Fintech entrepreneurs and investors, focus on the “Forgotten” Generation!

Millennials have been the focus of much of the consumer-focused fintech innovation of recent years. Many of these fintech startups have been launched by Millennial entrepreneurs (those born between 1981 and 1996) solving their own pain points, whether it’s wealth management, payments, banking, loans, trading, enhanced saving, or just targeting early adopters like themselves. We think there is an equally, if not more attractive, customer base out there that’s an untapped opportunity for entrepreneurs, investors, and financial institutions alike: Gen X, the “Forgotten” Generation (also sometimes called the “Slacker” Generation), those born between 1965 and 1980. So we’d like to make a call to arms for entrepreneurs (especially those of Gen X itself) to start launching businesses and designing products for the specific needs and pain points of Gen Xers at their age and stage of life. And to existing startups focused on other generations, as your offerings grow, consider Gen X as a target audience. It’s also a call to our fellow investors to focus on startups that target a Gen X customer base, the overlooked diamond in the rough. The current environment is the perfect time to do so, with history supporting the thesis that startups launched and built in downturns can see huge success (Venmo, Square, Uber, etc. during or after the 2008–2009 crisis, not to mention earlier ones like Google and PayPal).

Of course “Boomers” (those born between 1946 and 1964) are also a highly attractive segment, but the competition for them as customers largely already ended in the pre-digital world. The customer segment that has for the most part been ignored and overlooked, despite being one of the most highly valuable and up for grabs for the next 20 years, is Gen X.

Tackling Solutions for Gen X

As any finance professional knows, it’s actually the first 15–20 years of cash flows in any present value calculation that drive value more than the perpetuity or terminal value. Many consumer fintech businesses and existing financial institutions, which are trying to innovate around younger generations, have forgotten this basic truth when they think of new services and building a business for the next 20 or so years. It’s not wrong for those entrepreneurs and institutions to launch solutions that address Millennial problems, and we fully support those efforts. We certainly see the value in neo-banks, virtual debit cards linked to 3rd party bank accounts, commission-free stock trading, low cost robo-advisors, etc., and love the technology behind them, but those types of solutions are mainly for a specific generation and set of problems.

Gen X is at a different stage of life (managing home ownership, kids, mid-career leadership, retirement planning, elderly parents with current and upcoming care needs, etc.), and we don’t see nearly enough technology startups tackling those problems from a Gen X perspective. Gen X is a generation that likes technology and the efficiencies and solutions it brings but isn’t averse to physical bank branches, face-to-face interaction, or credit cards for that matter. Hybrid solutions may be quite appealing for Gen Xers. We’d love to see tools that aggregate and manage not just financial accounts like banking and credit products but encompass warranties, insurance, all assets and liabilities, securely and privately, all wrapped in a SaaS package. It’s a holistic financial life management solution Gen X would likely adopt, potentially in conjunction with a financial advisor for advice on the side.

Another area desperately needing technological innovation is long term care insurance solutions for elderly parents who might need to live at home in the near future in a post-Coronavirus world. These are just the surface of the type of consumer codes that need to be cracked. We can’t predict all of the new technologies or businesses that will address Gen X pain points, and we need innovators to use their skills to think creatively to build them. The current environment is forcing further digital adoption on everyone, which is a helpful tailwind. Solutions designed today to solve Gen X problems may also hit the mark for younger generations when they reach a similar stage of life. Engage with the Forgotten Generation to develop and launch your products and services, and we think you’ll not only build a big, profitable business today, but you’ll have a real shot at building the next generation’s great financial institutions.

Why Gen X Stands Out

To show why Gen X is so appealing as a target, let’s start with the Pew Research generational definitions, which are never perfect as the dividing lines as they’re somewhat arbitrary, but useful enough.

In addition to setting a baseline for the definition of Millennials and Gen X, note that the periods above mean that both Gen X and Millennials are actually the children of Boomers (essentially Gen X from the early Boomers and Millennials from the later ones). This often overlooked fact matters when we talk about future inheritance/wealth transfer. But let’s start with today and examine the size of each group.

This chart is the one that gets people really excited about Millennials and has attracted much of the focus, not just by Millennials designing products for Millennials and not just in fintech, but in consumer industries more broadly. They are the biggest group now in terms of sheer population, with the Boomers nearly the same size but about to precipitously decline in numbers over the next 30 years. Gen X is the laggard of the 3, although mid 60 millions is not that much smaller. Forgotten indeed! But sheer population numbers just aren’t that important when you’re talking about financial services; wealth and financial health are. Let’s look a level deeper into wealth and financial health data between the groups.

Share of Wealth By Generation

From a current wealth perspective, Boomers certainly have much of the current wealth, with Gen X somewhat on the rise (pre-Coronavirus at least) and Millennials bringing up the rear. Of course wealth is age and life-stage dependent, so the graph above is a bit misleading. Comparing these generations at a similar point in life reinforces the main point.

Millennials have a much smaller share of wealth not only in absolute terms (of course given their age) but also relative to what Boomers and Gen Xers had at that age (ie, the starting point for rest of life). And compounding really matters in finance and wealth generation.

Boomers clearly hold more wealth overall, but at this point many already have their financial relationships. So customer acquisition costs for them are likely to be high, getting them to switch long established relationships (especially to exclusively or heavily digital ones) is a tough task, and they may be more resistant to innovation or new technologies (they are rarely the early adopters). Providers who already have them or target them as customers are going to do well for the next 20 plus years, but it will be hard for startups or new entrants, especially those requiring a change in habits to build a business around them. The competition for them is essentially over. Which leaves Gen X and Millennials as the prime candidates.

We have to analyze all the components of wealth — net worth, assets, debt, etc. — in order to decide. So let’s compare them apples-to-apples, adjusted for stage of life as much as possible:

Net Worth Comparison By Generation

Not only was the average Millennial of 2016 worse off than Gen X at 2001 (the starting point), but the chart above likely understates in some areas. Take debt for instance: lower mortgage debt isn’t necessarily positive given the role housing traditionally played in wealth creation in America. Of course higher levels of education loans on the Millennial side may overstate financial difficulty if they reflect truly higher levels of education instead of just higher costs of education. Based on Pew Research, Millennials are better educated than other generations based purely on percentage of educational attainment, but it’s also true that education costs have increased across the generations significantly based on US Department of Education statistics.

You can see the housing disparity below, where Gen Xers looked (and currently look) a lot more like the Boomers in terms of homeownership than Millennials do.

Homeownership rates — 2015

To be fair, housing may not be the driver of wealth going forward that it historically has been. But if we had to bet on one of these segments based on their starting points, it would be Gen X of 2001 over Millennials in 2016. To bring them into the present and what’s relevant for starting a business today and the next 20 years, today Gen X looks certainly better off than they did in 2001.

The Global Financial Crisis/Lehman Shock hit everyone’s wealth hard, actually Gen X the worst of all. Millennials got hit hard in terms of employment and earnings, which really hurts based on the lost compounding to build wealth, but they didn’t have that much built up wealth to lose at the point. But as a Pew Research Center analysis of Federal Reserve data in 2018 found, Gen X was the only group who recovered the wealth lost in that financial crisis (in large part because of the relative importance of housing assets in Gen X’s net worth).

According to data from a 2019 Epsilon research report , Millennials and Gen X appear to spend roughly similar amounts annually on a per person basis (Gen X consumption is likely more reliable and sustainable given the net worth position mentioned earlier). Millennials have the sheer population size going for them, but it’s not clear they are head and shoulders the most desirable consumer group, especially in terms of the ability to sustain that consumption (which by the way is why installment and point-of-sale credit products are a good example of a product targeted at Millennial needs).

Some believe the ‘Great Wealth Transfer’ is coming, by which Boomer wealth is inherited by their children and miraculously changes the picture over the next couple decades. However,

1. Boomers are pretty healthy (range of ages as defined above is 56 to 74 today), so it will take a much longer time for this wealth to transfer, and remember the first 20 years of any present value calculation tend to carry the most value.
2. Remember, Boomers’ kids are both Millennials and Gen X. The oldest baby boomers generally will be the first to pass away, and they’re largely the parents of the Gen Xers. Nearer term inheritances are coming to Gen X

So financially speaking, Gen X is a very attractive bet as a generation to target, both now and and for the next couple of decades. There’s perhaps a preconceived notion that Gen X is (too) resistant to technology or innovation, and new technology and services that have been and are going to be invented or deployed are wasted on them. That’s not the case, and looking at the data, it’s the complete opposite.

Adopting New Technology

In fact, according to surveys conducted by Nielsen, Gen X is the actually most connected generation based on the amount of time spent on digital/tech activities. Again reflecting age and stage of life, Gen Xers may be spending their time on certain digital tasks (like catching up on email or social media or streaming a home improvement show during weekends), while younger generations are out and about (of course that doesn’t mean they aren’t online on mobile phones during that time). Gen X has lived through both the pre and post-tech boom eras as well, so it is used to adapting to these changes.

It needs to be noted as well that Gen X will soon be the corporate leaders and executives running the show, if they aren’t already. In the Global Leadership Forecast 2018 (published by consulting firm DDI, nonprofit research group The Conference Board and professional services firm EY with support from CNBC), research concluded that more than 50% of all leadership roles are held by Gen Xers — and that will only increase as Boomers retire. And nearly half of all Organisation for Economic Co-operation and Development country leaders are now Gen Xers.

Gen X As Founders

Despite popular images of college dropouts founding all of the successful startups, Gen X entrepreneurs actually appear to be more abundant and ideal as founders. Research on successful technology firms by a team led by Vivek Wadhwa at Stanford, looked at companies that had made it out of the garage and were generating at least $1 million in revenue. This research revealed that the average and median age of their founders was 39. Twice as many were older than 50 as were younger than 25. In a follow-up project, they studied the backgrounds of 549 successful entrepreneurs in 12 high-growth industries. The average age of male founders in this group was 40, and the average age of female founders was 41. A more recent 2018 NBER paper titled Age and High Growth Entrepreneurship concluded in its primary finding that “successful entrepreneurs are middle-aged, not young…all evidence points to founders being especially successful when starting businesses in middle age or beyond…The mean founder age for the 1 in 1,000 highest growth new ventures is 45.0. The most successful entrepreneurs in high technology sectors are of similar ages… While the prevalence of the highest growth companies having middle-aged founders is due in part to the prevalence of entry by the middle-aged, we further find that the ‘batting average’ for creating successful firms is rising dramatically with age.” The main takeaway is that there are plenty of Gen X entrepreneurs out there to build these companies and solve their own pain points (likely successfully).

Bet on Gen X!

As investors, we’re big fans of all fintech solutions that improve upon the status quo for everyone, and we’ve seen amazing products geared towards Millennials that have transformed everyone’s lives. However, we see a dearth of focus by fintech entrepreneurs and fintech investors on what we think is a phenomenal customer opportunity in Gen X. We’d like to see more startups, more entrepreneurs, more solutions, more designs, and more investment targeting Gen X specifically. We’re willing to bet on that addressable market and think the next generation’s great consumer financial institutions are more likely to be built on them as the foundation. Address Gen X’s pain points, build solutions for them, and we think you’ll own the future in financial services.