Banking and FinTech: fight, flight or thrive?
In this article, we focus our attention to one of the biggest stakeholders in the FinTech ecosystem: incumbent banks. Though many banking executives still express a great deal of anxieties over potential threats posed by Fintech, FinTech companies also have been a vital player in the ecosystem from the beginning. And their importance continues to grow, as many more banks have started mission-specific internal investment teams to enable innovation and collaboration between Wall Street and Silicon Valley.
Banks in the past have focused on later funding rounds across Capital Markets, Wealth & Asset Management and Auxiliary Infrastructure (e.g. RegTech) sectors. Some recent examples highlight the value created from partnership between incumbent banks and FinTech companies:
- Goldman Sach’s 2016 acquisition of Honest Dollar, which expanded their retirement products’ reach to previously underserved small businesses.
- Symphony’s investment led by the consortium of JPM, Citi, Morgan Stanley, Bank of America, Goldman Sachs, UBS, and Wells Fargo, which is a Bloomberg-like cloud-based messaging and collaboration platform.
- Boost, a B2B InsurTech platform, partners with incumbent insurers to accelerate go-to-market timeline for InsurTech startups.
What’s in it for FinTech startups?
In addition to capital, banks offer several attractive value propositions for entrepreneurs.
- Branding / visibility. Partnering with a well-known bank can give instant legitimacy and branding power to your product. There’s no better way to tell the market that your product works than a press release announcing that you’ve signed up potential clients as your investors.
- Partnership opportunities such as consulting agreements and product trials can accelerate go-to-market traction and provide often missing resources that the company needs to thrive in forms of capital, customer reach, expertise and industry networks.
- Strategic relationships with banks can, and often lead to attractive exits for entrepreneurs.
- VC investors often defer robust diligence to larger institutional investors and assume that they must have robust internal diligence policies in place. Effectively, they trust that larger banks will pay the necessary army of bankers and lawyers to run a robust diligence process. Therefore, presence of banks in VC investment rounds gives comfort to potential investors, which facilitate future rounds.
This sounds all great; but how should I position my company?
The same principles in any VC meetings apply. However, perspective is a powerful tool: corporate investment teams typically have more layers of authorities to report to. Approach the conversations as if you’re providing a packet from which they could draft a Board of Directors presentation. A few important points are:
- Work with your lawyer to organize and keep track of important corporate formalities: board meeting minutes, vendor contracts, employment agreements are most often under scrutiny. Fishing for signature pages while running a company full-time and engaging with investors is painful and distracting as it sounds.
- Update the cap table and prepare it in an easy-to-read format across founders and shareholders.
- Spend some time with your Finance team to create defensible and thoughtful financial projection, valuation, and Total Addressable Market.
- Talk with your lawyer to discuss IP strategies your company has any important proprietary know-hows or patents. Even if an issue is unlikely to materialize in real life, it is important to understand where the potential holes are and be able to talk about them intelligently with investors. For instance, a U.S. patent cannot preclude a French company who developed the same technology to serve U.S. clients from overseas.
