A Tiny TAM

I’ve been a huge proponent of FinTech for years now and a shareholder in some of the most exciting companies on the cutting edge within the space: Riskalyze, Brightscope, StockTwits and SparkGift. I’m a big believer in the idea that innovation makes the market work better for investors, which has been my pet cause since the beginning.

That being said, I always feel bad when someone approaches me to test out a new app or take a spin through a new site because I feel like I know something that they might not. That something is the fact that the total addressable market (or TAM) for most fintech products is tiny.

On the trading and investing side, the TAM is not only not big, it is actually shrinking. I try to put this delicately to the creators and founders who approach me to show off a new software screening tool or an investing app they’re launching. The reaction is sometimes like I killed their dog. There are so many solutions in search of a problem in the fintech space I’m sometimes blown away by the sheer amount of new offerings I see.

Three years ago I had lunch with the recently departed CEO of TheStreet.com, Elisabeth Demarse. Her business at the time was finding a way to reach more active traders and hands-on investors to boost the site’s popularity. After commissioning a study to determine the true size of the audience for this kind of content – the TAM – Demarse seemed taken aback by the numbers: 3 million people, total. Put into context, the markets for daily sports or entertainment content is something like 5 to 10x!

And, frankly, I would take the under. I think it’s a 3 million person TAM but the population is shrinking as the boomers move steadily into retirement and the drawing down of their financial assets. In the heyday of online investor content and highly engaged traders, the market was much bigger and stocks became the national pastime. That era died with the Nasdaq in 2000 and it never really came back. It’s not that people are investing anymore, it’s just that the generation that loved the game is now two decades older than they were in the mid-1990’s and their priorities have changed.

The financial crisis probably didn’t do much to rekindle that old love affair. In its aftermath, the popularity of retail trading news, opinion and data still hasn’t recovered much. These days, the mass market is investing in the missionary position – allocating to low cost ETFs and tuning out the daily gyrations as a rule.

I don’t think many traders-turned-entrepreneurs have really accepted this fact yet. I watched my friends at Covester struggle to find an audience for their platform, which allowed investors to discover trading talent to run their money transparently online. Bhargav Shivarthy told me, toward the end before a fire sale, “We’re two far ahead of our time at this point.” I joked that “Actually, you’re probably 15 years too late.”

Writing at Medium this week, fintech entrepreneur Savneet Singh nails this idea of the market not being as big as the people who love trading think it is:

It’s really easy to get fooled by early adopters.….but they arent always looking for what all of us need. In FinTech you often times see someone creating a solution for a very narrow need who is then falsely encouraged by a group of early adopters to continue to build. They end up building a product that a small group REALLY wanted and that small group then tells the entrepreneur that the product is EXACTLY what the world needs, only for the entrpreneur to find out 2 years too late that his market is tiny and his customer acquisition costs make the unit economics a failure.

I found myself nodding in agreement as I read that. I’ve seen it so many times. Everyone has great ideas to revolutionize trading, investing, portfolio creation, backtesting, talent discovery, idea generation, etc. The problem is, the TAM is just not that big. There simply aren’t a lot of people who want to spend their spare time doing this stuff on the web or on their phones. It’s really interesting and fun and helpful for a small amount of people, but not terribly important to most people.

And it never will be. Millennials are not taking up stocks in the same way that their parents did for many reasons. It’s not a given that they will once their net worths overcome student debt and the unaffordable real estate problem they face. This is not to say that they aren’t investing – they most certainly are, in their 401(k)s, which is what they should be doing. Will we ever have a bull market that features tens of millions of young investors trading stocks and poring over market data the way the boomers did in their 40’s and 50’s? My guess is no, but anything is possible.

In the meantime, the TAM is tiny. The most successful fintech startups of the current era have been those that bet on serving the pros – the B2B plays, if you will. This hasn’t been a slam dunk either, however, for other reasons that Singh gets into, like long sales cycles and regulatory burdens. I send you there now to read the rest of his frustrated take on the blind optimism within the fintech space.

Why FinTech is the WORST. (Medium)


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