OBSERVATIONS FROM THE FINTECH SNARK TANK
Impact Alpha reported that robo-advisor platform Swell was shutting down at the end of August, noting the company said it was “not able to achieve the scale needed to sustain operations in the current market.”
Coming on the heels of the Finn shutdown, I thought this would be a good time to talk about why fintech startups fail.
The One Reason Why Fintech Startups Fail
A Google search on "why fintech startups fail' yields roughly 4.3 million results. Articles listing the five, eight, and even 10 reasons why fintech startups fail abound.
Let me save you some time and tell you the one reason why fintech startups fail: They don't make enough money.
Let's see how that criteria holds up.
Fintech Singapore recently published an article titled 8 Reasons Why Fintech Startups Fail. Here are five of the purported reasons (with my take on them):
- Underfunding. Fintech Singapore: "Under-funding is a killer and it usually strikes much quicker than the unsuspecting startup thought it would."
Fintech Snark Tank: If the startup was making enough money, it wouldn't be "underfunded." - Choosing the wrong VCs. Fintech Singapore: "Fintech startups must choose VCs with experience and understanding of the space."
Fintech Snark Tank: If the startup was making enough money, it wouldn't matter who the VCs are. And if the startup founders had "experience and understanding of the space" themselves, the VCs' experience wouldn't matter as much. - Overlooking compliance. Fintech Singapore: "Fintech startups must remain at all times compliant."
Fintech Snark Tank: Duh. However, Robinhood "overlooked" compliance when it launched a checking account in late 2018, and that didn't stop them from just raising a round of funding with a $7.6 billion valuation. - Thinking a fintech startup is the same as any other tech startup. Fintech Singapore: "It is primordial for a fintech startup to understand psychological behaviors around money, credit, savings, and payments: individuals do not think the same way about their money as banks and regulators do.
Fintech Snark Tank: Huh? If a fintech startup is making enough money, it could overcome this "primordial" shortcoming. - Competing solely on cost. Fintech Singapore: "While the promise of providing services at a cheaper price is great, fintech startups often overlook the fact that banks have massive scale advantages."
Fintech Snark Tank: First off, fintechs aren't "overlooking" banks' scale advantages--many, in fact, are collaborating with banks to take advantage of that scale, Second, if a fintech startup can't maintain a cost advantage as it scales, then it really doesn't have an advantage.
What About the Competition?
It might seem odd that not one of the articles mentions "competition" as a failure factor. But according to Cameron Yarbrough, co-founder and CEO of Torch, "One of the things I learned at Y Combinator: startups rarely fail due to a competitor."
He's spot on. Ironically, too many fintech startups have the reverse problem: They think they don't have any competitors. They wear it as a badge of honor. They're usually wrong, but even when they're right, creating a new market is no easy task.
Having competition is actually a good thing. A quick story to illustrate:
Years ago I was consulting a Miami-based Pepsi bottler who served the Brazilian market. Went down to Sao Paolo to meet with the local execs and had to wait for a prior meeting to clear out of the boardroom. When we went in there were some business cards left on the table--business cards from Coca-Cola executives. I said "You're meeting with Coke? Isn't that collusion?" My client laughed and explained: "Maybe in the US it is, but not here. In Brazil, people don't drink soda. For the next few years, we'll work with Coke to build the market--then we'll slug it out."
Some fintech startups could take a lesson there. If there's no market, there's no way to make money. And if you don't make enough money, you fail.
You Don't Have to Make Money to Succeed
Not making enough money is the cause of failure, but not making enough money doesn't mean a fintech will fail.
There are fintech startups out there not making money, but who can still "succeed" by getting acquired by someone--usually an established vendor or financial institution--who can help them grow.
Just two problems:
- There are examples of fintech startups being acquired by larger firms, but who then languish within those companies (names withheld to save me a lot of grief on social media). The startup founders may have "succeeded," but that's about it.
- Too many startups have overblown opinions of their technology's or solution's worth. Maybe the reason they have something unique is that no established firm would develop because they know they couldn't monetize it.
Why Fintech Startups Fail
Astute readers will have surely concluded by now that "not making enough money" is a symptom of failure and not necessarily the cause.
So why do failing fintech startups not make enough money? Often, because they choose the wrong business model.
Fintech startups pursuing a B2C business model often overestimate the extent to which consumers will: 1) change their behavior, and 2) pay for a new product or service in addition to all of the things they already pay for.
While a B2B model may be a better path for some fintech startups, some fail by not understanding that they're a vendor--not a "partner"--which may require a completely different set of skills and capabilities from those they already have.
In any case, if you want to know why fintech startups fail, remember the words from Deep Throat (from the movie All The President's Men): "Follow the money."
