We asked 4 VC investors what they look for in a fintech founder: they want someone who's 'gritty' and has 'transgressive' ideas, but also knows when to take advice
Citi Ventures; Insight Partners; Bain Capital Ventures; Andreessen Horowitz; Shayanne Gal/Business Insider
- We spoke to investors at Andreessen Horowitz, Bain Capital Ventures, Citi Ventures, and Insight Partners to find out what they look for in a startup founder and what makes a great pitch.
- For fintechs looking to grow products like lending, explosive growth isn't necessarily as attractive as it might be for startups that are expanding through inking partnerships.
- It's also important to find a founder that's willing to take advice, some said, be that from VC firms' own tech and sales teams, or from data and feedback from seasoned players.
- And as lines blur between consumer-facing tech and fintech, it's key to distinguish between the two and make sure that both founders and backers are on the same page.
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There's a lot of cash out there for fintechs, but startup founders and venture capital backers are playing in a crowded market. We asked four VC investors focused on fintechs what they're looking for in a founder and a pitch.
They said the investment decision can take as long as three-plus years, and that getting to know the founder and understanding how they view the scalability of their business is key. For fintechs looking to grow products like lending, explosive growth isn't necessarily as attractive as it might be for startups that are expanding through inking partnerships.
And as lines blur between consumer-facing tech and fintech, some said it's also important to distinguish between the two and make sure that both founders and backers are on the same page. That's grown even more important as big money-losing, high-growth companies like WeWork and Uber grab headlines (and rattle investors' confidence.)
It's also important to find a founder that's willing to take advice, some said, be that from VC firms' own tech and sales teams, or from data and feedback from seasoned players, as is the case for Citi Ventures, the venture arm of Citibank.
VC funding for fintechs has been surging. There are currently 58 fintech unicorns globally, and third-quarter fintech funding topped $8.9 billion, according to CB Insights. That's a quarterly record when you discount Alibaba's fintech Ant Financial's giant $14 billion fundraise last year.
These big rounds and rich valuations have attracted a broad crowd of startups looking to grow by putting a tech spin on financial products and platforms. And big tech players also want in.
The launch of Uber Money, for one, shows how the struggling ride-hailing giant sees an opportunity in offering its drivers and, ultimately, everybody, financial products.
Facebook, too, is eyeing fintech. Aside from its Libra ambitions, the social network announced a new payment service that will span it's suite of apps like Facebook Messenger, Instagram, and WhatsApp.
Here are some things startups should keep in mind to keep the VC cash flowing in.
Anish Acharya, general partner at Andreessen Horowitz
Anish Acharya spent his career in and around fintec, and joined Andreessen Horowitz as a general partner in August.
The Silicon Valley venture capital firm is well-known for its early investments in companies like Facebook and Lyft. In the payments space, it has backed startups including payments giant Stripe and fast-growing cross-border player TransferWise.
"There's a lot of obvious stuff in terms of what makes a great pitch, but I think one of the most important things is the founder's authenticity to the space," Acharya told Business Insider.
That's "a good proxy for how gritty they're going to be, how much they care about the outcome and how carefully they've thought about the way to achieve that outcome," Acharya said.
As more non-bank companies like Uber and Apple lean into fintech, Acharya noted that the lines between fintech startups and other consumer-focused pitches will blur, and that there is a learning curve on each side of the existing industries.
"There are consumer internet founders who are going to night school for fintech, and then there are fintech founders who are going to night school for consumer internet and technology," Acharya said.
"I think both of those things can be learned, but I think as you see fintech everywhere and more non-fintech companies are playing the part, you're going to start to see this gray area between the founders."
Acharya noted that as lines blur, VCs still have to look at a startup's growth in the context of its actual business model. Explosive growth in lending, for example, doesn't necessarily bring a consumer-facing fintech startup closer to profitability.
"For a lending business, for example, you might see a huge exponential growth curve, but it turns out that giving people money is a great way to drive growth," Acharya said. "That may not necessarily mean it's going to be the next Facebook."
Acharya said curiosity is another key attribute he looks for in a founder. Founders, he said, should have a clear vision of where the company will go, but be open to perspectives that may shift that view.
"A big part of that is having a point of view as to where things will go, but being curious when presented with new information," he said.
Acharya founded a gaming startup called SocialDeck, which was acquired by Google, where he then worked for four years. Acharya left Google in 2014 to start mobile notifications startup Snowball, which was acquired by Credit Karma. Ancharya worked at Credit Karma in product management before joining Andreeseen Horowitz.
Matt Harris, partner at Bain Capital Ventures
Bain Capital Ventures
Matt Harris is a partner at Bain Capital Ventures. His portfolio includes fintechs like robo-adviser Acorns, bill-pay-software startup AvidXchange, and the payments platform Flywire.
"There has to be something transgressive about it," Harris said, especially when it comes to founders with early-stage companies. "Otherwise, it's kind of boring."
Harris' most recent Series A was a payments infrastructure platform company called Finix in July, which was also joined by Insight Partners, Aspect Ventures, and Visa.
Finix offers payment processing infrastructure-as-a-service, helping businesses side-step providers like Stripe by helping companies build their own payments platforms.
"We can agree that there are going to be competitors. And the Finix pitch is fundamentally different for the segment, more appealing, and really hard to emulate, because it kind of takes Stripe out of their comfort zone," Harris said.
Stripe is one of Silicon Valley's hottest fintechs, valued at $35 billion. It got its start offering a platform for accepting credit card payments, charging merchants processing fees for each transaction. It has since launched a corporate card service, fraud prevention tools, and a small business lending arm called Stripe Capital. It even has a press house.
"I remember taking this to the investment committee, and my partners are like, 'really? You're going to go against Stripe?,'" Harris said.
It's unlikely Stripe will grab 100% of the payments market share, Harris said. In addition to Finix, there are also more established competitors like Square and PayPal.
Early-stage companies account for about half of Harris' investments, he said.
"We assume that most of them will fail. That's actually the business we're in, that more than half of the startups we back will fail," said Harris. "I think VCs who don't really understand that are never going to help to build great companies."
For later-stage investments, Harris isn't willing to take on as much risk of a startup folding.
"You don't really want to lose $40 million, and you probably shouldn't have to," Harris said. "Later stage, there are a lot more analytics you can do about how well the company is doing and how much substance they have."
Harris started his career at Bain, before leaving to start his own venture firm, Village Ventures. He returned to BCV as a partner in 2012.
Ramneek Gupta, managing director & cohead of venture investing at Citi Ventures
Ramneek Gupta is the co-head of venture investing at Citi Ventures. Gupta joined Citi in 2011, and has led investments in payments processor Square, robo-advisor Betterment, and small business lender BlueVine.
"There are a few different lenses and a few different things that we're looking for when somebody's building something amazing," Citi Venture's Ramneek Gupta told Business Insider.
The first, Gupta said, is figuring out whether it's a platform, a product, or a feature, and cutting checks accordingly. It's not that one is necessarily better than the other, Gupta said, but platforms often yield the best results.
"It's rightsizing the amount of dollars going in relative to what might come out of the opportunity," Gupta said.
Square, which started as a payments platform company, has seen its share price rise from $9 to $66 since its 2015 IPO. Plaid, a startup that offers an API for fintechs to link into customer's bank accounts, is valued at $2.7 billion.
What the two fintechs have in common is their approach of first building something to then distribute out to other companies.
"If it's anything other than [a platform], then you have to be very, very disciplined in terms of your valuation and capital going in," Gupta said.
Product companies, which develop products to market directly to customers, are also raking in funding. Neobank Chime and small business lender Kabbage are both unicorns, and have worked to expand their product offerings.
However, Gupta said, given business models vary between platforms and products, VCs have to take that into account when determining whether and how much to invest.
With a platform, once its built, the company focuses on scale through inking more partnerships. A product company may require more investment in design and technology, and needs to focus on customer acquisition.
Citi Ventures also takes cues from its parent Citibank when determining the possible value and market demand of a pitch.
"We are fortunate to have access to the signals from our mothership and the entire client base that we serve globally. And that signal we leverage quite a bit. That gives us a good sense for testing the proposition," said Gupta.
Gupta said that for a startup, it's not just about founders.
"It takes a village to build anything amazing," Gupta said. "Are there the right investors around the table? Is this team capable of executing through the good and the bad times? There will invariably be hiccups and roadblocks. How do they handle that?"
Citi doesn't tend to invest after a first meeting with a startup, he said.
To be sure, this is more of an art than a science, Gupta said. Citi is looking for people with experience and a strong record of teamwork. "It's intuition-driven in that sense, and it's not an exact science," Gupta said.
"Often times, we watch what they are talking about, and wait to see if they can deliver to the next milestone," Gupta said. Citi may follow up in a quarter or so to check in on a startup's progress.
Gupta looks for the team's ability to put together a plan, set goals, and execute. Personalities also matter.
"If where they coming from, everybody's happy to get rid of them, that's not a good sign," Gupta said.
Byron Lichtenstein, principal at Insight Partners
Byron Lichtenstein is a principal at Insight Partners, a New York-based VC firm that invests in growth-stage software companies involved in various industries, like education, social media, and fintech. It has backed German neobank N26, business expense management startup Divvy, and payment fraud monitoring startup Sift.
"We like really strong tech and we like people who understand their unit economics," Lichtenstein told Business Insider.
"I think that there are folks that come in and have this grand vision. They're like, 'I'm going to spend $50 million and I'm going to get to $10 million in revenue. But don't worry, when we get to scale and it's going to be fine,'" he said.
WeWork's failed IPO, for example, called into question the aspirational and enigmatic founder running a business with wide losses and an unclear path to profitability. Uber, whose stock has trended down since its May IPO, still isn't profitable.
"I think what the public markets have proven, especially over this last year, is that spending unsustainably doesn't work," Lichtenstein said.
"We're very much willing to spend, but we have to feel confident that the entrepreneur knows that if I put a dollar out today, I can get that dollar back in 12 to 18 months," said Lichtenstein.
Not only is Insight looking for return on its investment, it also wants to see customer stickiness and what's often called a "moat"- differentiating services and products that keep the competition at bay.
Insight's investment process can take years, Lichtenstein said.
"From first contact with the company to actual investment, the median is three-and-a half years," he said. There are always deals that will pop up, but for the most part, Insight takes its time to make sure it's the right investment.
"You get to know people pretty well," Lichtenstein said.
For Lichtenstein, when a startup comes in, Insight is also pitching itself. One of the key things Insight looks for is a founder's willingness to partner with them.
"We want to be part of the software ecosystem. We've structured ourselves as such," Lichtenstein said. Insights offers sales, marketing, tech, and talent teams to its 150+ portfolio companies.
"At the end of the day there's a lot of capital out there, and a dollar is a dollar. We want somebody who's willing to take advice and hear the data," Lichtenstein said.
For many startups, the CEO is the main salesperson during early stages, and they might not trust anyone else to sell their product. Insight, Lichtenstein said, would help the find the right person to lead sales as the company scales.
"There are founders who come in who it has to be their exact way and - we'll still look at the business and we'll probably still be interested at times - but for us, it's really important to find a good partner," he said.
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