I’m a fintech entrepreneur and investor. I’ve been amazed how much interest this space has had over the last year. It’s like fintech has become THE place to “disrupt”.
While it’s great to see the pool that I play in get so much attention, I often times find myself arguing against it. FinTech is really hard and the hubris I see in entrepereneurs and investors entering the space makes me worry that people have no idea what they’re getting into. Here’s why.
- FinTech businesses don’t scale quickly. If you look at all the successful and hyped verticals of fintech and compare the marketshare of those startups vs the incumbants, its almost laughabale. Add all the loans originated by marketplace loan companies (LendingClub, Sofi, Prosper, etc) and compare them to one of the US banks. It’s not even close. Add up all the assets of the roboadvisors (wealthfront, betterment, etc) and compare that to just Merrill Lynch — its not even close. There are even individual team FA’s that have more assets than the entire robo industry. Do the same in payments, exchanges and trading. I LOVE all these businesses, but they are so far from truly distrupting.
- It’s really easy to get fooled by early adopters. Early adopters of new financial products are often times very passionate, super smart and way ahead of their peers….but they arent always looking for what all of us need. In FinTech you often times see someone creating a solution for a very narrow need who is then falsely encouraged by a group of early adopters to continue to build. They end up building a product that a small group REALLY wanted and that small group then tells the entrepreneur that the product is EXACTLY what the world needs, only for the entrpreneur to find out 2 years too late that his market is tiny and his customer acquisition costs make the unit economics a failure.
- FinTech is not an acquisitive space. When thinking about investing in any company you have to imagine an exit. What I’ve always found odd, is that while there has been strong growth in the industry, there is so little M&A. I would have assumed that the larger players would have come in and scooped up some of the lending platforms, blockchain plays or even the payment apps. I’ll talk about why this is in another post, but in short, these companies havent yet built brands that are strong enough for them to hold customers > most of us shop around for our financial products no matter the name on the “front door”.
- The sale cycles are really long. Sales cycles in fintech are often long because they involve individuals’ finances, the movement of money or something involving a regulatory body. Large companies take their time deciding and in FinTech its even longer. This can kill a teams morale, deplete cash and I think also dramatically slow innovation. A long sales cycle hurts even more because it doesnt allow your product to get feedback quickly and hence iterate fast enough to maintain an edge. This makes being an investor very hard because you often times findyourself funding a second round before you’ve had REAL product feedback.
- Customer acquisition is hard to hack. FinTech companies broadly have some of the highest customer acquisition costs. Very few companies have been able to find a way to truly grow viral and many have found that the need to spend to acquire actually grows over time, unlike most industries that see CAC decline once scale is hit. This makes sense though. It’s really hard to convince a random person to hand over their bank info, DOB and personal info. No matter how great the product is, that’s still a tough sell. I once remember talking to an execuive at Bank of America who told me that BofA offers $500 referral fees for brokerage accounts, his bet was all the online investing sites (lendingclub to the robo) would end up there eventually. I think this will get better over time, but its an enormous challenge.