Fintech Looks Like the Achilles Heel of Global Corruption

[According to one Harvard professor, the world is getting better. Perhaps this is partly driven by the impact of fintech on global corruption.]

[3 min. read]

pablo escobar corruption fintech

The world can be a tough place.

In my courses on International marketing, I spend an entire class period talking about corruption around the world. What’s the difference between a full-on bribe and slipping someone $20 as a lubricating payment to expedite your application?

I talk about how different cultures perceive these with varying degrees of acceptance. What is blatantly dishonest to one is just the way things are done (and really NBD) to another.

How does corruption impact humanity?

In the course, I introduce the class to the Global Corruption Perceptions Index released by Transparency International.

Global Corruption Perceptions Index 2017 for Fintech Article

This world map illustrates how countries are perceived in terms of their tolerance and support of corruption.

I heard Utah-based VC, Paul Ahlstrom on the Sales Founders podcast discussing the impact of fintech especially in the developing world (which you may notice also tends to have a high perception of corruption).

Paul drew the interesting correlation between global corruption and global poverty. By comparing these two maps, it isn’t hard to distinguish a rough correlation between corruption and poverty.

2007 World Poverty Map

Paul makes the case that graft and the flow of money fueled by corruption is thwarted by the adoption of fintech tools for moving money around electronically.

This makes sense to me. If I was pulled over in Mexico, for example, I would not expect the officer to whip out an iPad with a Square Reader attached so he could take my pay-off via credit card.

I’d love to see the memo on my statement for that transaction.

Nor would I expect to get shaken down for ransom payments in bitcoin (although that’s not unheard of).

What do the trends for poverty and corruption look like?

I’m not suggesting that big fintech startups have these aims explicitly in mind.

Maybe they do.

But I expect they are out to make a buck by solving problems for people just like any other company. Messing up the financial infrastructure for corruption is just an unintended bonus.

In fact there is some evidence that rapidly emerging fintech is a challenge for regulators and watchdogs to keep up with. And corruption seems alive and well (here are two notable examples from Mexico and Argentina).

Maybe there’s an argument to be made that these examples of corruption would be unknown to the public if not for the rise of technology.

Whether intentional, related, influenced, or coincidental to the growth of fintech in regions with a history of corruption, the status of poverty in the world is improving significantly.

Harvard professor and author of Enlightenment Now: The Case for Reason, Science, Humanism, and ProgressSteven Pinker gave a TED talk in which he shared that today fewer than 10% of the world’s population still live in abject poverty.

Which seems like a very good thing.

Since my time as a fintech CEO, I’ve been very bullish on the fintech space and today that seems more sensical than ever. I’m excited for the changes we will see in the coming years as these developments among others alleviate suffering caused by corruption (however unintended).

Author Bio: @chadjardine is the CMO @goreact, an associate professor at @uutah and sometimes blogs about marketing on Medium.

2016 Sees Utah top $1B in venture capital for the first time

2016 saw Utah companies raise over $1 billion in venture capital, a huge milestone for the Beehive State.

99 Utah companies raised $1.17 billion in 2016 according to the latest Venture Monitor report, from NVCA and Pitchbook, closing out 2016 Q4.

2016 saw total VC investments nationally shrink from their peak in 2015 (with $69.1 billion invested vs. $72.3 billion in 2015) as some of the unicorn bloat shook out of the market and skittish VCs withdrew from seed stage deals and bet heavy on later stage rounds. That’s pretty good news.

The great news is that Utah bucked the national trend with a banner year in 2016. What’s behind Utah’s growth running counter to the rest of the country.

Well, Utah does a lot with a little.

In 2015, Utah firms reported $875 Million in capital under management. That’s after coming in a respectable 8th place in the country for new commitments to venture funds: $284 million for 2015.

But in terms of total capital, that puts Utah 18th in the U.S. (even D.C. is ahead of us and they aren’t even a state). If the 2% rule held true, you could pay the management fees for every single VC Firm in Utah for less than $18 million. Muy poco.

Look at the giants in VC. CA by contrast reports over $90 billion and NY and MA are each over $20 billion under management.

Historical VC raised in Utah 2010–2016

So Utah’s capital resources are puny.

In other words, despite Utah’s local venture firms growing their funds at a healthy clip—and those firms doing an awesome job at getting Utah companies off the ground with their seed and A rounds—the companies in the state still need and capture outside investment.

Modest as locally available capital is, the remarkable thing in Utah isn’t the age or maturity of its locally sourced capital. Utah’s story isn’t about a venerable history of finance (no disrespect to the firms that have operated in the state for years). No, Utah’s story is the explosiveness of its growth.

Utah now represents 1.7% of all venture raised in the U.S., Utah isn’t the heavyweight Lennox Lewis, it’s welterweight Sugar Ray Leonard punching way above its weight class and coming on with a fury.

Utah’s on a three-year tear. As anyone who attended this month’s Silicon Slopes Summit can tell you, it’s showing no signs of slowing down.

It’s interesting to note that over half of Utah’s funding falls into the growth equity category. Ironically, this is evidence of Utah companies focusing on building their businesses in a more traditional sense, focused on revenue growth rather than growth at the expense of revenue. Utah startups, even in tech, tend to be prematurely profitable, conservatively run businesses with legitimate traction measured in long-standing metrics—crazy stuff like consistent revenue growth from paying customers.

Utah ranks 8th in the nation in terms of total capital raised in 2016 (behind CA, NY, MA, TX, FL, WA and IL respectively), but is coming off a 4th place ranking in 2015 for growth equity raises at $538 million.

Utah has maintained its 3rd place ranking for per capita venture capitalsince 2014, beating out New York for the #3 spot again in 2016 with $390.45 per person in the state.

The moral of the story is that if you’re looking to leverage a disproportionately favorable startup ecosystem, which won’t require you to mortgage your firstborn to rent an apartment nor to sacrifice your health and family for phantom productivity, follow in the steps of companies like Chatbooks and wherever you started, find a way to locate your startup here.

Source: NVCA/PitchBook 2016 Q4 Venture Monitor Report