Big 4 | Edition #87 - Fintech Inside - 22nd Dec, 2024

Hi Insiders, I’m Osborne Saldanha, an investor in early stage startups.

Welcome to the 87th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

Every industry has its royalty. Whether you're in tech, finance, fashion, or consulting, a small elite group of companies invariably emerges to dominate the landscape. These aren't just the largest players - they become the very definition of success in their sectors.

As a venture capitalist, I often hear founders say "the market is large enough for everyone". This response misses a crucial aspect that markets may be large, but the winners' circle is always small. The pattern is remarkably consistent - just 3-5 players capture the majority of value in any given sector.

In this edition, we'll explore why this concentration of power happens, what it means for founders building the next generation of companies, and why being a "good" business is rarely enough. The stakes are simple: in most markets, you either become one of the dominant few, or you risk being relegated to fighting for scraps.

As usual, there’s also a beautiful song recommendation at the end, if you’d like to listen to a song in the background while you read this. Do share your recommendations with me too :)

Happy holidays to you and those close to you. Best wishes for a fantastic start to 2025! See you then.

Thank you for supporting me and sticking around. Enjoy another great week in fintech!

Subscribe now

🤔 One Big Thought

Winners take most - There is a FAANG in every industry

We've all heard of the concept of Big 4. In the accounting industry it commonly refers to the four largest auditing firms KPMG, EY, PwC, and Deloitte. We've also heard of MBB i.e. the top three management consulting firms McKinsey, Bain, BCG. Similarly we know of IIM A, B, C referring to the top three Indian Institutes of Management i.e. IIM Ahmedabad, Bangalore, Calcutta (Kolkata). In high street fashion we have the Big 5 referring to Saint Laurent, Chanel, Gucci, Valentino, Dior. US tech has the FAANG (now MAANG) companies Meta, Amazon, Apple, Netflix, and Google.

Some other industries may not have Big 4 or 5, but only 2-3. Take India's cab hailing market - Uber and Ola, Ecommerce - Amazon and Flipkart, quick commerce - Zomato Blinkit, Swiggy Instamart and Zepto. In virtually every industry we have terms like this to refer to the top companies of the sector, the largest companies of the sector or the most influential companies of that sector. This pattern is remarkably consistent across industries.

While these monickers are also a great way to remember the top companies in the sector, it signifies something important. Let's dig into this.

Among the many questions I ask founders when evaluating an investment opportunity, I always ask "how do you define success?" or "given the levers in your control, how will you win?". The most common response from founders is "this is not a winner take all market. The market is large enough for several large companies to be built".

Unfortunately, I disagree with this view.

The financial services or fintech industry is massive. In Edition #82, I wrote that India's public market, financial services companies are valued at $1tn, generate $500bn in revenue and $50bn in net profit (as of FY24). Each individual sector of payments, lending, wealth, insurance etc. in the industry has a market value in the trillions of dollars. There's hundreds of billions in revenue to be made in financial services just in India.

Financial services companies account for 1/3rd of the overall net profit and 1/4th of revenue of the overall listed Indian companies. But, the Top 5 companies in financial services i.e. HDFC Bank, ICICI Bank, SBI Bank, LIC and Bajaj Finance, account for 50% of the market cap, revenue and net profit of all listed financial companies. Indian Financial Services' very own Top 5 i.e. BLISH - if you want a memorable term :) *cringe, I know*

The Big 3 - HDFC, ICICI and SBI account for 35%+ of market cap, revenue and net profit. ISH - if you want another memorable term. :D

PhonePe and Google Pay account for 86% of all UPI transactions (value and volume) in the country. Groww, Zerodha and AngelOne account for 57% of total active stock broking customers. Wonder how much market share Razorpay, PayU or PineLabs account for. Many more such examples of concentration of market share and therefore revenue and net profit among the Big 3/4/5 companies in every sector.

The natural tendency towards market concentration isn't random - it's driven by powerful underlying forces. When you examine why industries gravitate towards having just 3-5 dominant players, several key mechanisms emerge:

Network effects create a powerful flywheel where size begets more size. Economies of scale are equally crucial. Larger players can spread fixed costs across a broader base. Brand value compounds these advantages. HDFC Bank's trusted brand allows it to acquire customers at a fraction of the cost compared to newer entrants. Regulatory compliance adds another moat. In regulated industries like financial services, larger players can better absorb the fixed costs of compliance.

Here's the thing: financial services is not a winner take all market, no market will ever be a winner take all market - competition commission agencies across the world will come after you like bloodhounds.

But winners take most. As founders, one needs to figure a way to capture as much of the market as one can. And therefore it is important figure out a way to control as much of your business model as possible.

This brings us to why venture capital firms are obsessed with identifying potential "Big 3/4/5" players. As an investor, I'm not just looking for companies that can grow to $100M in revenue. Besides, $100M is a random number that suits the US market, not Indian. I'm looking for companies that can capture and defend a dominant market position.

This concept of Big 3/4/5 becomes even more important if you raise venture capital. When I ask the question "how will you win?", I know I cannot expect the founder to have a full plan in mind or have mathematically figured out - "if I have x users, with y ARPU then I've captured z% market share".

When evaluating early-stage companies, VCs aren't just looking for good businesses - we're looking for companies that could become one of the dominant players in their space. As an early stage investor, I know that things change even within 6 months as a startup. But what doesn't change is the ability to generate unique user insights (Edition #68) through rapid execution.

The scale math is compelling: in most sectors, the top 3-5 players capture 50-80% of the profit pool. Companies outside this elite group often struggle with sub-scale economics and compressed margins. This concentration of value means that being a small but profitable player is increasingly difficult. You either go big, or you risk being squeezed out.

This reality shapes how VCs evaluate early-stage companies. We're looking for signals that a startup can break into this elite group of N’s-of-1, even in a seemingly crowded/hot sector.

The most common response I get of "the market is large enough for multiple players" misses the point. Yes, multiple players can exist, but the value distribution is heavily skewed towards the leaders. The market is big, but it doesn't have space for too many big players. While no modern market is truly 'winner take all,' the reality is that winners take most. For founders, this means:

1. Identifying the key factors that drive market concentration in your sector.

2. Building strategies to capture and defend market share early.

3. Understanding that 'good enough' rarely is - you need to be among the best to capture significant value.

Your goal isn't just to enter the market - it's to become one of the few brands that define it. Find a way to become the Big 3 or 4 or 5 of your industry.

1-min Anonymous Feedback: Your feedback helps me improve this newsletter. Click UPVOTE 👍🏽 or DOWNVOTE 👎🏽

🎵 Song on loop

Fintech updates can get boring, so here's an earworm: Just Going by Ronnie and Barty (Spotify / Youtube). Slow, lo-fi vibes to relax as you unwind this year end.

Ronnie and Barty is my absolute favourite Youtube channel. I watch everything on Youtube at 1.8-2.0x, except this channel. Ronnie and Barty’s channel is to be savoured at 1x. (Thanks to Manas Saloi for introducing me to this gem)

👋🏾 That's all Folks

If you’ve made it this far - thanks! As always, you can always reach me at [email protected]. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.

1-min Anonymous Feedback: Your feedback helps me improve this newsletter. Click UPVOTE 👍🏽 or DOWNVOTE 👎🏽

See you in the next edition.