A chat with Maximilian Friedrich, fintech analyst at ARK
Private vs public market analysis, ARK's operating philosophy, American vs European trends, and more
Sar : You have been a fintech analyst at ARK for almost two years now. Your twitter has become a must-read for a fintech nerd generally and Square bull specifically like me. Before we get to your story, can you tell us what ARK does and how can retail investors take advantage of what you guys do?
Max : ARK is an asset management firm investing solely in disruptive innovation. For us, that’s not a phrase but the conclusion of our proprietary research: We think that historians will look back on this era as one of unprecedented technological foment, perhaps comparable to that of a century ago when the internal combustion engine, electricity, and telephony swept through the economy.
ARK started out in 2014 offering actively managed ETFs to retail investors and since has expanded into the institutional space as well. Today ARK manages $43.6 billion as of 11/30/2020. Besides our investment focus, what sets us apart is our long-term horizon and open approach to research. We evaluate all of the companies we look at on a five-year time horizon, our top-down technology forecasts often look out decades. We do a lot of proprietary research which we publicly disseminate and hope to learn from feedback that comes back to us.
Sar : You were at Berlin based venture capital firm Redstone before joining ARK. In the American venture ecosystem, it is very common to see young Wall Street analysts join VC firms, especially those with growth practices. You went from private market to public market research. That’s very rare. What was ARK’s rationale behind making such hires and what was that transition like for you?
Max : When Cathie Wood, ARK’s founder, CEO and CIO, founded the company in 2014, part of her thinking was that the traditional research departments she came from are set up too siloed to understand today’s world in which technologies are converging. For example, it’s difficult for a traditional automotive analyst at a sell side shop to understand Tesla, because a company like Tesla is vertically integrated and requires knowledge of hardware chips, artificial intelligence, autonomous systems and so on. Therefore, ARK’s analyst team is set up more by technologies than sectors and analysts’ backgrounds often are non-traditional by Wall Street standards. James Wang, our AI analyst, spent 10 years at NVIDIA. Yassine, our crypto analyst, joined straight from college and is a huge crypto nerd, having exchanged his first bitcoin before coming to ARK in an alleyway in his hometown of Casablanca, because there weren’t any formal exchanges yet.
For me, the transition into the role at ARK was challenging in the beginning, I had to learn about public markets, but at the end of the day those are skills and frameworks that one can learn over a certain time frame. I think ARK excels in selecting analysts that are truly curious about their coverage areas and are not afraid to get their hands dirty.
Sar : Can you walk us through the idea of “open research” as you guys define it and how it feeds into what you believe is ARK’s differentiation? When I think about similar institutions in other industries like venture capital or investment advisory, I think of a16z and Ritholtz Wealth.
Max : Part of Cathie’s realization prior to founding ARK in 2014 was not only that research departments were set up too siloed but also that information flow and access was changing. ARK’s approach to research, therefore, is open source. ARK’s analysts are encouraged to be part of online communities, like Twitter, Slack, and Medium, that are focused on the technologies we research and invest in. We want to engage with thought leaders and we seek to share a large part of our research not only when it’s finished but right in the middle of it. That way, we can incorporate feedback from the community and reduce errors. I find that my Twitter feed made up of people who actually care about Fintech and have skin in the game is more relevant to my job than most sell side reports. Personally, I’m also really grateful that I’m able to put out research with my name on it. That’s all part of our philosophy. We are building trust with our investors and followers. The open-source approach adds to transparency (we publish all our ETF trades every day), which is key to our mission of democratizing investing and especially making investing in innovation accessible to everyone.
Sar : What does a normal day look like for you as an analyst?
Max : Every day starts with our morning meeting, which brings together the entire firm and then goes through updates from every analyst about the companies they cover. That can take up to two and a half hours. After that, meetings either are focused on research with our Director of Research, Brett Winton, or portfolio management with Cathie. If there are no meetings, analysts mostly work on their research. This head-down work typically makes up most of the day. We conclude each week with a Friday Brainstorm. This brings together the entire investment team as well as external thought leaders. Analysts present topics relevant to their research and all are encouraged to weight in, further battle testing our themes and producing unique insights.
Sar : I have enjoyed following your insightful research on Square for a while now. It is easy to find your bullish takes on their buyer and seller ecosystems on twitter and ARK’s website. What are some reasons for being bearish on Square going into 2021? What do you need to see to change your mind on how big an opportunity Cash app can be?
Max : Well, hopefully by the time this is published we’ll have a vaccine approved, but another full shutdown would hurt Square’s seller business. Besides that, Cash App has to balance rapid growth and managing KYC/AML without losing the trust of its user base. There have been some more reports about fraud on Venmo and Cash App in the context of stimulus payments and PPP loans. I see this issue as somewhat of a threat if it’s not resolved by the companies or if there is increased political scrutiny. Square should be set up fairly well to mitigate this though, given their approach of underwriting sellers for over ten years. To change my mind on how big Cash App can be, decreasing or stagnating attach rates and monetization on existing and new products would have an impact on my conviction. Essentially, if Cash App’s ability to cross- and upsell users to other financial products were to slow down.
Sar : What are some indicators you look for when trying to determine areas or companies you want to take a deeper dive in?
Max : We generally use Wright’s law to assess technologies. Wright’s law is different from Moore’s Law, which focuses on cost as a function of time. Wright's law on the other hand forecasts costs as a function of units produced. Specifically, it states that for every cumulative doubling of units produced, costs will fall by a constant percentage. Using Wright’s law enables us to forecast the inflection point where cost has decreased to a level where mass demand is expected to be unleashed. This concept is more difficult to apply in Fintech than say for lithium-ion batteries or genome sequencing. But customer acquisition costs (CAC) still are a large factor when assessing Fintech companies. Many of the companies we invest in are using network effects to minimize CAC and maximize retention. For any company, we are looking for proprietary data coming off end-point digital distribution, giving them an information advantage and the ability to price risk more efficiently.
Sar : What do you believe American discourse undervalues or misunderstands about banking and payments trends in Europe?
Max : First, debit card interchange rates are capped! Some Fintech business models used in the US don’t work in Europe. It’s much harder for challenger banks to be profitable in Europe than in the US, that’s why you see more fee-based models in Europe. The banking infrastructure is more developed in Europe, but I think there still is a market opportunity for some fintech companies we see in the US but not in Europe, for example the massively viral peer-to-peer applications. The Scandinavian banks were smart to build out peer-to-peer networks themselves, but they are still missing in major Central European countries, and with Cash use decreasing they should become more relevant. Satispay in Italy is a good example.
I think another point is capital markets, which are underdeveloped compared to the US, indicating a good opportunity for Robinhood-like applications servicing a new generation of investors in Europe. Generally, as a public equity investor, Europe is less investable than the US and emerging markets regarding Fintech.
Sar : A lot has been written about how digital banking, contactless payments and QR codes are seeing growth this year because of the pandemic. What are some underappreciated or counterintuitive areas of accelerated growth this year?
Max : First, I think it’s appropriate to point out that not only has there been a lot written on QR codes and alternative forms of payments, but that there’s something happening in the real world. Cash for Business, a virtually closed-loop payments system between Cash App business and consumer accounts, now accounts for nearly 10% of Square’s payment volume and 20% of Cash App’s revenue excluding Bitcoin.
We think the real estate space is generally underappreciated by many. Buying a house is the most significant financial event in most peoples’ lives, yet until recently there has not been any “Fintech” involved. We think that’s going to change drastically and with it the underlying transaction economics and ultimately the volume of homes sold. The COVID-19 crisis forced some of this change to kick off, including virtual home tours and digital documentation.