CeFi vs. DeFi - building it for the next billion users?

Next Billion Tech

To start the discussion, let’s demystify what centralized finance is. The present form of financial institutions is centralized, i.e., people or institutions manage the asset class and processes in some form of centralization of assets, e.g., banks. Banks are the perfect examples of centralized financial institutions - from deposit to lending, all the functions are performed centrally. 

A bank fundamentally allows people to safely deposit money that banks use to lend to good borrowers, charge interest to the borrowers, and give the depositors a piece of the pie.  To do all of these things, an entity named a bank has to go through lots of regulatory hoops and hurdles to pool money, create escrow accounts, get licenses, leading to creating misaligned incentives, geographic restrictions, and operational inefficiencies. This way of banking is very top-heavy and centralized, and hence we call it CeFi - Centralized Finance. 

Though there is a better way to create a banking infrastructure with almost zero to negligible cost that can be scaled across geographies, creating a borderless infrastructure for depositors and borrowers to interact, i.e. 

  • Depositors from high liquidity zones, i.e., developed nations where interest rates are almost close to zero, or negative in many cases and 

  • Borrowers from inefficient capital markets, where access to capital is a problem, i.e., emerging economies like India and Indonesia. 

We can do this by leveraging decentralized finance infrastructure on blockchain protocols like AAVE, Anchor, Terra, Compound, and many more. You can learn a bit more about various decentralized blockchain protocols and companies here. 

Though it’s not just banks, current fin-tech companies mainly use archaic centralized infrastructure, impeding growth and increasing the operational costs to reach out to the end consumer. I expect many of these companies will either adopt the hybrid structure, wherein the backend infrastructure of payment, lending, saving, and investment apps will use blockchain, or they go all decentralized. Otherwise, the survival of these growing fin-tech companies doesn’t look that promising compared to next-generation fin-tech companies built on blockchain from scratch. 

A few DeFi companies that are leveraging blockchain/ crypto assets to deploy in real-world are: 

  1. Maple - a corporate debt marketplace that enables institutions to borrow from Liquidity Pools funded by the DeFi ecosystem and managed by Pool Delegates.

  2. Centrifuge - an on-chain risk assessment and pooling infrastructure for borrowing against illiquid assets such as invoices, real estate, and commodities.

  3. Goldfinch - bring crypto loans to the real world

  4. Vauld - build Wealth Automatically With Crypto

  5. OnJuno - get your paycheck in crypto

The hybrid structures of DeFi and CeFi are pretty exciting and have been getting quite a lot of attention from venture capitalists, especially in the west. A few companies that caught my attention are as follows: 

  1. Fireblocks - hundreds of crypto and digital asset businesses use Fireblocks software and APIs to custody, manage treasury operations, access DeFi, mint & burn tokens, and manage their digital asset operations 

  2. Celsius - a platform of curated services that big banks have abandoned – things like fair interest, zero fees, and lightning-quick transactions

  3. BlockFi - the most accessible place to buy, sell and earn cryptocurrency.

The implications of DeFi infrastructure are pretty powerful for emerging economies like Indonesia and India. It will allow low-cost credit deployment for productive purposes, especially high-growth SMEs, cheap ways to operate saving accounts, and liquidity to the micro-finance institutions. I think it’s high time fin-tech entrepreneurs focusing on the next billion users try to build financial products for real-world use cases on blockchain/DeFi infrastructure, rather than archaic banking infrastructures in Indonesia and India. It will allow them to provide financial products to low-income and growing middle income at zero to negligible costs and transfer the benefits to the end-users. 

What do you think about the potential of DeFi/blockchain application in financial inclusion with respect to Indonesia and India? Where can it play a critical role - payments, lending, savings, investments, asset management, liquidity provider, etc.? I would love to hear from you. 


If you are building a DeFi startup or investing directly in DeFi protocols or startups, please do write to me. I would love to learn more from you and would be happy to help in any way.


"first followers" is founded by Sagar Tandon. You can reach out to me at sagar@firstfollowers.co.

The "first followers" is a monthly newsletter covering impact investing, venture capital, innovative financing instruments, and venture building.

SDG 18 Zero Animal Exploitation

Building a Conscious VC Fund

I am working in impact, sustainable, and gender-lens investing for quite a while and have been part of many fellowships, workshops, and conferences focused on SDGs. Still, it never crosses my mind that none of the SDG goals focus on 70 billion land animals and possibly 1 trillion marine animals killed EVERY YEAR.

The argument against animal cruelty is pretty strong, though it’s a matter of time when everyone in the mainstream will accept and talk about it. Right now, a handful of us is trying to make a dent in animal welfare by activism, vegan businesses, or vegan investing.

Beyond Cruelty calls for the United Nations to add Zero Animal Exploitation as the 18th Sustainable Development Goal to its objectives.

Why should we add “Zero Animal Exploitation” as our 18th SDG goal?

Slavery

Today it's immoral to have a slave or treat someone as a slave. Even though racism still exists, nobody in the right mind can support racism of any kind or type. That's how we have evolved to accept the moral arguments behind this topic.

Gender rights

Still, there were times when women, especially in western society, were legally treated below men. Similarly, now women have the same fundamental rights as men, and nobody can dare fight against this argument. As a feminist, I think we have given fundamental rights to women. However, as a society, we still have a lot to do to accept different genders and create equal opportunities.

Animal rights and the future of meat

Today it's moral to eat pigs, cows, chickens, goats, etc., but strangely, it's immoral to eat your own cat and dog. I see the point, but it's very logically inconsistent. Do we as humanity can accept this logical inconsistency for a long? NO Fudge NO, we won't, and that's where we will expand our empathy circle for animals beyond humans and few animals like dogs or cats.

What is moral today in most people's heads will be immoral and potentially criminalized in the future? We evolve as a society; we learn from our past, but we don't just get stuck in the past, and we don't need to. We can be better. It's a matter of time, to be honest, that many other vegans and I will be proven right, but I feel the pain for those voiceless animals who are at the moment crying for not to be slaughtered for pleasure and someone's hunger. None of us wants to give pain to others and to even animals, and hey, it's okay to accept your failure and make mistakes, almost every vegan used to be a non-vegan, too, including me.

If you are a vegan, it's important to understand we as a society are conditioned in a certain way; there will be inertia against the idea of a NO-MEAT world. Still, as soon as we passed the inertia, then things will start to change. I already see patterns in the upcoming generations, which are more conscious and cares about these issues. We, as vegans, need to be non-judgemental and act as better choice architects.

If you are non-vegan, please forgive vegans. If you think they are judgemental, they come from a place of heart and love for animals, and they feel hurt equally that non-vegans cannot understand them.

I hope we all can pass on the initial inertia and resistance against the concept of NO-MEAT/NO-ANIMAL ABUSE and probably reach a state when it is immoral to even think and talk about it.

Hence, we need to add SDG goal 18 and bring everyone to agree upon ending animal exploitation.

Inspiration:

  1. [Documentary] Carnage 2017

  2. [TEDx] Extending our circle of compassion: Zoe Weil

  3. [Campaign] Beyond Animal Exploitation Manifesto

  4. [Book] The pornography of Meat by Carol J. Adams


If you are building a vegan business or investing directly in vegan businesses, please do write to me. I would love to learn more from you and would be happy to help in any way.


"first followers" is founded by Sagar Tandon. You can reach out to me at sagar@firstfollowers.co.

The "first followers" is a monthly newsletter covering impact investing, venture capital, innovative financing instruments, and venture building.

The case for investing in local SMEs

Next Billion Tech

In a market where liquidity has always been a significant problem, SMEs generally lack access to finance from banks and even non-bank capital allocators like PE funds. In contrast, many have all the ingredients to grow well beyond their current volume. It provides a great opportunity and demand for private credit funds. 

In addition, while the emerging market governments have not implemented any policies to alleviate the suffering of SMEs during the COVID crisis materially, banks have started dramatically cutting back on issuing credit, thereby kicking off a period of more cash shortage in the economy.

A research paper from the Wharton School presents 4 major challenges that Latin American SMEs are facing: (1) technology that falls behind; (2) underdeveloped human capital; (3) an obstacle known as ‘marketing’; and (4) restrictions on loans.

SME owners preference:

Afraid of losing control over their business, SME owners are reluctant to take in equity capital from local private investors, let alone from more institutionalized VC/PE, making them susceptible to getting stuck in a “slow-growth trap,” and hence limits scale. This has come to me as a surprise that I read in books and my interactions with SMEs in Indonesia and India.

Some possible solutions,

With a convertible loan product for SMEs, it can be structured as a Debt First instrument, with an option to convert into equity when the entrepreneur is ready to accept equity infusion. Growing mid-sized enterprises in emerging markets can be a significant target pipeline for private equity funds. 

It is beneficial to consider using innovative financing structures like variable debt, revenue share, self-liquidating debt, and other mezzanine instruments.

Gaps beyond financing:

While capital is a crucial ingredient to drive an SME’s growth, the owner and her/his team are usually not ready to cope with the implications of a sudden acceleration, whether financial planning, cash flow management, human capital requirements, or supply chain management.

Therefore, the nature and dynamics of the SME market make this group of customers less attractive to banks, PE, and other capital allocators and leaves this huge market underserved. However, a huge underserved market means a huge potential opportunity.

Curated Resources for further curiosity:


If you are an SME or SME-tech or investing directly in SMEs or investing in SMEs-tech in Indonesia or SEA, please do write to me. I would love to learn more from you and would be happy to help in any way.


"first followers" is founded by Sagar Tandon. You can reach out to me at sagar@firstfollowers.co.

The "first followers" is a monthly newsletter covering impact investing, venture capital, innovative financing instruments, and venture building.

Startup Support Ecosystems

Building a Conscious VC Fund

In my attempt to understand the overall startup ecosystem, I thought of summarising my thoughts on how I see startup support ecosystems, or as some call ESOs - entrepreneur support organizations. There are five specific kinds of startup support ecosystem exists: 

What do these startup support ecosystems (existing) offer apart from the capital? 

  • Recruiting

  • Outsourced Financial Services - especially for tech startups

  • Service Providers - PR firms, legal firms, SEO firms - it takes a lot of money in advance - late-stage VCs do that

  • Templates of how to build your company

Types of Startup Support ecosystems:

  • Theme-based: Theme or sector-focused ones are generally started by experts in those fields with deep knowledge and expertise. The theme can be a particular business model focus like B2B or B2C or B2G or C2C, or it can be sector focus like Agriculture, Education, Consumer Tech, Lifestyle, Media, etc. or it can even be AI focus, Deep tech focus, Computer Vision focused, etc. Generally, theme-based startup ecosystems are small micro funds or minor in size in terms of total capital size.

  • Sector/ Theme Agnostic: Most of these ecosystems have some focus areas, but they generally invest/support across sectors and different business model types. All the significant startup support ecosystems are mostly sector agnostic, as their investors like to invest in a diversified pot rather than focused areas. 

Who are the investors of startup support ecosystems? 

  • Philanthropists and CSRs to do good and to give back to the entrepreneurial community 

  • Professional investors, investing in this asset class. E.g., family offices, HNIs, or HNWs. 

  • Corporate VC and Corporate Innovation - most of the time for strategic reasons - e.g., Touchdown Ventures, which provides CVC as a service to corporates.

Key Insights: 

  • Considering the whole startup support ecosystems, most of them have focused on technology ventures (whether accelerators, incubators, venture studios, or early-stage VCs). 

  • Theme-based startup ecosystems are smaller than Sector/ Theme agnostic. However, they are catching up a lot of attention as theme-based startup ecosystems develop deep expertise and knowledge. 

  • Recently, there has been a lot of activity in the corporate VC and innovation space.

  • There is a considerable rise in venture studio funds, and many LPs are looking to invest in them, especially in mature markets like the USA and Europe.

  • Last but not least, to build a thriving theme-focused startup support ecosystem, it needs to build its reputation and thought leadership. E.g., Publishing a playbook and blueprint on how to build an impact-tech venture.

Curated Resources for further curiosity

  1. [Blog] Startup Studios and More

  2. [Website] Global Accelerator Network

  3. [Directory] Compiled Global Accelerator data

  4. [Blog] Venture Capital: Rumors of my death have been greatly exaggerated

  5. [Report] The Emerging Role of Venture Builders in Early-Stage Venture Funding

  6. [Blog] Do VCs really add value? — Founders say sometimes

  7. [Blog] Why do VC firms become Platforms? (or why a16z is successful)

  8. [Blog] Corporate Venture Capital: The Devil...or an Innovative Growth Channel?

  9. [Research paper] The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success


I am continuously looking for first-time fund managers looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.

With Love,

Sagar


"first followers" is founded by Sagar Tandon. You can reach out to me at sagar@firstfollowers.co.

The "first followers" is a monthly newsletter covering impact investing, venture capital, innovative financing instruments, and venture building.

5 reasons to back First-Time Fund Managers

Building a Conscious VC Fund

Previously, I have written a piece on the case for female fund managers, in which also I made a case for first-time fund managers, so I thought of dedicating a whole post on five reasons to back first-time fund managers (FTFMs).

Here are the five reasons that make FTFMs an attractive opportunity for LPs to diversify their capital allocation to:

  1. Performance: Most emerging firms raise smaller funds than their established counterparts. Smaller VC funds generally outperform because a single outlier can generate more robust fund-level performance. Rather than deploying a percentage of a larger fund, these partners are now deploying all of a smaller fund.

    Preqin’s analysis1 showed a consistent 3% outperformance in IRR in several vintage years.

    17.7% of first-time funds had an IRR of more than 25% compared with 11.3% of vehicles that are Fund IV or later, according to PitchBook's latest private equity fund performance data2.


    In Greenspring Associates’ experience investing across approximately 180 partnerships, emerging managers have outperformed3 relative to their established counterparts.

    ”In venture capital, smaller funds generally outperform, as a single outlier has the potential to generate fund-level solid performance, even if the fund is only able to garner modest ownership. “

  2. Alignment of incentives: With smaller fund sizes and no prior funds paying management or incentive fees, first-time managers need to produce returns to get paid beyond a minimal salary.

  3. Newer Models, Rethinking Industry: Emerging managers generally rethink strategy, process, and objectives to support entrepreneurs. 
    They promote better suited, more impactful, and more efficient venture fund models. And they tend to specialize more narrowly, becoming more adapted to the increased sophistication and specialization of the venture space.

  4. Pipeline diversity: Access to a unique pipeline, especially if emerging managers come from diverse backgrounds.

  5. And most importantly - Timing: While since the onset of the COVID crisis, established VCs have focused on padding the balance sheets of their existing portfolio rather than take on new risk, it is at significant hinge points in history like now that the most exciting new investment opportunities appear.


I am continuously looking for first-time fund managers looking to create their first-time impact funds with an edge or a differentiated value proposition in emerging economies. If you are building one, please do write to me. I would love to learn more from you and would be happy to help in any way.

With Love,

Sagar


"first followers" is founded by Sagar Tandon. You can reach out to me at sagar@firstfollowers.co.

The "first followers" is a monthly newsletter covering impact investing, venture capital, innovative financing instruments, and venture building.

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