Given the success (and astronomical returns, if you got in early) of tech investing over the past decade, every investor is trying to find the next “unicorn”. In order to understand what the next big tech thing is, our research partners Banyan Tree Investment Group spoke to some of the largest and most active early stage and venture capital firms around the world.
For some context, one firm has invested in 2,300 startups since inception and has a network of 5,000 founders. The premise was simple – the innovative business models, technology and/or services likely to emerge over the next 5 to 10 years will likely be attracting Venture Capital (VC) dollars today. They further validated their findings from these discussion by looking at deal flow and funding data in the VC/early stage sector. They highlight some of the themes to emerge from these discussions.
- Smart HR (or HR Tech). HR tech is moving beyond simply just automating the workforce hiring and people management (e.g. performance reviews) process. Companies are now utilising background check firms (led by technology) to better use all available data in the hiring process. Artificial intelligence (AI) is also being trialled to fully automate the hiring process (AI recruiting), to potentially eliminate all human bias. Team management tools are also attracting investments in the VC sector, such as Monday.com which is a team-based project management software. One of the reasons, they believe, that HR Tech is still not garnering enough interest is because business leaders still see the HR function as process based centre rather than a business strategic partner. With technology adding more tricks to the toolkit, they believe this thinking will change.
- Digital health. This is an area that will see significant investment over the next decade. One key enabler of this is improved speed (e.g. 5G) and computational ability (processing large sums of data). Healthcare (and related data) is a key pillar of any developed economy. Whilst the sector has access to a vast amount of data, being able to compute it in a timely and efficient manner was not previously possible.
Key themes in the digital health area:
- artificial intelligence is being used to transform pathology and increase the speed with which patients are diagnosed;
- artificial intelligence is being used to enhance and speed up the drug discovery & development process by using algorithms to analyse disease-related data and forecast treatment outcomes; and
- value based care such as using existing networks of providers and payers to help improve referrals and decision making. According to data by CB Insights, the most funded companies include We Doctor (providing primary care using technology) valued at $5.5bn, insurance technology company Oscar Health valued at $3.2bn and genomics startup GRAIL valued at $3.2bn.
- Insurance Tech. According to data by Willis Towers Watson and CB Insights, investment in insurance technology in 4Q 2019 was at an all-time high of $2bn. Whilst still early days, the insurance sector is looking to digitize its functions:
- pricing and underwriting;
- policy administration and central systems; and
- claims and settlement.
One area which is seeing growth in investment (but still a long way to go) is fully automating claims processing.
- Machine Learning. Machine learning is just a branch of artificial intelligence. As the name suggest, machine learning is a process of a machine learning a process. Instead of explicitly programming the functionality into the machine, a system is created for the machine to learn on its own. This can be done by providing the machine labelled or unlabelled data, which it learns and begins to perform functions on its own.
In the following section Banyan Tree dig a little deeper into blockchain and how it could touch many parts of the economy.
This may be elementary, but it is important to distinguish between blockchain and Bitcoin upfront to avoid any confusion. Blockchain is just the underlying technology used by Bitcoin. But obviously blockchain emerged as a result of Bitcoin and since then there has been plenty written about it with much hype. On the other side of the argument, there are also several loud voices which believe blockchain is over hyped (the bears). But as with most things, investors tend to become too optimistic with the “game-changing” capability of an innovation early on and similarly can become overly pessimistic when the implementation to the real world is not as fast as hoped.
What is blockchain?
At the core of it, blockchain is a decentralized digital database of transactions such as asset sales, contracts, goods and, in fact, anything of value. These transactions are accessible to all in the network (via permission if private or everyone if public) and cannot be altered without the approval of consensus (the network). Every transaction is stored in a block, which is verified by a wider community. This creates more transparency and a record which is shared across a network.
Figure 1. How a block is built
Source: Banyan Tree
How does blockchain work:
- Transaction. There is an economic transaction between two or more parties (that is, exchange of data) in digital form.
- Verification. The transaction needs to be verified by the entire network as valid. That is, every member in the network can see the data and therefore can either reject or approve it (consensus algorithms). Each transaction will be in a block, which contains all the information such as price, terms and conditions.
- Structure. Each block has its own “hash” or an algorithm which the network uses to identify a block. It is the link between these hashes which creates a chain.
- Validation. Once the blocks are validated, they can now be added to the blockchain (i.e. prior transactions) in chronological order that cannot be altered.
- Database. The database (distributed ledger) is replicated and synchronized across multiple sites (computers, servers etc) and does not have a centralized location or control. Any additions to the database are reflected across all members.
Figure 2: Blockchain
The following are the key benefits blockchain:
- Security. Data in blockchains is accessible by everyone and cannot be altered. If the data in previous transactions is changed, it will also change the value of the hash (the algorithm) which links these transactions. Given these hash values must match to other copies in the database, it will highlight as invalid if data has been altered and will require consensus to correct it. This should reduce the risk of fraud and make it difficult for an external party to alter the data.
- Transparency and quality of data. The visibility to all members and requirement of consensus to validate data should mean there is more transparency across multiple parties (or firms). But it also increases the quality of shard data and ensures consistency. Firms which are continuously sharing data or transactions with one another are exposed to human error (which can require onerous manual correction) or could be using labourious methods (e.g. sharing spreadsheets).
- Fewer intermediaries. Given the transactions are between members (or peer-to-peer), blockchain means there is no requirement for third parties such as lawyers and brokers in real estate transactions.
- Faster and automated. Blockchain can speed up the transaction process between multiple parties and is able to be programmed. This should increase efficiency, reduce costs and provide scalability.
At this stage, blockchain bears have some reason to celebrate, given blockchain’s only real-world application is Bitcoin. As the chart below highlights, funding (and the number of deals) for blockchain companies in 2019 was materially down on previous year, perhaps signaling some waning investor interest.
Figure 3: Funding to blockchain companies ($m)
Source: CB Insights
However, in Banyan Tree’s view, the next ten years will see the technology emerge out of investment phase and into implementation. The concept behind blockchain has significant merit and could touch many parts of the economy. According to IDC (International Data Company) forecasts, global investment in blockchain is estimated to grow to $15.9bn by 2023. The bulls often point to blockchain’s potential to disrupt traditional businesses and even displace traditional currency (e.g. cryptocurrency). Whilst we appreciate these big picture views (no doubt some business models will likely be disrupted), we are equally interested in how blockchain’s application in existing businesses and industries can improve efficiencies and business models. In other words, the discussion around blockchain should focus on how the technology can be an enabler rather than just disrupting. 4Q19 funding and deal data supports our view, with CB Insights data highlighting that three of the four largest deals during the quarter came from firms looking to streamline business processes (that is, enterprise solutions).
Figure 4: Blockchain 4Q19 deals
Source: CB insights, Banyantree
Examples of how blockchain technology is being proposed across certain sectors:
- Banking (e.g. cross border transactions). According to IDC, the banking sector is driving investment in blockchain for cross border payments & settlements among many other use cases. It has been reported several global banks – UBS, Barclays, HSBC Holdings and Banco Santander – are spending millions of dollars on blockchain technology to streamline their back-office operations. JP Morgan is also looking to introduce JPM Coin to help facilitate transactions between institutional accounts. The potential back-office cost savings quoted are in the billions for these banks, which highlights why the banking sector is driving investment in the space (making up approximately 30% of the spend).
- Securities settlement. Blockchain can increase efficiencies in the securities trading industry, specifically the clearing and settlement of cash equities. For example, the ASX Ltd (ASX) is looking to replace its current CHESS system, which provides post-trade settlement services with an updated model utilising blockchain. This could also see faster settlement times.
- Car leasing. Visa Inc and DocuSign are using blockchain based smart contract to streamline the car leasing & buying process. DocuSign allows you to send digital rental agreements online. It allows consumer to select a car, choose an insurance policy and sign the agreement electronically. This all gets updated on the distributed ledger without the need for any manual intervention.
- Real estate transactions. Given the number of intermediaries, manual processing and paperwork required to transact in a property, startups around the globe are looking to utilize blockchain to securely record and transfer property titles. At the same time providing a secured storage space online. It could significantly improve the time to complete the process, which can take weeks.
- KYC (Know You Customer) compliance. Using the digital database system to provide accurate and quality data will reduce the need to do extensive KYC account checks multiple times across firms.
To find out how you can gain exposure to this rapidly growing and changing technology give us a call ……