The rate at which investments in financial technology or fintech companies is astronomical. In just a few years, funding for global fintech reached more than $100 billion, with substantial M&A deals and massive rounds of financing leading the way. The strength of the industry will swell even more in the years to come, as most startup fintech companies seize growth opportunities.
While there are a wide variety of businesses under the scope of fintech, most are centred around financial services and products such as:
- Blockchain technology
- Credit reporting
- Digital cash and cryptocurrency
- Finance cybersecurity companies
- Investment advisors
- Lending marketplace
- Mortgage lending
- Online business loan services
- Payment services
- Remittances and money transfers
- Small business credit cards, financing, and payments
- Software and infrastructures to make financial applications run
- Stock trading
These fintech companies follow either a B2C or a B2B business model. Most of these companies show great potential and are receiving impressive market valuations. In fact, some of these companies already have a valuation of as much as $35 million. However, not everything is good for startup fintech companies as they have to deal with critical issues such as regulations, fundraisings, and competitiveness.
Some of these issues include:
Getting VC or Strategic Financing
Startups struggle to raise VC funding because these sectors follow strict guidelines and due diligence before they decide to fund startup companies. A few of the things that VC firms look for include:
- Areas in the financial process the startup company aims to solve
- The presence of a qualified management team
- The size of the market opportunity
- The presence of pilot customers and early achievements of the company
- Founder’s passion and determination
- Founder’s understanding of the business including their business metrics
- Referrals from a trusted investor
- Great qualities of a product or service
These are just some of the things that VF firms must address before they can say a fintech startup is worthy to receive funding.
Availability of an Exhaustive Investor Pitch Deck
Both venture and strategic investors must see a well-written and exhaustive summary of a business before they even set up a meeting. With this, fintech startups must be able to come up with an investor pitch deck that would immediately hook an investor and consider a meeting.
To achieve this, startup companies must:
- Prepare 15 to 20 slides to tell their story.
- Explain the market opportunity
- Showcase their team
- Present key indicators
- Avoid jargons
- Address the competition
- Present updated metrics
One important detail that shouldn’t miss out is this wording: “Confidential and Proprietary. Copyright © by [Your Company]. All Rights Reserved.” Make sure to email it in PDF.
The growing number of fintech startups gave birth to several regulations that they must hurdle. It has now become necessary for investors to hire team members who can effectively understand and analyse growing trends, work with regulatory bodies, and market your product in the best way possible. Fintech powerhouse countries such as Singapore and the UK have existing regulatory sandboxes that can effectively help fintech startups.
Competition with Huge Brands
In the business world, fintech startups are often the underdogs, and as such, they must compete with big names not only in the financial industry but also in the technology sector. Companies such as Amazon are now expanding its foray into the financial services and poses an additional competition of fintech startups. These companies have existing business foundations, massive market valuation, and dedicated followers. Rising against these big names is one of the critical issues that fintech companies have to contend with.
They have to come up with marketing stunts that will stand out since these big companies are more than willing to spend fortunes for direct consumer marketing. They have to effectively distinguish their products and services to they get their own following. Fintech startups have an edge against the fintech incumbents. Startups are faster in responding to the ever-changing market, and speed to market is their competitive edge. They must effectively use it.
Startups often have excellent ideas, but the lack of funding often hinder them from marketing it to a broader audience. To get a better market share, fintech startups must use time-proven cost-effective marketing efforts such as:
- Affiliate programs
- App marketing
- Content marketing
- Direct mail marketing
- Influencer marketing
- Official website
- Press releases
- Search engine advertisements
- Social media marketing
- Word of mouth marketing
- Getting Early Adopters on Board
Fintech startups face an issue of getting early adopters of the brand or service. They need these early adopters to measure whether what their offering has a market or none. It can spell much difference when they are trying to get VC funding or strategic funding.
B2C startups have a much easier time when it comes to early adopters because they have to offer incentives whereas B2B companies usually have long sales cycles and they cannot easily convince other businesses to become an early adopter if they don’t see any value for what the startups are offering.
Cyber Threat and Data Privacy
Probably one of the alarming issues that fintech startups have to contend with is the issue of cybersecurity and data privacy. Fintech companies handle highly sensitive information, which are often preyed on by malicious individuals. One simple mistake and it can cause a domino effect in the business and the entire system.
Majority of the cybercriminals use sophisticated tools to hack into unsuspecting companies and steal confidential information, and most of the time, the deed is done undetected. A delay in reporting can result in loss of business due to loss of consumer trust in relation to a cybersecurity event.
Intellectual Property and Technology
Most investors in the fintech sector are interested in the startup’s software, technology, and intellectual property. Startups must be able to prove that their company has a competitive edge over other technologies. Investors would also be interested to know the length of time at which the company’s offering can be replicated by other institutions. Startups must also prove that no other individual other than the founders have intellectual property rights to the technology.
Most fintech companies face the challenge of creating a business model that encompasses everything their company has to offer while still effectively differentiating itself in the vast playing field of startup companies. Their business model must take into consideration the finances. While startups are excellent in expense projection, they can use some help in projecting their revenues.
While a great idea can spawn the creation of a startup, it often leads to inadequate consideration of legal issues. Issues like these are relatively common – Facebook and SnapChat both dealt with it. Incidents like these are not foreign in the startup industry. Fintech startups must make sure that their company has all the legal issues checked before launching it.