Acrew Thesis Spotlight: Fintech & Web 3.0
By Lauren Kolodny, Charlie Liao, Maitree Mervana Parekh, John Gardner, Mark Kraynak, Vishal Lugani; Acrew Capital
The month of January always creates a moment of reflection. At Acrew, we take the time to build upon our theses and define the opportunities we’re most excited about. As we kick off February today, our fintech team decided to publicly share some of the thinking we’ve been doing over the past several weeks.
Fintech is our largest thematic investment area at Acrew, with nearly half of our companies having fintech as part of their businesses. We believe that traditional financial products and services are being fundamentally rebuilt from the ground up, opening up the gates to new possibilities and access to those who have been previously underserved. Decentralized finance accelerates these possibilities even further.
Our partnership at Acrew has invested and partnered with companies across the stack in fintech and crypto from the consumer application layer (Chime, Coinbase, Papaya Payments, Lolli, AltoIRA) to B2B application layer (Gusto, Divvy Pay, Pie Insurance) to infrastructure (Deserve, Orum, Finix, Dfinity, SKALE). We’ve also invested globally (La Haus, Klar, Banked) and in defi enablement (AvantGarde, among others).
We have been investing in crypto projects since 2017, but believe that 2022 is the year we will see some real convergence between fintech and DeFi. These communities have been previously siloed but we’re seeing many previously-deemed “fintech operators” jump into web3 and many fintech companies adopt crypto strategies aggressively. Further, with increasing regulation and the need for more mass market adoption, DeFi projects are looking to the learnings of the web2 fintech companies (i.e. streamlined consumer experiences, speed to execution, reduced costs). Not only have the fintech leaders of the last decade really put the category on the map, they have primed the financial services for a fundamental rebuilding of its underlying outdated infrastructure and awakened legacy financial institutions to the criticality of innovation.
The power of collaboration between fintech and defi is what gets us most excited for the remaining 11 months of the year. Within that, here are some of the specific themes we’re looking out for:
- The convergence of TradFi, CeFi and DeFi requires new infrastructure: DeFi is in the early innings of becoming a robust banking infrastructure. Through staking, lending and yield farming, consumers benefit from much higher APY’s relative to traditional primitives. On the other hand, TradFi and CeFi benefit from years of consumerization. Incumbent banks will start testing out risk-adjusted ways to more efficiently deploy customer deposits (e.g., staking, lending, yield farming) while passing some of those economics down the chain to retain end customers. Leading and emerging fintechs will similarly benefit from offering higher yields and interoperability with crypto, offering consumers a more holistic lens from which to see and manage the entirety of their financial lives. Most importantly, powering all of these trends will be infrastructure solutions that enable the interconnectivity of TradFi, CeFi and DeFi.
- DeFi is too clunky for mass market adoption, creating an opportunity for product consumerization: Onboarding the next 100m+ users into DeFi means designing streamlined user experiences around onboarding, interoperability, fiat->crypto exchange, etc. These critical changes will open the category to a more mass market and improve retention. When you look at the rapid clip of development and innovation in this industry, it’s no wonder that the current reality is a sprawling mass of protocols and point solutions that don’t yet talk to each other well. In this next phase, protocols that proactively reduce these frictions — either natively or through imported UX features from platform players — will be instrumental in driving mass adoption. At the application layer, we imagine a more streamlined and automated DeFi experience through next gen robo advisors and democratized asset managers. Specifically, projects that emphasize unique multiplayer incentive structures (e.g., earning tokens through gamification, collaborative finance and reward mechanisms) may see best in class engagement — we’ve already begun to see this from traditional fintech players which have far fewer incentive levers than their defi counterparts.
- Tokenization will further democratize ownership in alternative assets: In DeFi, composability and smart contracts have created new financial instruments while unlocking potential for old one. Further, the broader web3 ecosystem has attached direct economic value to a host of activities previously considered purely qualitative (e.g., what really was the value of a community beforehand? Or of a label-less indie artist?). Tokenization of assets enables access to these alternative investment opportunities. In web3, protocols are increasingly finding ways to further democratize ownership for its users & communities. Similarly, DAOs serve as a compelling organizational & economic medium for collaborative investing and collective purpose. In traditional fields, real estate, which is often constrained by large upfront cash requirements, legacy workflows and poor liquidity can now be fractionalized on a more liquid market. The same could be said for physical art and, yes, even NFTs. The variations are ample.
- Rapid evolution towards international crypto payments rails: International payments rails, especially those in emerging markets, are inefficient and unreliable. Fortunately, emerging market rails are not as entrenched as those in mature markets and often charge higher fees (especially on remittances). Institutions and individuals would benefit tremendously from a more frictionless and low cost payments network for both domestic and remittance focused payments. This network will materialize through web3 APIs built for both B2B and B2C transactions. Where crypto user adoption is high, P2P payments products can gather early interest, especially when paired with crypto brokerage features. With businesses, there may be strong use cases in countries like Mexico. SMBs here are locked into the banking system to receive and process payments. Crypto-enabled payments allows emerging economies to leapfrog ahead of traditional banking and payments practices modeled after the US. Specifically, we’re excited about payments evolution in emerging markets where crypto adoption is mounting in large part due to currency instability and where many talented founders are in their early days.
- Evolving regulatory environment and continued ecosystem growth drive a need for risk and compliance primitives: Rapid growth in the crypto ecosystem has been attracting much more regulatory involvement and will continue as there is more adoption. KYC / AML will become existential — DeFi’s long term success benefits from broad consumer adoption. And if regulators turn off the onramp among other enforcement actions, this can’t happen. We see significant opportunities for decentralized KYC / identity solutions, while preserving key web3 principles such as privacy. We also see opportunity for nascent, risk-focused primitives like smart contract audits + insurance and protocol security to begin taking the forefront, particularly as we see more institutional involvement.
Significant and widespread infrastructure has been built for DeFi and web3 fintech and we’re in awe of the innovation we’re continuing to see. This sets the stage for an even more meaningful and mature wave of growth in the next decade. Many draw comparisons to the lasting infrastructural impacts from the dot com boom, but this cycle is orders of magnitude more widespread in global reach. And what’s more pertinent in DeFi is one of its core attributes: the opportunity to create a more equitable and accessible financial system for everyone — a tenet that has been the basis of our fintech investments since the beginning.
