By Richard D. Harroch and Melissa Guzy
Investment in financial technology (“Fintech”) companies is growing dramatically. Global Fintech funding has risen to over $100 billion, fueled by large M&A deals and large rounds of financing. Investment in Fintech companies is expected to continue to grow significantly in the next few years, as such companies offer outsized growth opportunities.
Fintech companies encompass a broad landscape of businesses, generally around financial-oriented services and products. Examples of Fintech related companies or products include:
- Payment infrastructure, processing and issuance, such as services provided by Square, Ant Financial, Revolut, and Stripe
- Stock trading apps, such as from Robinhood, TD Ameritrade, and Schwab
- Alternative lending marketplaces, such as Prosper, LendingClub, and OnDeck
- Cryptocurrencies and digital cash, such as Bitcoin
- Blockchain technology, such as Ethereum
- Insurtech, which seeks to modernize and simplify the insurance industry, with companies such as Lemonade, Oscar, and Fabric
- Money transfer and remittances, such as TransferWise, PayPal, and Venmo
- Mortgage lending, such as through LendingHome and Better Mortgage
- Robo investment advisors, such as Betterment and Wealthfront
- Neobanks such as Chime, N26, and Monzo
- Credit reporting, such as Credit Karma
- Online business loan providers such as Lendio and Kabbage
- Small business credit cards, payments, and financing, such as through Brex and Fundbox
- Financial cybersecurity companies seeking to protect institutions from money laundering, chargeback risk. and cybercrimes, such as Forter, EverCompliant, and CrowdStrike.
- Infrastructure and software to power financial applications, such as from Plaid
See a thorough analysis of companies in the Fintech space in Fintech Insights by FT Partners.
Fintech companies fall into either a business-to-consumer sales model (B2C) or business-to-business model (B2B). Each model has its own challenges, although the B2C sales cycle tends to be much shorter than the B2B sales cycle, as businesses are slower to adopt new technology.
A number of Fintech startups show great promise and are quickly earning rising market valuations. Some of these companies have grown, or will grow, to become valued at billions of dollars. For example, Stripe is valued at over $35 billion and Square is valued at $25 billion.
Startups in the Fintech space face a number of issues and challenges, from regulatory to fundraising and competitive issues. In this article, we will outline 10 of those key issues and challenges.
1. Raising Venture Capital or Strategic Financing
Raising venture capital financing is never easy for Fintech companies. Venture investors will raise a number of key questions in their due diligence process, including:
- What problem in the financial process is the company’s solution looking to solve?
- Is there a qualified management team?
- Is the market opportunity big?
- What positive early traction has the company achieved? Are there early or pilot customers?
- Are the founders passionate and determined?
- Do the founders understand the key financials and metrics of their business?
- Have the founders been referred to the investor by a trusted colleague? (It’s extremely difficult to get a venture investor interested through cold calling or cold emails.)
- Is the investor pitch deck professional and interesting? (See item#2 as to what your investor pitch deck should contain.)
- What are the potential risks to the business, especially regulatory risk?
- Why is the company’s product or service great?
- How will the investment capital be used and what progress will be made? Will it be enough to obtain the next round of financing?
- Is the expected valuation for the company realistic?
- Does the company have differentiated technology?
- What is the company’s intellectual property?
- Are the company’s financial projections realistic and interesting?
See 15 Key Questions Venture Capitalists Will Ask Before Investing in Your Startup and A Guide to Venture Capital Financings for Startups.