The following is a guest post by Pascal Bouvier (@pascalbouvier), venture partner at Santander InnoVentures.
You have a great fin tech business plan. You assemble your team and create your startup. Here are ten common mistakes you should avoid if you want to have a chance to live another day.
1. Not thinking about proper licensing
You think you are a tech company. You think you are only building software. But if you are focusing on a business-to-consumer model, chances are you may require some type of license. At the very least you may need to talk to your local regulator. Many a startup has tripped up by forgetting that the financial services industry is heavily regulated — sometimes maddeningly so, sometimes rightly so, sometimes both. Make sure you understand the regulatory laws and licensing requirements. Do not be shy, ask a law firm specialized in regulatory work. Heck, upfront homework may actually save you time and money later on and may help you be smarter with your business plan.
2. Not thinking about what it takes to raise money from strategic investors
You have decided to raise money from a bank or an insurance company. Financial services incumbents are regulated entities. They need, they must, they have to abide by very tight rules. If you are raising money from a financial services (finserv) incumbent, do your homework, ask if regulatory approval is needed and plan accordingly. Prior to closing an investment from a finserv incumbent, ask what type of reporting they will need, what type of governance, and what type of ongoing information they will require. They work under different rules. Be aware of the cultural differences and fine tune how you interact with your future shareholder.
3. Disregarding compliance as a pesky annoyance
This may actually be your death sentence. If you do not comply, if you cannot prove that you intend to comply. If you are late hiring a compliance officer and/or are late to develop a compliance rule book that you abide and operate by, you may end up dead meat. Be smart, realize compliance can be your friend — this includes anything that has to do with AML/KYC (Anti-money laundering/know your customer) norms.
4. Not choosing a VC with fin tech experience
If there is one industry where experience matters, deep experience, granular experience… it is the financial services industry. VCs with an understanding of the space are invaluable. Shun them at your peril.
5. Thinking that the general laws of growing a startup apply uniformly in fin tech
Wrong. Money is a weird concept. Individuals care about their money and at the same time they are not as engaged with it as they are with their social networks, friends, or the passionate causes they care about. Finserv incumbents care very much about money and are risk averse, whether the risk affects them or their clients. Regulators obsessively care about individuals’ money and the health of the enterprises they regulate. In other words, if you think the laws of growth hacking, of scaling a business apply in exactly the same way in any given tech industry as they do in fin tech and finserv… think again. Understand psychological behaviors around money, credit, savings, payments, both at retail and institutional levels, and you will be better off. Most startups that do not study these cautious behaviors closely end up being surprised by how slowly they gain traction either because growing a retail customer base is much more expensive than they originally thought, or selling to finserv incumbents is taking much longer than they thought.
6. Thinking that competing on cost will win the day
Many startups come up with business plans that provide financial service or products at a cheaper price with the application of better technology. Payments startups and robo-advisors are prime examples of such hubris. If you fail to understand that incumbents have massive scale advantages you will be wiped out when said incumbents finally move into action and race you to the bottom while undercutting you on cost. Be smart, find a real differentiator, one other than just cost enabled by “better” technology.
7. Thinking that IP is easily defensible
There are two lessons worth noting here. If you have come up with some technology you think is defensible, chances are a) a finserv incumbent already has something similar in its intellectual property portfolio and b) your tech can be tweaked easily by anyone without much effort. I bet this holds true for other industries. In fin tech it holds especially true and if you base you business model on your IP alone, then you will run into trouble.
8. Payments is easy — a false positive
Payments is the easiest of financial services sectors to enter. It is the most difficult to succeed in. Many startups mistake ease of entrance for ease of success, and as a result many startups fail. Think of how difficult it is to sell to customers in any industry. Now, multiply that by 2 or 3 in payments. You may have to sell multiple stakeholders: users (retail or corporate), merchants, processors, banks, networks. Better be prepared.
9. Overlooking legal aspects
Certain financial services sectors are ultra-specialized when it comes to the legal world. Think of securities law in capital markets. Think of laws protecting borrowers. Think of privacy laws when applied to personal data. I could come up with many more examples that can potentially trip up your company. Legal is sometimes different than compliance. Make sure you cover legal aspects too when developing your business plan.
10. Not paying attention to business cycles
Whether the economy is expanding or contracting will have an impact on your business. This goes without saying. Doubly so in fin tech. Let’s take the example of alternative lending platforms. If the management team of an alternative lending platform has built its business model off of low interest rates and related assumptions regarding default rates… said management team will be in for a rude awakening when interest rates start to rise. Building a business model in fin tech off of where one is in the current business cycle is short-sighted. Think of credit downturns, think of interest rate cycles, think of monetary policy and start scenario planning.
Conclusion:
Do your homework. Study the space. Seek expert advice from law firms that specialize in financial services law, regulatory work, and compliance. Seek and hire specialized team members early. Learn from these specialists and include their advice in your business plan, your product or service offering, from the start. Specialized fin tech planning is different than mainstream business planning.
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Pascal Bouvier is a venture partner with Santander InnoVentures, Santander Group’s global fin tech VC fund. Prior to that, he was general partner with Route 66 Ventures where he built the firm’s fin tech venture arm.
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