10 Reasons – part 1
Why FINTECH Startups Fail… and what you can do to solve them
1 Mistake: The fintech startup was underfunded.
Underfunding is a killer and it usually strikes much quicker than the unsuspecting startup thought it would. Once a startup realizes it needs additional funding, they don’t take into account the amount of time before their company will actually begin to receive the money from the investor. The time lag from a letter of intent to an actual check can be three months to one year, and investor infusions never come in one lump sum. In the meantime, no matter how good the product, no prospect will buy from a company that is on financial life support. During the vetting process, financial institutions will demand assurance that your company is strong and viable.
Too often we’ve seen company founders who thought the rules of funding simply didn’t apply to their company because they had enough to self-fund. Once their personal coffers dried up they either didn’t have any connections with the right VC’s, or it was too late. Likewise, we’ve seen startups that think their product will sell itself. They have a buddy at a bank that promised to buy from them and once that sale happens, there’s no need to budget much for marketing. But either the deal dies or is delayed for so long that the company fails.
Solution:Before I start any do-itmyself home fix-it project I’ve learned (the hard way) that it’s going to cost me twice as much, and it’s going to take me three times longer than I budgeted. Smart FINTECH startups should use similar logic. Seek and make multiple funding connections early; never depend on that first promised deal to carry your company to the next deal, and build in a healthy budget for marketing. If you don’t need the money, great – no harm done.
“As a basic rule of thumb, you need to start raising venture capital at least six months before you need it,” says Sean Banks, Partner of Atlanta-based fintech venture funding group, TTV Capital. “By the time you go out and pitch the VCs, develop interest for a second and third VC meeting, sign a term sheet and start working on full due-diligence and deal docs – normally from the first step of pitching the VC to when you get a term sheet is going to take anywhere from 45 to 75 days. Once you have that term sheet, you’re looking at another 90 days to close. Typically next steps include all due diligence, background checks, reference checks, looking at your capitalization and then the production of the actual investment docs by the outside counsel. So you’re talking six months.”
It is equally important to find the right investors that can bring more than just money to your organization.
“There are a lot of venture capital investors who have decided that FINTECH is the space they’d like to get some exposure to through their investments,” said Banks. “But FINTECH is a different animal. We liken it to bioscience. If you don’t have a PhD in your fund, then you don’t want to do a bioscience fund. Likewise, If you don’t have somebody who understands the regulatory complexities and the nuances of how money movement works in your FINTECH venture fund, then those aren’t the folks you want to have put money in with you. You want somebody who has industry connections, who’s lived and breathed this industry for decades on end – whether it’s on the operating side or the investing side. You don’t want to get in with a generalist venture fund that doesn’t understand FINTECH.”
Mistake 2: The fintech startup underestimated the length of the sales cycle.
Too often fintech startups think their product or service will defy the rules of time when selling to financial institutions. Yes, banks are doing their best to keep up with all the fintech disruptors, but the truth is that financial institutions have been and will always be notoriously slow purchasers of anything new.
Solution: If you’re selling FINTECH to any financial institution – be it small community or money center bank – expect a long, arduous sales cycle with multiple setbacks and delays. Even if you’ve got a champion inside the bank, they’ve got to sell your solution up the chain of command. And bankers will always have an excuse to delay implementation: “We’ve got too much going on to handle any more implementations.” “We’re not busy enough to justify any more implementations.” Be patient, but be tenacious. Keep in mind that no matter what they tell you, it’s not really a budget issue, or a compliance issue or an IT issue. Bankers are conditioned to delay everything. Sluggishness is in bankers’ DNA and nothing you say can speed the process. This is why it’s so important to build the longer sales cycle into the startup’s business plan – 18 months MINIMUM.
Mistake 3: The FINTECH startup didn’t understand their market.
As PR and marketing specialists in the FINTECH space, we here at WMA, are privy to topsecret stuff under development. And we’ve often seen startups think they’ve got something new, when it’s already being done by another company. And if the startup had done a little homework, they would have discovered that their solution was already available and heavily entrenched in the market – either by another vendor or through the bank’s own IT department.
Another common mistake is the fintech startup develops a solution that financial institutions aren’t at all interested in purchasing. Huh? How is this possible?
“But our fintech startup’s gizmo solution is really cool and we are certain that bank customers will demand it if only given a chance.”
Solution: Too many startups are blinded by their own arrogance into believing their solution will completely change the way the financial world operates, and they don’t need to work within existing parameters. The “if we build it they will come” approach doesn’t work in fintech if you don’t play well with others.
“The FINTECH entrepreneur should not look to completely disrupt the existing FINTECH eco system,” says Banks. “The best bet for success is to partner with the eco system. The eco system is not very good at innovating and they are currently very receptive to outside ideas for innovative products. Partner with the existing eco system for your product. Let them help you take it to market and grow a big business that way. Don’t think you can disrupt the entire banking system simply by having tons and tons of servers and thinking the technology can solve problems that have existed for hundreds of years in the banking industry. There are reasons that procedures and policies and compliance and operations are in place. And not appreciating that can be a fatal flaw for a FINTECH entrepreneur.”
Do your homework! Research your market. Go to as many FINTECH expos as possible and see what’s already out or coming out in the market. Study your competitors, or all possible competitors and their offerings. Then ask yourself, “Is our solution truly unique from our competition?” “Is our market close to saturation?” “Is our solution something a bank must have?” “Are there regulators or even banks that could foil our business strategy?”
Talk to everyone, especially bankers, about what you’re doing and get their opinions long before you’re close to passing the startup event horizon (aka point of no return). Be your own devil’s advocate and try to see the sale from the banker’s perspective. Imagine all possible reasons they may not want to buy your solution. Don’t be fooled into thinking your new, top secret solution hasn’t already been tried, or is already being implemented by others.
Mistake 4: “Our solution is so great it will sell itself, so we really don’t have a sales strategy.”
Solution: Many brilliant FINTECH startups were ruined by terrible sales and marketing efforts, and the mistakes always started at the top. It is the CEO’s responsibility to lead the most well-planned and aggressive sales and marketing campaign as possible. But the reality is that FINTECH startups are often the brainchild of software techies that have limited sales and marketing skills. So, if you are a techie, the first step to success is to acknowledge that you don’t have a knack for sales and marketing, and you need to surround yourself with the right resources early in your startup process. Sales and marketing is never an afterthought. No solution is so great that it will sell itself.