The future of money is smart data and decentralization

Jalak Jobanputra is founding partner of FuturePerfect Ventures, an early stage venture capital fund in NYC. She has 20 years of experience in venture capital, impact investing, media and technology, especially in international markets previously overlooked by Wall Street. We talked this week about venture capital investments and the future of money. Jobanputra will be talking about these topics and more at the O’Reilly Next:Money Summit, March 14-15, 2016, in San Francisco.

Key points from our conversation:

• The representation of money is changing. Paper currency was once a financial innovation. Today, it’s about the digital token. That’s why Jobanputra is so keen on bitcoin and the blockchain.
• Human potential is limitless; it’s the opportunity and the capital that determines who succeeds in bringing these ideas to market. It’s important to understand pain points in emerging markets, which have a different set of problems.
• What’s exciting about portfolio companies BitPesa, Abra, and Kanjoya.
• Always think one step ahead with artificial intelligence and blockchain: we have the ability to be one step ahead of the machines by thinking broadly.

Heather Vescent: Has technology changed the way you think about money?

Jalak Jobanputra: If we take a step back and look at the purpose money serves, it’s as a store value, a transaction mechanism.

Take a look at what’s happening in Kenya with M-Pesa — it’s not actual, physical, money that’s being transacted. Money is a representation of value, but in the case of M-Pesa, that representation is really software and bits and pieces of software that are communicated as a representation of money.

There are limitations when you have a piece of paper that needs to be transacted with. If you can say that a piece of software or a token or a bitcoin represents a certain amount of value, this enables a lot more cross-border transactions. We can talk about bitcoin as a result of this, that now represents money as we know it.

Start by looking at the challenges we’ve had with the current representation of paper money. Technology is an enabler of thinking bigger and going back to the core goal of money. Paper money was developed to be able to transact, and now we’re opening that up with the technology advancements we’ve seen.

HV: In some ways, bitcoin and the blockchain doesn’t seem that mind blowing. It makes perfect sense as the next technical evolution of money.

JJ: Yes, and if you think about how long paper money has been in use, it’s about time we disrupt elements of the system. I’m not one of those people who thinks we should do away with all of the existing system. But, I think given the developments we’re seeing in technology in other industries, it’s about time to reconsider what we accept in terms of the token and the representation.

HV: What fintech trends do you follow? Are there themes to your investments?

JJ: When you’re a VC, you have to look ahead a few years and not just at what’s happening right now. Right now, marketplace lending is certainly a very hot area, and we’re seeing a lot of innovation happening. I’m not saying the innovation’s done there, but I’m looking a few years ahead, and that’s one of the reasons I’m very interested in the blockchain.

The thesis of the fund is around smart data and decentralization. As we get to more distributed and decentralized networks, the nodes of those networks can become a lot more intelligent.

HV: You mentioned intelligent nodes. I’ve never heard that terminology before. Is it an object or application that has intelligence and data affiliated with it?

JJ: Yes, exactly.

You could look at our cell phones as nodes. If you start looking at the Internet of Things, a refrigerator can be a node. My smart watch can be a node, and I can also be a node, with all the information that I carry with me. That’s where I think the blockchain and identity becomes interesting for people. We carry all this information. We process all this information. I think the human brain is one of the most incredible machines.

HV: It seems to me there’s not going to be this logical god-like artificial intelligence, but rather information, data, objects, and things that will feed information both to other machines and other humans to help us expand our brain capacity, whether that is an algorithm or augmented intelligence. We’ll offload things from our brains, what’s in our skulls, to digital machines that are in some ways agents of ourselves.

JJ: Yes. I’ve been looking at the recommendation engine in the AI space for over 10 years now, and one of the early things I concluded (back in 2004) was that we have the ability to stay one step ahead of machines. So, I don’t agree with a lot of my peers in Silicon Valley who have these Doomsday scenarios that machines are going to take over the world. I think machines can help us become smarter. That’s where the theme of diversity and gathering as much intelligence in the network and human intelligence is important. That is what’s going to keep us one step ahead of having artificial intelligence destroy us.

Now we’re coming out with machine learning and deep learning, and I think we’re trying to get away from the whole concept of artificial intelligences because it’s actually human-created. That feeds back into what humans are able to do.

I was thinking about this when I launched FuturePerfect Ventures. I started thinking, what is that future? I believe we can control that future. We can invest and support entrepreneurs — that actually does make a better world, instead of thinking of it as a race with the machines.

HV: You mentioned diversity. Could you talk more about that in relationship to your investments or companies you support in developed nations versus developing nations? Do you see a difference in the perspectives in what people are thinking about?

JJ: I was born in Nairobi, so I spent a lot of time in my childhood going to Africa and India when these places were not very developed. After business school, I spent some time in Dar es Salaam training women entrepreneurs in the food processing industry.

From my on-the-ground experiences, I’ve gained an appreciation that human potential is limitless. There are brilliant people everywhere. It’s really the opportunity and the capital to surface these innovations that determines who succeeds in bringing these things to market and who doesn’t.

I always keep an open mind where innovation can come from. Folks on the ground in different places are best suited to build solutions for those markets because they have an innate understanding of the pain points.

HV: Do you have advice for entrepreneurs?

JJ: Entrepreneurs always ask what investors look for. I always say, “Does an entrepreneur truly understand the pain point he or she is trying to solve?” Basically does he or she live with this pain point, and is it a big enough pain point to solve? I find emerging markets have solutions to problems that we may not see as problems here in the U.S.

If you look at BitPesa, an investment of mine based in Nairobi, they are building a bitcoin and blockchain network with a set of applications for Africa, as a continent. I think a lot of investors in the United States didn’t understand why people would buy and sell, transact, with bitcoin in Africa, when we’re not necessarily doing it over here. Whereas, I never thought of the U.S. as a market for consumer or immediate business adoption around bitcoin.

This is because, frankly, we have a very well-functioning banking system. We have credit cards. We have a lot of frictionless and inexpensive ways to transact. We take that for granted.

In a lot of the world, there aren’t real credit cards, transactions are difficult, and not everyone has a bank account. People still use a lot of cash. Even in a place like Kenya, that is used to mobile money, it’s hard to transact across borders or for multi-national businesses to pay their employees in the local currency.

Places that don’t have legacy infrastructure, like Africa, present a lot of opportunity, and that’s why there’s so much potential around financial services in emerging markets.

HS: What are your thoughts on trust, credit, and credit scores in developed nations?

JJ: We’re realizing the current system is pretty incomplete in terms of really assessing risk. There are a lot of folks left outside of our current system — there are many more outside of it than are actually within it, which means that there’s opportunity to find alternatives.

In much of the developing world, most mobile customers are prepaid. This is compared to post-paid minutes, which are monthly plans with a certain number of minutes, usually unlimited. These are very cost-effective plans compared to what people in the developing world pay.

There’s another conversation about the “Poor Tax.” A lot of these people don’t have credit history or are unbanked, so there’s no way to assess their risk. They have to pay in advance for mobile minutes, which are a lot more expensive.

The idea was to build data profiles around these pre-paid customers and then offer a more cost-effective solution.

We started using different types of data points to build credit profiles, using social networks and profiles to help assess risk. Then there are derivations of this throughout the world. I feel like in five to 10 years, we’ll have some sort of alternative credit scoring using different types of data. I think it’s all good, but we have to be careful getting feedback and building true credit profiles.

Data can be construed in many different ways and interpreted in many others. I want to make sure we’re responsible with the data that’s collected.

HV: I found your portfolio company Abra (a peer-to-peer global money transfer) really fascinating. Can you talk about it and share why you decided to invest in it?

JJ: I invested in Abra pre-launch. I was really taken by Bill Barhydt, the CEO and mastermind of the company. He and I had a conversation about utilizing the blockchain and bitcoin network as the rails without making that the be-all-end-all of the business model.

One of the frustrations is that the conversation is focused mostly about the code and mining and Silk Road, instead of looking at how this technology can make our lives better on a global basis.

Abra was one of the first companies I came across that epitomized this ethos. The idea was to bring the existing offline teller networks in these emerging markets online. These tellers are actual individuals, and they perform the last mile of getting the money to the person it’s supposed to go to.

Bill’s vision utilizes the blockchain on the backend, while bringing the teller network online with mobile apps. Abra enables them to expand their business, all while putting more money into the pockets of the people that receive the money. I thought this was a win-win and a great display of using this new infrastructure.

There’s very little discussion on how it all happens. It’s all done on the backend, and it’s actually very complicated. Bill successfully built it, and there’s a lot of early strong usage happening through the network. It’s an exciting company that has global application, something I really like to see, utilizing these different technologies that have emerged over the last few years to make an impact.

HV: Why has interest grown about bitcoin and blockchain in the last few years versus previous years?

JJ: A lot of investing is really about timing. I’ve been a VC since 1999, and it certainly seems that several cycles have occurred since then. One of my biggest takeaways has been timing. It’s not necessarily about technology — being available or developed. It’s often that the time is not right for the technology to be adopted and reach the mainstream.

It’s a given that we now have distributed networks, just in terms of people. The mobile phone and the smartphone have been instrumental to a lot of things being adopted that were tried in the late ’90s or early 2000s but never could gain traction until we had the broadband connectivity.

Since 2008, we’ve seen banks steadily have to retreat from a lot of their core businesses. This is partly due to regulation but sometimes due to the business realities and looking outside of their own walls for innovation.

It’s partly the result of some of the regulation we saw post-2008, where they’ve been forced to look outside for innovation and they just can’t efficiently create as much internally, and then they also have to figure out a way to reach both the under banked and the emerging markets, and in the US.

HV: I was interested in your portfolio company, Kanjoya. It’s more in the space of affective computing. How did you get interested in them?

JJ: One of the things that appealed to me was that the team had built out a website many years ago that built communities based on people’s personal experiences around different life events.

These could have been the death of a spouse or the birth of a child, and it was people sharing their own experiences and reacting to others. What they ended up with was this incredibly rich, powerful database of interactions around these life experiences.

It started me thinking about how we could take this information and make it scalable, so it can be helpful to a broader audience.

Their approach from the beginning was not one of going out and collecting data, which I think can have its biases. They started from a community perspective and over time built up reference points and these sentiments had more purity. I thought that was a really powerful approach, one that can’t be replicated easily.

I’ve been excited with some of their recent products. They have a product to detect bias in employee feedback and reviews. This is really powerful, especially when we’re talking about biases that aren’t necessarily overt; we all have hidden biases that exist in all of us.

Kanjoya is software to help us detect our biases, and detection is the first step in terms of being able to solve for them. It’s a great application of their core technology and engine.

HV: What excites you?

JJ: The last few years, many institutions are open to outside innovation. They’re looking at how the innovation happening external to their institutions can make them more efficient and reach more folks. The open white space markets are dwindling as we reach more and more folks in the world, but how do we efficiently reach a lot of the underserved and the unbanked? Then how do we make bank-to-bank activities also more efficient?

Financial services and fintech is just an exciting area in general. I think we don’t know how a lot of these new technologies are going to be utilized by the industry, and that’s what, as an early-stage investor, I get excited about. I’m in the early stages of disruption in a sector.