The impact of Morgan Stanley’s ex-CEO in LendingClub!

As entrepreneur and CEO at a Fintech company, Kantox, I was very glad to read that John Mack, “Mack the knife”, Morgan Stanley’s ex-CEO, became part of Lending Club’s Board of Directors and decided to invest USD 2,500,000 of his own in that company. That was August 2012. A guy who once was the top executive at one of the largest banks in the world was joining a Fintech company that had not even reached 1 Billion transactions in 6 years, that is, a drop in the ocean…

I might be wrong, but it is hard to imagine an ex-CEO or top executive of a leading European bank joining a Fintech company. And this is probably the largest difference between Europe and United States in terms of innovation. It is probably due to cultural reasons, but the main advantage of United States is its capacity to attract top-level senior profiles to young companies that are then enabled to grow significantly faster.

Let’s go through the events in further detail:

• Summer 2012: John Mack joins Lending Club.
• November 2012: Lending Club reaches its 1^st Billion transacted (after 6 years).
• May 2013: Google invests USD 125 Million in Lending Club.
• June 2013 (7 months later): Lending Club reaches its 2^nd Billion transacted, which means that in 7 months it has been able to generate the same volume of transactions as in its past 6 years.
• July 2013: 2 banks, Titan Bank and Congressional Bank, start using Lending Club’s platform as an additional channel to perform transactions.

It is obviously impossible to measure the role that John Mack played in the growth of the company, in the arrival of Titan Bank and Congressional Bank, or in Google’s investment. However, there is no doubt that the impact for Lending Club in terms of credibility has been extraordinary; for customers, investors and media. It meant a voting trust for an industry, the Fintech, in search of more visibility and credibility.

In the next 20 years, the financial industry will change dramatically. With new generations that were born online, and the possibility to sell without a physical and costly network, Fintech companies have a promising future ahead of them. So now, the question is: “Will Europe be able to create leading Fintech companies, or will it be the United States which will lead this change, one more time?”

Bankers, Europeans included, made a mistake when they took exorbitant risk with speculative products… now it is time to take risks with something that creates real value, the Fintech companies.

Why Europe needs to develop a risk culture among senior executives?

Silicon Valley is still by far the best place to start a new venture and get an opportunity to achieve world dominance as Facebook, Google, Amazon, eBay, Paypal and many more did. The San Francisco area benefits from prestigious universities, the largest venture capitals, many ambitious people and, maybe the most important, the American culture which promote risk and reward and do not blame those who fail.

In recent years, many cities in Europe have tried to build areas, or at least districts, similar to Silicon Valley: London (Silicon Roundabout), Berlin, Paris, Barcelona (@22) among many more. They try to attract venture capital and create tax-incentives for people investing in start-ups, they promote the collaboration between universities and companies and they try to develop an entrepreneurial culture among young people. This last point remains very weak.

Nevertheless, European start-ups achieving world dominance are almost inexistant. Except Skype, which achieved a true global leadership, the largest successes concern start-ups which achieve at best a European dominance, and are often bought by American competitor: Meetic, Vente-privee, etc. Let's see what happen with Spotify, it is probably to early to answer.

To explain the American leadership in the start-up world, funding and culture (risk, reward, fail) are the most common reasons used by experts. Nevertheless, they are probably missing one key point: the capacity of start-ups to attract first level experienced executives to scale the business once traction has been achieved.

As an entrepreneur in P2P finance, I was recently very excited when reading that Lending Club, the leader in P2P lending but still a very small company compared to banks, had been able to get John Mack on board. The former Morgan Stanley Chairman and CEO, joined the Board of Directors and invested 2.5M$ of his own money! I am unable to imagine an ex CEO of a leading European bank joinning a P2P finance company. They do prefer manipulating the LIBOR and things like that. John Mack joining Lending Club is probably an "extreme" example of an ex Wall Street star joinning a start-up. Nevertheless, concerning senior positions like VP, Directors, etc., American start-ups have a great ability to attract first level professionals able to bring their experience from multinationals companies, and thus a lot of value-added, to companies that need to jump from being a start-up to being a fast growing company. This is something requiring a very different kind of management and that is when senior managers are necessary to convert an innovative company into a global leader.

In 2001, when Google hired Eric Schmidt as a CEO, the company was not yet the cash-machine it is today. Nevertheless, E.Schmidt, a former CEO at Novell, accepted this risky position along with the challenge to build world dominance .

To be able to compete with Silicon Valley, Europe definitely needs to develop a risk / reward culture among young people AND among senior executives.

Internet and the era of monopolies

From 1911, year in which the US Supreme Court declared the Standard Oil group to be a monopoly and break it up into 34 independent companies, the biggest two being Exxon and Mobil, governments have been struggling against monopolies in order to prevent any company from abusing of a dominant position. Remember that by 1904, the Standard Oil controlled 91% of the refined oil flows in the United States and converted John D. Rockefeller in what is considered the richest man ever!

More recently, in Western countries, there is no case of any government breaking up a monopoly or a large company to avoid a dominant position in a market. Companies like Microsoft have been sued and had to pay penalties but it is far different from a break up. It seems that break ups are simply no more politically aceptables.

On the contraty, in some industries like banking or telecomunication, we can reasonnably think that (public) regulation, supported by industry lobbyists, has been converted into a barrier to new entrants and to innovation and has converted these industries in oligopolies. So, we are not speaking about monopolies but we are not so far. In the UK, the 4 leading banks have a consolidated market share of around 85%. In most European countries, there is only 3 or 4 telecom companies acting as a true oligopoly, offering the same products, same prices, bad customer support, etc. Thanks Free Telecom for starting changing the landscape in France.

On the other side, the Internet is a young industry in which innovation and creative destruction are a natural way to prevent the development of monopolies over the long run. Even if companies like Google, Facebook or Amazon can be considered monopolies, they are not selling first necessity products like in the case of the Standard Oil.

But the main risk with the Internet is speed. The Standard Oil was 41 years old when the monopoly was broken up and the struggle with the government last almost 10 years. In the Internet, what will happen when a company providing a first necessity product or service, or something similar, will convert into a true monopoly at the speed of light? Governments have prooved that they may forbid any merger or acquisition leading to a monopoly but that they are no more able to break up a monopoly based on organic growth. 

As an Internet entrepreneur, I still have a lot to learn, but there is something I have understood from years: in the Internet, any smart entrepreneur wants to build a global monopoly and leading Venture Capitalists, usually American, only want to fund start-ups that have a chance to convert one day into a monopoly... even if they never publicly speak about it. That is the main reason why Venture Capitalists are keen to invest huge amounts of cash in start-ups with sometimes no revenues, no business model but a potential dominant position over the long run.

Source: Wikipedia, http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/61204.htm

The financial crisis for dummies: how marketing killed us!

Many papers and reports have been written in the last 4 years about the financial crisis. Almost everyone has his own opinion. Nevertheless, as always, experts are trying to find complex reasons and solutions to explain how the financial system bankrupted and how it has to be fixed. My opinion is that the financial crisis is the consequence of one main reason: a never-ending story of over-consumption for 30 years. This phenomenon of over-consumption has been promoted by 3 main channels:

1.  Advertising everywhere at any time: Web, TV, Radio, Newspapers, Streets, Roads, Airports, Stations, even Schools…
2. A highly materialistic way-of-life promoted by famous (and not so famous) people: sport and movie stars, politicians.
3. A sensation of easy and fast glory promoted through stupid TV programs: Big Brother, American Idol...

When I was a child, every boy wanted to be a policeman, a firefighter or something similar. Nowadays, as a little boy said in the press recently, kids want to be football players because they are rich and f..k a lot of models!

In developed countries, until the 70’s, we were living in a world in which citizens existed by themselves: “I think I am”. From the 80’s, the hyper and fast development of what we can name marketing, started promoting a world in which you are what you consume: “I (over) buy I am”. This is definitely the point of inflexion. In the 21^st century, people in developed countries can still easily afford their basic needs but could hardly afford their superficial ones. Who really need a new iPhone every 6 months to be happy? That is when greedy bankers arrive and find “new” ways to finance over-consumption and over-spending with risky products that first looked safe. The same phenomenon occurs among politicians who are keen to find new ways to finance their public overspending in order to get votes.

After years of over-consumption and over-spending, the system finally bankrupted and is still almost bankrupt. On the long-run, you can definitely not spend more than you earn.

In conclusion, the most effective solution to the crisis would be a total change of mind of the developed world in which people stop being consumers to become citizens. As always, culture is a key variable to explain problems and fix them.

But on the other side of the world, developing countries like China, India or Brazil are so influenced by the western culture that they are also engaging in this never ending story of over-consumption. China has probably created the largest real estate bubble of the history of mankind. Be prepared for the burst…

The future of the Euro will depend on European cultures alignment

The Euro crisis is the most important issue of the last months and hundredth of experts do not stop giving their opinion about the reasons and solutions to the crisis. Nevertheless, I definitely think that they are missing the point. The main reason of the Euro crisis are cultural differences.

The Euro is the product of the European Union, an union based on the idea that Northern Europe (mainly Germany and France) might benefit from the development of Southern Europe. In other words, Germany and France finance the development of countries like Spain, Italy, Portugal and Greece, considering that German and French companies will benefit from a large integrated European market. This way, Germany and France thought they might achieve a virtuous circle in which every European country might grow and increase its standard of living. A great idea...on the paper.

The problem is that Germans think like ... Germans, Frenchs think like Frenchs, Spanishs think like Spanishs and ... Greeks think like Greeks! In other words, northern countries / cultures are naturally more rigorous, more rationnal, more long-term thinking, etc. When northern countries invited southern ones to be part of the Euro, meaning to benefit from a stronger currency and lower interest rates, they definitely never anticipated that these countries might overspend in such an irrational way. Spain has now many more airports (many closed or with no activity) and fast trains than countries like Germany or France which are much more populated and richer. Greece had one of the highest rate of Porsche owners in the world. Black markets are much more developped in the south and corruption is endemic until a point probably unthinkable for Germans.

Whatever the short-term solution to the Euro crisis, the only long-term solution is an alignment of the European cultures. Southern countries have to be much more rationnal in the way they spend money, even more when it is money coming from Northern Europe, they have to eliminate the black market and reduce corruption to a reasonnable level. They also have to understand that being competitive in a flat world requires a lot of efforts, as Germans did to reunify their own country. On the other side, Northern countries have to be more flexible in the way they lead the European Union and never forget that a single integrated European market with a single currency is an asset to compete with the USA, China and the rest of the world.