The Millennials Shall Inherit the Earth and The Financial Revolution

Here we are in 2017 and Millennials will inherit the largest amount of personal wealth of any generation — and personal finance apps are emerging to seize on this opportunity.

If you follow me, you know that for the last 11 years our Social Leverage funds are very long early stage financial services (fintech) founders and companies (Wallstrip, Stocktwits, Etoro, Chartiq, Apple Pie Capital, Produce Pay, YCharts, Robinhood, Civic, Lifelock, Stacks Media). We have a few more in our latest fund that we have not announced.

In 2014, after we invested in Robinhood, I wrote the following post with an interview I did with Baiju one of the founders. Recently Robinhood raised $100 million at a $1.3 billion valuation.

While I often mock the banks, I have been long PUBLIC financial service companies the last 5 years like Schwab, Paypal (here was my buy on this blog), Visa, Mastercard, NOAH, Interactive Brokers (no position today unfortunately) and recently Goldman Sachs.

My friend Vinny who is the founder and CEO of Civic (one of our investments), penned this incredible piece last week titled ‘The Financial Revolution‘. Everyone should read it top to bottom. Some of my favorite riffs:

The stock market has been largely closed to small cap, high opportunity IPO’s. Even when companies do IPO, venture capital & private equity funds have already loaded the companies up with so much capital pre-IPO, that the general public doesn’t really get to participate in the growth of company once it’s public. Companies do this to maintain control for longer, but by the time they go public the risks are mitigated to such an extent that you’re not going to get a mediocre returns, with albeit lower risks. Low risk, low reward.

Millennials, who saw how the financial system destroyed their parents savings and wealth in 2008, are eschewing it. Banks are unable to cater to this sector adequately and are quickly trying to attract this generation, but with products that are not serving the needs of the market.

Tech savvy millennials typically have high disposable incomes, and are happy to throw it all into projects that even have a slim chance of creating real wealth for them. It’s the mindset of younger folks who are trying to create asset bases for themselves — they don’t have kids or high overhead lifestyles, and don’t care if they lose their shirts as much as if they were 40+ with families, college savings, etc.

Global capital formation is changing, rapidly. Companies can do an ICO and raise tens or hundreds of millions of dollars within hours or days, without needing to be backed by a VC fund. So, where is this money coming from? It’s coming, in part, from millions of young, tech savvy kids worldwide who previously did not have any opportunity to participate in the high risk, high reward technology that has upside which could be life changing, like the value creation effects of Ethereum or Bitcoin.

People, anywhere in the world, are now able to build high upside crypto portfolios with hundreds or maybe thousands of dollars. These portfolios give them the opportunity to make hundreds of thousands or even millions of dollars. They don’t care if they lose the money, they don’t want 5% a year return either. They’re happy to buy hope, and take the risk because 5% won’t change their lives, but this could. The reality is that single digit returns are not going to help those who don’t have much to invest — so the mentality is akin to the notion of buying a lottery ticket when you don’t have enough to buy a single share of a quality company. Yes, it does start to look to more like gambling and not investing, but that’s pretty much what crypto has become, for now.

With enough high risk crypto assets, you can begin to construct an Efficient Frontier portfolio, that can eliminate much of the risk as a sector and still offer sufficient alpha. How much of your portfolio you choose to allocate to crypto is still your choice, but the point is that we need lots of high risks bets with the hopes that 1/10 or 1/50 pay off at a rate of more than 100–1 to make it all worthwhile. In some ways, this is what VC is supposed to do, but the shape and structure of VC prevents this as partners can only take on so many investments, nor do they have the ability to make smaller bets and spread them out more (although accelerator firms like YCombinator have managed to do something like this).

The global financial system has meant that stock markets and investment opportunities have been very regionalized for decades. When I was a 20 year old living in South Africa, I could only invest my money on the Johannesburg Stock Exchange and into South African technology companies. I couldn’t open a US account and invest in US stocks or bonds like Yahoo or AOL. The crypto world doesn’t work like that — crypto assets now have global audiences instead of regional ones, which means there is more money chasing these assets — through vehicles that don’t operate like traditional stock exchanges.

Obviously the smartphone is at the center of this revolution that Vinny speaks of and does not get enough credit.

One of my favorite investing millennials is Stefan ‘Avocado Toast’ Scheplick who is an editor at Stocktwits. He lives a frugal life and has learned to not just love the markets, but to take a little bit of money from them. He has the bug. He is fascinated by markets and learning the language. Yesterday he wrote this great post titled ‘What I Learned From the Investor Letter Warren Buffett wrote after the Financial Crisis‘.

The millennials have smartphones, zero cost investing, access to global markets and exciting new asset classes. They are also going back to study the investing greats and apply their techniques and strategies.

Obviously, a lot can and will go wrong as the inevitable next bear market returns.

But, I love what I see as this boom has onboarded millions to the joys of investing.

Also published on Medium.