Finovation Friday | Software is Eating the World(?)

a16z co-founder Marc Andreessen is well-known for his saying that software is eating the world. To illustrate his point that software and technology are changing industries rapidly, he provides common examples: Amazon > Borders, Netflix > Blockbuster, etc. The entire nature of the retail and media industries have changed over the last 15 years thanks to rapid advances in and accessibility of technology.

Most CEOs would agree with this idea. In fact, the playing field has shifted so much that 72% of Fortune 500 companies said that they consider themselves to be a technology company (despite less than 10% actually residing in “software” or “IT” classifications). Despite this change of heart (or lip service if you are cynical), many large corporations get mocked for being too slow or trying to fit in where they don’t belong (i.e., in the “cool techies club”).

What isn’t often questioned is if most business should be technology businesses, or have business models that are primarily predicated on software. Of course, all business must use some software to run a business, but are all these companies truly “technology companies” or just technology users?

Limits of the Software Model

Elad Gil believes that tech investors are starting to overstep their industry. The risk here is that tech investors end up trying to apply a “software-driven” economic and business model to a merely “software-aware” business. The excerpt below is incredibly insightful.

I think it is important on an ongoing basis to ask “how important is software to this business” and “why now?”. Software is truly eating the world, but you need what is fundamentally a software business in these traditional industries to make a real difference. Too many people are saying “oh this biotech is using algorithms so it is a tech company” even though it is really still a drug company with all the standard drug business timelines and fundamentals. They are merely using software for one part of their approach, but it is not a software driven business.

Another way to put it – is software truly transformative/the basis for competition for the startup? If so, you may end up with a tech model of innovation and disruption which is great. If you are merely using software but the business fundamentals have not shifted – than the startup is probably not that differentiated and will not merit tech multiples. A software-enabled, network connected, crowd funded, smart toaster is, when all is said and done, still just a toaster.

What does this mean for fintech?

The same theme applies to fintech. While fintech is not a “hardware” business, which is the main point Elad is making, it seems like a software-enabled, network connected, smart bank account is still just a bank account. A digital wallet is still the same payment information, just on your phone (as less-than-stellar adoption rates would attest).

Just as software-turned-hardware investors have to understand the change in fundamentals, I believe too many founders and investors underestimate the complexities of the financial services system and regulatory environment. You still need a bank account or credit card somewhere to transfer money, regardless of the app/mobile wallet/bot you use.

Forward-thinking banks can replicate or acquire customer experience or process improvement technology. However, to truly change the paradigm of financial services, we will need more innovation around the regulatory environment and infrastructure of the system. Bitcoin is one attempt to do this, allowing users to transact without needing to interact with the financial system (unless you want to exchange your Bitcoin in and out of dollars ;)).

OpenBazaar is an example of how Bitcoin can be combined with other technology to create a peer-to-peer commerce platform that does not rely on any banks for payments (so no fees) or even the web for a connection point. It is this type of innovation that truly threatens banks and financial services firms.

I believe the massive force of time, effort, and money will create some truly world-changing businesses in fintech. However, it will require smart investors to sift through the noise. It will also require financial services incumbents to not get swept up in chasing shiny objects, but focus on the key business drivers and how foundational shifts will change their business models.