is an online-settlement service startup seeking to replace PayPal.
What is surprising is that the PayPal Mafia is also deeply involved in this startup.
Unlike Personal Capital or Affirm, the company’s management and board members do not seem to have any relationship with PayPal. However, shareholders include Peter Thiel and Elon Musk.
Therefore, it may not be a coincidence that the company’s investors include Sequoia Capital in Round B, and Founders Fund and Khosla Ventures in Round C.
・Sequoia Capital is a venture capital firm at which Roelof Botha, former PayPal CFO, is a partner.
・Founders Fund is a venture capital firm founded by Peter Thiel.
・Khosla Ventures is a venture capital firm at which Keith Rabois is a partner. Rabois,who served as a senior executive at PayPal, became COO at Square, a smartphone settlement service provider.
In this way, the influence of the PayPal Mafia as investors and advisers cannot be ignored.
Perhaps Reid Hoffman, a co-founder of LinkedIn, is the most famous member of the PayPal Mafia who succeeded as an investor.
Hoffman, often called the most successful investor of the past 10 years, also invested in Facebook when the company was starting out. He is also an ardent investor in the FinTech field.
Among the FinTech operations, Hoffman is particularly interested in settlement services. He has invested in Cardspring, which was acquired by Twitter, and Xapo, a Bitcoin settlement firm.
・For reference:Article based on an interview with Reid Hoffman concerning credit card settlement services
・For reference:Article based on an interview with Reid Hoffman concerning Bitcoin
Founders Fund, a venture capital firm founded by Peter Thiel, the Mafia boss, has also invested in a number of FinTech startups in addition to Stripe, including Oscar (43th on the Disruptor 50 list), an online platform for health insurance; BitPay, a Bitcon settlement system; and Mint, a household budget and asset-management service.
These are just a handful of examples.
It should be clear by now that PayPal has produced a number of people who exert strong influence on the FinTech industry.


Human network includes established players

Of course, the human network goes beyond startups in the FinTech industry, such as PayPal. It goes without saying that individuals who previously worked for major banks or related entities contributed significantly to the development of the industry.
Motif Investing, an online investment broker that ranked No. 1 on Disruptor 50, is one such company.
Advisers to the firm include a former CMO, COO and president of E*Trade, the world’s biggest online brokerage; a former CEO of GETCO (now KCG), a well-known market maker; and a former CTO of Intuit, a major accounting system firm.
Most executives of Betterment, an online investment advisory service, come from investment banks or major financial institutions, including CEO Jonathan Stein.
Likewise, Wealthfront, an online investment advisory firm ranked 20th in Disruptor 50, has Burton Malkiel, author of “A Random Walk Down Wall Street,” as its CIO. Malkiel served as chairman of the Economics Department of Princeton University and a member of the president’s Council of Economic Advisers.
Certainly, it may obvious that the FinTech industry has many people from the financial industry. Even so, the extent of the connections is quite unusual.
In recent years, the FinTech industry has seen a number of cases in which established companies supply human resources.
These companies send executives as board members to firms in which they have invested, and establish incubation programs to provide human support.
Of course, the market environment was not always this way.
Prior to the global financial crisis, established companies did not show any interest in FinTech startups.
Major banks considered the business scale of FinTech startups too small.
However, the inefficiency and inconsistency of the financial system came to light after the financial crisis. Growing distrust of the system led to a loss of customers.
Banks had to act swiftly in response, but they could not transform on their own. Not only were they too weak, they were simply too big to change.
As a result, they turned to the FinTech industry.
At the same time, FinTech startups were attracting many customers, who had begun to distrust and be disappointed with established players. These startups were being accepted as providers of new financial solution services.
That did not mean, however, that everything was smooth sailing for FinTech startups. Although they were attracting many customers, the size of their operations still paled in comparison with that of established companies.
They lacked enough capital and customer trust necessary to create a financial system that could serve as social infrastructure. There were also many regulatory hurdles.
Thus, FinTech startups turned to established companies for help.
The final section of the previous article stated that the U.S. FinTech industry arose as a result of a joint effort between venture-capital companies, the government, and major corporations. This was made possible because of a vast human network, including people in major corporations.


The continually expanding human network

The human network in the FinTech industry is also expanding outside the financial sector.
Tien Tzuo, Zuora CEO and co-founder, comes from the Saas industry.

・Zuora is a startup that offers payment software and solutions for providers of subscription services. The company ranked 11th on Disruptor 50.
Tien Tzuo is the 11th employee of Salesforce.com, which is No. 1 in the Saas industry. At Salesforce.com, he served as chief marketing officer and chief strategy officer.

In addition, the CEO of Coinbase, a Bitcoin settlement company, comes from Airbnb, while the CEO of investment advisory service Wealthfront worked for LinkedIn and eBay.

The FinTech industry could serve as a financial platform for all businesses. The human network that extends beyond the financial industry is one factor behind the rapid spread of FinTech startup services.

We have discussed the people involved in the FinTech industry. We hope that this article provides a useful analysis of (one of) the factors behind the recent rise of the FinTech industry overseas.
In recent years, even in Japan, those who hail from the financial industry have established FinTech startups. Financial institutions are investing in such startups and providing human resources, and it seems like a human network is being formed. However, the depth and breadth of connections are still far short of what they should be.
In Japan, the creation of a new financial system centered on the FinTech industry will require the participation of the government, major corporations, and venture-capital firms. The process must begin with the formation of a human network.


hayashi

Shunsuke Hayashi, Business Producer

Joined DI after graduating from Tokyo University, majoring in economics, specializing in finance.
At DI, he is involved in constructing growth strategies and the medium-term management plan, planning overseas strategy development, and developing new businesses in various fields, such as finance, communication, environment and energy, trading, medical, and consumer products. Recently, he has also been focusing on venture capital businesses, and has experience providing investment advice, strategy-making, and execution support in areas such as finance, digital media, environment and energy in Japan and abroad.
From Shanghai, China.