Venture Capital Drawn to AI and Data FinTechs as Next Connected Economy Unicorns

The connected economy is materializing so quickly that existing digital infrastructure is starting to fall behind — especially regarding how data is used to solve business problems.

In a recent conversation with Karen Webster, David Blumberg, founder and managing partner at the VC firm Blumberg Capital, talked about closing the company’s fifth early-stage venture fund of $225 million, and the new breed of global FinTechs it’s going into — chiefly those using artificial intelligence (AI) and machine learning (ML) to decode and deploy data in new ways.

Seeing immense potential in decentralized finance (DeFi) and blockchain solutions to create these faster, more accurate payment flows by freeing data from legacy bonds, Blumberg said, “We are looking actively at the DeFi world and the smart contract. We think this has a lot of potential as the speeds of transactions increase, as the security increases, as the regulatory guidelines and taxation are clarified, and as the technology frankly just becomes more stable.”

Calling DeFi the future of “cheaper, better, faster” FinTech, Blumberg envisaged an array of burgeoning opportunities for individuals, businesses services for individuals, small cross-border transactions, micropayments and more, Blumberg said — most of which will eventually be done using blockchain technology.

Research supports this, even at the consumer level. The Cryptocurrency Payments Report: How Consumers Want to Use It to Shop and Pay, a PYMNTS and BitPay collaboration, found that “thirty million consumers currently own cryptocurrency, and nearly 24 million consumers who are either former owners or nonowners plan on acquiring it in the future. In all, 29% of consumers are likely to purchase cryptocurrency, whether they are owners or not.”

See the study: 46M Consumers Say They Plan to Use Cryptocurrency to Make Purchases

New supply chain, logistics and trade finance DeFi solutions, he said, will be increasingly crucial “in helping to get receivables down and managing on the other side of your payables.”

Smart Contracts Can Unlock Data ‘Diamonds’

Using the childhood game of “telephone” to illustrate what happens to supplier data as it gets misplaced between disparate systems, Blumberg said there is still a great deal of loss, from imperfect manual and digital systems.

“The technologists are brilliant, and they’re working better than ever, but I’m shocked that the systems between the great retailers — the Walmarts, Krogers and Amazons of the world — and their manufacturing suppliers are not perfectly attuned and connected.”

Advancing end-to-end data management and B2B trade finance solutions using blockchain are ways that Blumberg believes DeFi can play a major role in removing existing roadblocks.

“A lot of this can be done better through smart contracts,” he said, describing solutions that better connect manufacturing systems, warehouse systems, carrier systems, trucking and rail, last-mile aggregators and other players touching goods as they move from point to point.”

For example, such solutions are starting to have a dramatic impact on helping manufacturers reconcile problems like deductions for late arrival, wrong quantities and damaged goods.

“Often retailers will say you delivered late, or you were short this amount of goods, and they just reduce the invoice and send you 80% of what you billed them,” Blumberg said. “So, you have this information accusation, and we need automation to help defend the producers that are getting the goods there. Ultimately, we should reduce the amount of fighting between these.”

It’s these all-too-common data disconnects that Blumberg is prioritizing in FinTech investments.

“AI riding on powerful hardware is able to now mine and find data that was underutilized, unused or never created,” he said. “We’re getting new data sources from financial exports, streams of banks and other sources. There are diamonds among this data. We’re mining the data to learn from the past, take stock of the present and then help predict and improve the future.”

See also: New Banking Infrastructure Needed to Bank Today’s Crypto ‘Unbankables’

Solving Big Problems at Scale

Blumberg Capital’s Fund V is going into a variety of emerging connected economy ventures from “beautiful new embedded FinTech functionality [enabling] the ability to draw down payments that you’ve earned,” to real estate use cases including “sale-leasebacks” of people’s homes.

Since closing Fund V, Blumberg has already made 16 investments, three-quarters of which are seed round stakes. Areas of investment focus include logistics and trade finance.

“We don’t want to make incremental steps,” Blumberg said. “We don’t want a feature, we don’t want a product, we don’t even want a product line. We want to build great companies.”

Blumberg is shopping for great entrepreneurs and opportunities beyond the Bay Area in lower-cost places such as Texas, Utah, Arkansas and Florida in the U.S., as well as Canada, the U.K. and Israel abroad.

“Brains are widely distributed around the U.S., but capital is quite concentrated,” he said, noting his preference for big thinkers wherever they’re based and a trend made possible given the decentralized movement that the lockdown enabled. “We want companies that can really go toward the sky.”

Also see: B2B Payments Take Center Stage With VCs