GP Letter

GP Letter – Q2 2024

Posted: 18 Jun 2024

The Skeptical Optimist

At its core, being a good venture capitalist requires a quirk of personality. One must be extremely cautious while also being a hopeless dreamer. Said differently, one must be a skeptical optimist, an odd contortion that most sane people would not attempt. Furthering the insanity, the scorecard is unrelenting which means that every year we learn that we should have been MORE skeptical while being MORE optimistic. 2023 was particularly educational.

Bill Gates famously stated that humans chronically overestimate what will happen in the next two years while underestimating what will happen in 10 years. I call this the “Gates Window”. With an average fund investment holding period of 7 years, a skeptical optimist must somehow forecast the future with some degree of accuracy. This again brings us to 2023, four years from our inception. When we started MGV with our first fund in 2019, we believed strongly in numerous themes that would play out during the “Gates Window”. These included:

Starting Over: ie new core systems across FinServ,
Embryonic Asset Classes: ie digital assets, identities, data…
Innovating Oversight: ie RegTech…
Platforms (vs silos): ie Banking as a Service, APIs…
Better is Best: ie financial wellness and inclusion.

2023 was a great test of those themes. We learned a lot.

New core systems continue to be built. Our investments in core systems/tools are interesting and may indeed turn out to be solid investments but we underestimated the length of sales cycles. We were not skeptical enough.
Crypto/digital assets cleared out the frauds and is migrating, as we forecast, to compliant, regulated, onshore systems using institutional grade technologies. Our investments in custody, data, exchanges, market making, tax and new issuance are beginning to thrive. We were not optimistic enough.
We have not made many RegTech investments which was the right decision. The sales cycles are too long and the business models are usually a single product, something most institutional clients dislike. We were appropriately skeptical.
Banking as a Service worked and didn’t. The market is vast but is commoditizing fast. Competition is brutal, pricing is down, margins are collapsing. We picked the wrong horse unfortunately. We were not skeptical enough.
Financial wellness and inclusion startups have largely failed. Fortunately, we did not make any investments in the category (despite looking at them in depth). We were appropriately skeptical.

So what does a skeptical optimist expect for 2024 and the Gates Window?

Out → In