Forget bailouts. Forget regulations. Forget stimulus packages and executive pay caps. If we want to see real recovery, we need to see real innovation. Yet the traditional financiers of innovation, venture capitalists (VCs) are fiddling while Rome is burning. A recent survey of US venture capital activity shows that the three sectors with the least investment in the second quarter of 2009 are health care, retailing/distribution and financial services. Quick, what are three sectors of the economy that the U.S. depends on for a sustainable recovery? You got it.
Should VCs be the new scapegoat for a painful and slow recovery? Why are they under-investing in the areas most in need of change and growth? Or is the problem due to a lack of innovators?
At first glance, innovating in these sectors seems daunting. Healt hcare, distribution and financial services all require enormous economies of scale to operate profitably, and they rely on massive, established systems of providers -- stores, insurances, banks, payments networks -- that are resistant to change.
An under-served market
But I argue that VCs and, to some extent, innovators, are missing the opportunity. Innovation is not the same as invention: it is about applying ideas successfully to improve the world (see The Myths of Innovation by Scott Berkun). How this as a starting point: serve the under-served in these three sectors with products that are better, faster and cheaper than today?
Take the financial services sector. Given the misdeeds of the banking industry, the sector could make huge improvements simply by focusing on serving the ill-served with better, faster and cheaper products. (Anybody who doesn't fit the description of ill-served by your bank, please write me.) The best way to do so is to use the obvious and frictionless engine of innovation and growth: the Internet. I don't mean just providing online access to existing bank services but building online-only services that have none of the legacy and overhead costs of brick-and-mortar banking.
Despite the lack of venture capital, some financial pioneers have introduced new, online-only banking products. ING and HSBC both offer direct savings products that deliver significantly higher-than-average interest rates because the banks don't carry the overhead of distributing the product in branches.
A newer wave of services such as SmartyPig adds a social component by letting users share saving goals with family and friends.
And peer-to-peer lending from companies such as Lending Club make a better use of Internet-enabled person-to-person interactions, because they cut out the middle man and offer better rates at lower risks for both borrowers and lenders.
My company, Plastyc, offers an online money management portal called iBankUP based on a prepaid card account. We are able to eliminate account opening fees, overdraft fees, and in most cases account maintenance fees as customers interact with us through their browsers or even Facebook accounts.
These "pure-play" online companies, which can forego branches, tellers, and sometimes even corporate offices, are at a huge advantage over any of the incumbents. They have wide, instant reach and low operational costs.
But to spur economic recovery, we need even more, competitive new financial products.
Rally cry to entrepreneurs
The good news is that timing could not be better for newcomers: big-name banks have lost recently whatever little was left of consumers' trust, and Internet users now spend most of their time visiting online destinations that did not exist 10 years ago.
A little known fact is that, besides the Internet, innovators can also gain access to the huge and reliable networks established by Visa, Mastercard and the North American Clearing House Association. Granted, you have to be trustable and abide by many rules to get such access, but still, there's no receptionist or water-cooler needed.
Imagine having access to not one but three or four4 worldwide networks established more than 40 years ago to carry your business.
Overall, entrepreneurs can check all the boxes that investors look for when making new investments: fast product delivery, low startup costs, a hungry market and a technology infrastructure that can support real innovation and value.
So what's up with the VCs? Hopefully, the recent acquisition of Mint.com by Intuit will validate financial services as a worthwhile field of innovations and investments.
Please someone else addresses the under-investment in healthcare and retail services innovations. Meanwhile, I'll get back to running my own contribution to the financial services sector out of my virtual corner office.
Follow Patrice Peyret on Twitter: www.twitter.com/iBankUP
