Startups: Surviving the Fintech Labyrinth

For centuries, a dreadful creature with a head of a bull and a body of a man devoured 14 Athenian teenagers—seven boys and seven girls—every nine years in his infamous labyrinth, and no one could ever escape. The Minotaur was killed when his human half-sister Ariadne, madly in love with Theseus, gave the prince a ball of thread with which, by unwinding it, he could find his way out of the labyrinth after slaying the Minotaur. Thousands of startups have been devoured by a chaotic market over the years, where funds are concentrated in a relatively small number of companies and the investment process is hard to predict and even harder to conquer. 

In 2015 alone, more than 4,000 fintech startups were founded globally, according to the Moody’s Investor Service report, Financial Institutions—Global: Fintech Transforms Competitive Landscape, but Unlikely to Displace Banks’ Central Role. Published in May this year, the report found that the total capital investment from the approximately 900 investors worldwide surpassed the $19 billion, compared to just $2.5 billion five years ago, in 2011.  

The Research Factor 

For fintech startups, the ball of thread must start unravelling from day one, from the minute they decide to materialize their ideas and step into the fintech labyrinth. But good ideas are never enough—they have to be accompanied by detailed and well considered business plans, along with extensive market research. 

“Lots of startups don’t understand the market well enough—they think they’re unique, but they’re actually not. They don’t do enough research, and they overestimate the adoption,” says Nicole Anderson, CEO and co-founder of London-based solutions provider FinTech Circle Innovate. “Basically, you have to be neurotic. You need to know that you can’t be unique—there is always someone else out there popping up.”  

“We carried out a market projection about the need for automation and then we did a roadshow in Europe, where we contacted several firms asking whether our product had potential. Once we confirmed that there was a gap in the market, we released a simple product with limited capabilities and used the lean process to test it and gather feedback to adapt the platform to their needs.” Luis Taboada, Qbitia

Conducting market research is a common sense move for any fintech startup that takes itself seriously, and must be placed at the top of its priority list. “The whole thing started with a small idea,” says Frede Fardal, CEO of Islero, a Norwegian independent investment research company. “Then we conducted extensive market research and we spent a lot of time calling industry experts; we had Excel sheets with our different competitors to study what they do, and so on.” 

Luis Taboada, CEO of Qbitia, a Spanish firm that specializes in automated trading strategy platforms, followed a similar path. “We carried out a market projection about the need for automation and then we did a roadshow in Europe, where we contacted several firms asking whether our product had potential,” he says. “Once we confirmed that there was a gap in the market, we released a simple product with limited capabilities and used the lean process to test it and gather feedback to adapt the platform to their needs.”

The Lean Method

Taboada’s words reflect what is considered to be an essential part of a startup’s early life. The lean process or method has been integrated into the fintech industry as a prerequisite for commercial success. It was first proposed in 2008 by Silicon Valley entrepreneur and blogger Eric Reis, when he developed a model of experimentation that tests a business hypothesis, with limited product development. Essentially, it is a process where startups can put a sample of their business into the market and get feedback on what works and what does not. 

“Most startups in fintech either join an accelerator or they are part of a community where there is an opportunity to be exposed to the lean startup methodology. It is an industry standard now. You absolutely have to be agile. You risk, you learn,” explains Anderson. 

For instance, for Zurich-based startup NetGuardians, which provides platforms for risk compliance and fraud mitigation, the lean methodology helped it understand what its potential clients required and assisted in redesigning its products to meet these needs. 

“We used the lean methodology from the very beginning,” says NetGuardians’ COO, Raffael Maio.  “Eventually, the product we had initially designed ended up being way different than the one we put on the market. The major change brought about by the lean methodology was that in the beginning we were very security-driven—we were only concerned about security. But we had to change the security pitch to more of a business pitch.”

Neglected Marketing 

Market research and projections are issues that anyone with a basic understanding of how to create a business plan should consider from the outset, even though, according to Anderson, that is not always the case. What is often neglected, however, is the commercialization of the product. 

Nick Bortot, CEO and founder of Dutch firm Bux, which makes market trading services available to non-market players with limited knowledge and access to platforms and brokers, believes that too much focus on the lean methodology distracts startups from the crucial element of making money to support the product itself. 

“There are lots of companies that work on products for a long time and only then do they start marketing,” explains Bortot. “They stick to the lean startup methodology, and, although I believe in that method, you also have to focus on the marketing and money. And you need them so you can test and make mistakes.” 

Somewhat surprising is the fact that the same mistakes tend to be made by ex-fintech industry practitioners who leave their firms to establish startups. “They have good technologists, but where they often fail is in the ability to scale commercially. They completely underestimate the resource pool they need to put in place around them. You often see startups drown in their need to raise funding in their early lifecycle,” says Anderson. 

The commercialization of products is a key element that needs to be present and consistent, but similar to everything else in the market, it needs to be flexible and adjust to any given circumstance. According to Taboada, Qbitia’s marketing strategy had to change drastically during the promotion phase of the platform, going from direct sales to creating partnerships with well-established companies in the fintech sector. 

“Firms were reluctant to buy a product they didn’t know, especially in Europe. So, we started looking for partnerships with big firms that are leaders in the sector as we believe they added value to our product,” Taboada explains. 

This kind of collaboration as a marketing focus is considered vital by most successful startups in the fintech sector. In fact, John O’ Hara, CEO of London based Taskize, which provides a communications network for the back office, says that if he could turn back the clock, he would establish partnerships at an earlier stage. “Banks are incredibly challenging to sell your service to. That’s why we partnered with Euroclear, which is a neutral, well-established party, with a broad reach in Europe. If I had to create Taskize again, I would partner faster,” he says. 

The Investor Hunt

Numbers can be deceiving if you don’t know how to read them. The $19 billion investment boom Moody’s refers to in its report shows a huge level of investor interest in the fintech sector. However, how this amount is distributed and how many startups received it is the real question. 

And that’s because, as obvious as it might sound, those 900 investors globally put their money into companies that they think could benefit them and return a profit in the long run. At any given time, several trends in the market could provide some guidance as to where investors seek to put their money. Right now, for instance, the fintech landscape favors companies with consumer-centered services and products. 

As Anderson claims, there has been a significant uptake and adoption on payments, foreign-exchange (FX) and personal finance solutions. Furthermore, the banking sector is focusing on all things designed to keep their customers happy. Digital identity is also a massive trend nowadays, and of course, blockchain, according to Anderson.

She also points out that there are three areas that every startup needs to take care of when they seek investor funding. First is whether they offer a solution to a certain problem and whether the market is big enough for them to survive. 

Second is that the startup must demonstrate that it is not only its idea that it relies on, but also that its commercial nous plays a big part in its strategy. “It is imperative to have someone to take care of the commercial aspect, or collaborate with a third party for it. I don’t ever consider a group of techies a complete team,” Anderson explains. And third, investors are always looking for ways to accurately predict their revenues, an area where startups tend to overestimate their potential. “Of course, they won’t be asked to predict exactly what their revenues will be, but they need to be realistic in their estimations,” Anderson adds.

Fortuitously, there are a number of indicators within the investor community that can help startups point their products or services in the right direction. For instance, US investors are pretty predictable, according to Anderson. The big players, she says, have always been consumer-centric, whereas in Europe, the landscape is more modern and there’s more diversity in terms of what they find attractive.

Regional vs. Global

One of the biggest debates, especially among European startups, is the local versus global perspective a company should develop as a strategy. The two theories clash regarding what the safest choice is for the company’s survival in a globalized market.

“Often in Europe—and I don’t know whether it’s a cultural thing—they want to do everything in their own country,” says Maio. “They try to do things in their own country without going abroad, and then when we want to go to the next level, most are acquired by large firms, especially US investors. And that has consequences, as US firms bring those European startups and their innovative products to their country.” 

But what Maio describes as a potential pitfall, Bux’s Bortot sees as a sound business practice. “A lot of startups want to expand immediately to the whole of Europe. That’s what I did in the beginning. We started in the Netherlands and went to the UK after one month, and in hindsight, we should have focused much longer in our country. I think you have to start and expand in your region, where you understand the culture and the language, and then after you’re established, try and expand to other countries,” he says. 

Learning from Mistakes

Whether Bortot’s rush to enter the UK market is considered a mistake or not is a moot point. However, there are a number of typical errors that many fintech startups commit, especially in the beginning of their lifecycle. NetGuardians’ Maio tells Waters that even though the company had secured funding, they still made the wrong choices. “In our first round we had the option to raise either €1 million or €2 million,” says Maio. “We went for €1 million as we thought it would be enough. What we realized right afterward is that money is never enough.” 

On the other hand, Fardal says Islero, which places a premium on human factors and identifies them as the main reason for the success of any startup, admits that in its case, the wrong people caused trouble from the outset. “The biggest mistake we made was hiring the wrong person for the wrong position,” says Fardal. “That’s why now we dedicate more time and effort to finding the right people—they are your firm’s most valuable asset.” 

Having to take care of large numbers of moving parts is no easy task for every newborn startup. And for many, it is the very reason why they fail in the first place. Ignoring the distractions was something Qbitia had to overcome in its early stages. “I think losing focus in the beginning was something we regret. When you’re facing different challenges and opportunities, it’s easy to lose focus on the important issues,” says Qbitia’s Taboada.

Taskize’s O’Hara worked in the banking sector for 22 consecutive years, 17 of which were at JPMorgan. When he decided to found his own fintech startup in 2012, he admits that he was caught a bit by surprise: “The thing that you’re not really prepared for is that you think you work hard at a tier-1 bank. Well, you haven’t seen anything yet,” he says. 

For startups, mistakes, no matter how trivial they might seem, can be terminal. Prince Theseus, on his return voyage to Athens after his victory over the Minotaur, made an apparently innocuous mistake: He had agreed with his father, Aegeus, to replace his ship’s black sailcloth with a white one in the event of his victory, indicating that he was alive. Theseus forgot to change sails, resulting in his father throwing himself into the sea and drowning before Theseus’ ship could reach the Athenian coast. Big mistake. 

Salient Points

• More than 4,000 fintech startups were founded in 2015, with capital investment rising to $19 billion. 
• Market research and projections, especially through the lean methodology, are being regarded as integral for success.
• The commercialization of products is an aspect most startups neglect, yet it is vital for their survival.
• Consumer-centered products and services are current trends within the fintech industry, such as payments, foreign exchange services and personal finance.