This blog is based on the conversation our investment team held during our weekly Clubhouse Beer Bash, where we dissected the asset management firm ARK (mostly ARK(K)’s technology portfolio and positions). We shared our thoughts on the underlying investment thesis for ARK’s top-position holdings, combined with our views on the early stage opportunities. This is part II, please find part I here. All our opinions for these public companies are provided for informational purposes only, and should not be relied upon as legal, business, investment or tax advice.
In Part I, the takeaway from my analysis of the Shopify, Zoom and Twilio in ARK(K) holdings was the following three key early stage opportunities:
In Part II, I will dig into another three top holdings of ARKK. Though the holding positions could be varied in each trading day while the fundamentals stay. The core of the venture business - this eliminates most of the marketable noises and looks into the nature and core economy of business.
On April 5, 2021, Square, the company that started with giving mobile payment processing capabilities to all size sellers, became the 2nd largest holding in ARK’s portfolio that accounts for the weight of 6.49%. Today, Square has two reportable segments: seller ecosystem and cash app. The seller ecosystem offers a modularized and cohesive e-commerce experience that drives economic empowerment and works to democratize commerce for all size sellers. The seller ecosystem had processed over $103B of GPV (Gross Payment Volume) by the end of 2020. The other most noticeable revenue stream of Square is driven by their efforts to refine the world’s money transferring processes by making an intuitive P2P (peer-to-peer) app through Cash App. Cash App has evolved into a financial service hub that allows every individual to store, send, spend, receive and most importantly, manage and invest their money. With Cash App on the rise, Square is clearly making strides in two promising ecosystems at once. Seller ecosystem's massive processing power is still growing rapidly. And Cash App racked up $1.23B in annual net revenue, jumped up 168% YoY, and has accounted for 45% of Square’s gross profits in Q4 2020 (up from 27% in 2019).
Digital banking is ramping up. The trend that we saw was that mobile neo-banking users are surpassing the number of deposit account holders at the top financial institutions. The adoption speed here has also been surprising. J.P. Morgan took more than 40 years to reach roughly 60M active users while for Cash App, which amassed around the same number of active users, it took only 7 years. Another datapoint from Blackstone indicates that innovations are reshaping people’s daily life with faster and greater adoption. Most importantly, the rapid adoption is most pronounced among younger demographics. These younger demographics are becoming the next battleground for all institutions to capture and lock in customers earlier on in their financial journeys.
New ventures, especially financial tech companies, are all trying to drive customer adoption earlier. For example, the teenager cards offerings have all included financial literacy education and ESG features. These companies aim to graduate these younger demographics when they enter into larger spending periods of their life. Whether Gen Z will use Cash App for payment transfers or something entirely different (like borrowing bitcoin from a Roblox world) is yet to be seen and will play a huge role in the future of fintech.
By capturing users earlier in their lives, companies can enhance their LTV (Lifetime Value) and better upsell customers. Lemonade is a great example. They started by offering renter insurance. When these younger renters finally bought their own house and became homeowners, Lemonade graduated them from the “buyer of renter insurance” to the “buyer of house owner’s property insurance”. In this same vein, we are seeing a lot of fintechs that are tackling banking for teens and families by gamification, digitalizing pocket money, building teenagers’ credit scores, and encouraging gift conversions from families into savings and investment in these children’s accounts.
Generational behavior difference and perception have greatly accelerated the adoption of new things. Robinhood lowers the entry bar for people to invest while next-gen investors are more obsessed with different focuses, such as social investing and sharing their financial history, challenges, and questions through online communities.
Telemedicine usage grew more than 6000% during 2020. Tele-doc reported it delivered 10.6M virtual visits last year, up from 4.1M visits in 2019 with 36% increasing membership. By forging a new healthcare experience and transforming how people access health, Tele-doc helps people get easier access to remote doctor networks with different specialities. The service Tele-doc provides also combines connected devices, AI-enabled nudges, patient-specific data based predictive analytics, and human interventions with its blockbuster acquisition of Livongo last year. And there’s a high likelihood that we’re not going back to care-as-usual since patients feel more empowerment and flexibility from these tele-health and virtual visits, care and chronic disease monitoring. If this trend persists, Tele-doc’s predicted 2020 $1.1B revenue would only be a tiny slice of the US' $3.65 trillion healthcare spending even with a 30%-40% average annual revenue growth through 2023. This indicates they and their market have meaningful room to grow.
The US' healthcare system is infamous for opaque pricing and lack of transparency. Patients do not have much choice to shop around the providers, additionally, billing relations between insurance and healthcare providers have been ambiguous and remain a mystery. Most importantly, in spite of innovation elsewhere, healthcare has hardly been innovated at all. COVID-19 finally brought about the start of true healthcare disruption. The virus was a forcing mechanism as people desperately needed alternative ways to get care. The special time has also brought more awareness to the healthcare bill payers themselves about their right of choice for their health and wellness. Healthcare providers, in turn, have had to accelerate to adopt and scale up to meet all of the new demands from patients.
A key trend we’re foreseeing is a shift toward a more consumer central model in healthcare. Patients will have their preferred and more affordable way of accessing medical resources. The premium tele-health commands are not only about convenience but also about royalty, engagement, and transparency along the entire customer experience. Moreover, the healthcare system has been shifting from a facility-centered mindset to a customer-centered mindset. New players such as Sidecar Health rewrite traditional insurance company’s formulas to let patients pay directly for healthcare. The more transparent network fees enable patients more flexibility in making selections, making the best choice of care providers. Getting transparent pricing for each visit is finally possible. In a similar vein, Preveta was founded to collect cancer patient data for more precise care coordination. Preveta aims to build the richest and most complete cancer data set that can then power cancer therapeutics and oncology drug discovery.
Another trend that we’re seeing is the whole healthcare industry will be powered by a more modern and flexible data stack and technology architecture. As mentioned in Part I, new entrants such as Angle Health, provide next-gen digital health insurance for startups. The whole healthcare system was built entirely on the centralized API stack, enabling interoperability and seamless data transfer from all relevant players in the healthcare ecosystem. This contrasts with the traditional carriers that leverage EDI integrations (Electronic Data Interchange--a decades old form of data transfer). With this scalable underlying architecture, Angle Health will be able to underwrite more precisely and react faster with a shorter turnaround time for any claim.
Telehealth like Tele-doc will definitely experience exponential growth in a few years as the whole population becomes accustomed to virtual care. Companies that work on democratizing any part of the patient experience will have huge potential. Lastly, all these customized and patient-oriented experiences will be surely built on a modern tech stack.
ARK Trust holds over 649,130 bitcoins that accounts for 3.1% of the whole bitcoin supply as of Feb, 2021. There are two major trends ARK have sold investors on:
There are many ongoing debates around the underlying value of Bitcoin and all these assertive statements. As interest rates went down to nearly 0% last year, there were not many options left for both individual and institutional investors to park their cash in extra assets. People are pointing to the supply and demand as the underlying mechanism here that drives bitcoin’s volatility. They make predictions by comparing the whole market capitalization of Bitcoin with gold.
Others believe that Bitcoin and the whole category of digital assets have a deflationary nature. It has positive hedging effects and encourages deflationary attitudes. We, as a firm, are not part of the ongoing debate or hype, although we’re a firm believer of the technology behind Bitcoin - the decentralized but strictly contracted (tokenized) mechanism. The mechanism and process of forming such digital assets will transform people’s perception, economic thinking and relationships with everything when blockchain comes to different applications. The most obvious one is with money. Here comes Defi.
In a nutshell, Defi is a new way people define the ongoing financial activities (lending, banking, payment, asset movement, asset management and investment) that remove intermediaries and are powered by the smart contract and automated protocols. Like Airbnb connects tourists with local property without a travel agency, Defi connects people directly with a broker-less mechanism and ensures the entire money flow is on the right track, empowering people to be in full control of the transaction. In the world of Defi, money moves fast and freely cross-border (with certain regulations barriers) and no predetermined time for the trading hours, and all asset exchange would be free of interruption from broker platforms like Robinhood. We expect new forms of crowdfunding to address different allocations of capital and credit such as yield, savings, and liquidity mining applications. And most importantly, the whole Defi concept will be transparent. Defi is like an open source community where each player can generate, build and scale up their own applications. Companies tackling Defi’s remaining barriers to adoption represent huge opportunities.
Bitcoin is well-known but the penetration and acceptance of internet money for the broader population is not yet high. Consequently, the understanding and trust entry barrier toward wider adoption remains high. Coinbase is lowering the bar so more people can buy into the cryptocurrency, but a lot of friction still exists and the barrier is still high (with hurdles like high transaction fees and transactional commissions). Technology-wise, security remains a huge concern and there’s a lack of infrastructure to support the further expansion of Defi applications that are built on the Ethereum network. Companies that step in and build a commission-less platform for cryptocurrency that drives mass adoption will have huge potential. Similarly, companies building the Amazon cloud for blockchain could be transforming the next era.