Who in their right mind would launch an online personal finance startup right now?
The answer should obviously be no one.
Apparently, the obvious is not necessarily so for many internet mogul wannabes. I read with equal parts amazement and dread a post yesterday on Netbanker about yet another online personal finance startup, the tenth — that’s right, TENTH — this month alone in North America. These 10 join an already jammed dogfight for online personal finance users. When I was back in college, they’d call that too much supply for too little demand.
The volume of launches would be enough to get me shaking my head, but to see them now?!? With the economy and the banking world where they are today?!? You don’t just slap out a startup. It takes time. And that means these startups were greenlighted in the late winter/early spring 2008. These entrepreneurs should have seen the financial cataclysm around us — that is, if they really understand banking and personal finance. Let me put it another way. Would you have started a mortgage company in 2007? No. Would you have launched an internet company in 2000? Of course not. But online personal finance companies are still coming.
These startups are coming out of the woodwork in advance of Netbanker’s Finovate conference next month, which normally we would be enthusiastic for. But it just seems wrong to be considering new financial services ventures when financial services is facing a protracted and painful contraction. I guess there is some value in “thinking” about new banking ideas, but the focus right now needs to be on shoring up existing business models and overhauling risk management for any number of facets of banking. As I implied in this post a few days ago, now is not the time for 2006-era innovation. But that’s obvious, right?
Scott, first, thanks for your comments — even if you disagree with me. Obviously, you’re in good company. 🙂
My response, in brief:
1) Any financial services-related startup today that is focused on products, and particularly consumer products, will not make money for at least a year, if not two, and perhaps three — which would make any investment in such a startup today a bad one. Full stop. Every single financial services product line is declining and eroding, meaning originations are falling and credit performance is weakening. That was Sec. Paulson’s point yesterday: the Treasury needs to get consumer-related product originations going again, because right now they are mired by banks’ collective unwillingness to take on any risk of note. Couple that with the fact that every bank in the United States (if not the world) is cutting expenses for, well, everything and a product-centric startup has limited revenue opportunities for the foreseeable future. No revenue means failure for a startup. Why a VC or an entrepreneur would want to invest into such a headwind is beyond me.
2) Actually my first point is wrong. The only consumer-related product growing today is, uh, parking money at banks. Deposit levels at “safe” banks (excluding Wamu, for example) are soaring as consumers look for institutions to “simply hold their money” as the rest of the financial services sector implodes. There is nothing at all wrong with banks’ core raison d’etre: “simply a place that holds my money.” There’s a reason why this nation has an entire body of regulations surrounding that very “simple” function: because it is anything but simple. Besides, when consumers see their homes drop in value by 20%, 30% over the course of a few months and their 401k holdings fall by 14% since Election Day alone, there is great appreciation for simply retaining cash. We are in a recession. Cash is good in a recession, which leads me to my second point. If the financial play today is keeping your money in cash, then what do consumers need a PFM for? I don’t need my Mint friends to tell me that the equity in my house has plummeted. And what of P2P lending? If JPMorgan Chase won’t lend to anyone with a Fico below, say, 700, why should you or I? I certainly can’t underwrite a loan better than JPMorgan Chase (which has not started underwriting by MSA, by the way — more about that in another blog).
Others apparently agree with this sentiment. Look at the chart below. The volume of P2P lending is nominal, while the number of P2P sites is anything but. Something has got to give.
Clearly, this dynamic will not last. Clearly, investing, the housing market and the economy at large will rebound, but I wrote my blog in response to the rash of startups in September 2008. There is not a banking executive who thinks the economy and financial services sector will rebound before the fourth quarter of 2009, if even then, and that means any startup at this point in the credit cycle has very little chance of generating revenue and, therefore, achieving financial success. I certainly agree that consumers deserve to own their data. I too am grateful to the PFMs for seeking to faciliate that. But this is about revenue. Simply put, a business needs revenue to survive, and there is little of it in financial services today. Considering the 12 to 18 months for development that a startup needs, perhaps VCs might think about investing in this sector in the first or second quarter of 2009.
All this is with a big caveat, which is that I am super bullish on startups that help fix the current financial problem. Any venture that advances risk mitigation, loss mitigation, credit analysis, treasury management, cost containment, etc. has a good shot at success. And I wish them that in spades.