“The interesting blockchain solutions will come from companies that come up with new use cases for the technology. If we wait for the insurance companies or the banks to use blockchain we will have to wait for many years. They move very, very slowly. There are Israeli companies building the infrastructure that will provide banks and insurance companies with access to blockchain, but there are only very few such Israeli companies and there is only little innovation going on. We would be happy to see a lot more,” said Tomer Michaeli, General Partner at Viola Fintech, speaking on a fintech expert panel.
According to Gil Arazi, Founder and General Partner of FinTLV Ventures: “The old insurance companies have yet to internalize that the revolution is on the way and that they have a long way to go. Over the past year, there has been crazy investment in companies in the sector. These are new digital companies that were founded in order to solve the customers' interactions with the old insurance companies.”
“The Open Banking reform led by the Bank of Israel has created a conceptual change according to which the financial data doesn’t belong to the financial institution but to the client,” noted Dina Pasca-Raz, Partner and Head of Technology at KPMG Israel. “There are startups being founded around this, whether by developing solutions that allow the bank to increase its data infrastructure and services provided to the client or whether by providing companies with comparison tools for financial data.”
Meirav Harnoy, Co-Founder and Managing Partner at Moneta VC, said that fintech has gone from vertical to horizontal growth. “Uber drivers can now for example acquire from Uber their insurance, receive funding to purchase a car, as well as vouchers for gas and snacks for passengers, so basically Uber is providing all their financial services. When you look at Wells Fargo, for example, and ask if they are relevant to the future or daily life of that driver the answer is no. As time progresses and regulation catches up, companies with customers will find the right models to integrate financial services. This is a trend we see growing.”
Answering the moderator’s question regarding the drop in value experienced recently by fintech companies, Arazi noted: “These are companies that went public with a valuation of several billion and are now worth several hundreds of million. The investors lost a lot of money. The investors understood that not all new insurance companies know how to generate profit in the foreseeable future. We are seeing that there is talk in the sector regarding possible mergers between companies. Nevertheless, it is important to remember that this revolution has only begun. These insurtech companies have only addressed 1% of the insurance world. Over the coming years, we are set to see dramatic changes in this sector.
“We have invested in six companies that are now unicorns valued at over $1 billion. We look at the capability of the company to become profitable,” added Arazi. “There are companies that we can’t manage to understand when and how they will become profitable. We may be wrong, but I don’t think companies can keep burning more and more money to bring in clients and ultimately remain with a negative EBITDA. There ultimately needs to be some business model otherwise I don’t understand why I should be investing in this.”
Harnoy explained that the important question to be asking as an investor is whether you are buying the share or the company, and how long do you plan on holding on to it. “In the short term, the valuation is very high even though they aren’t making money because they are focused on growth. The question is can these companies display a long-term model for 10-20 years showing that they will be profitable during that period. Maybe the IPO was too highly valued, or can $1 billion turn into $10 billion in the long run? Is there a business model and can it support long-term growth?”
Pasca-Raz has a different outlook on the matter. “Ultimately we look at the financial reports. We must remember that there are two matters that affect these valuations, especially in funding rounds. The first is the number of users. WhatsApp at the time had insignificant income but was sold to Facebook for $14 billion. It looked weird at the time but no one is questioning it now. There are companies that acquire other companies for their users, like Waze, Moovit, and others. The second matter is that at these big funds there are people who are technology experts and see the potential for growth or a new market. They see something significant which doesn’t yet appear in the financial reports.”