As the founder of a global VC firm, a member of Kauffman Fellows, the global network of venture capitalists, and an investor in a number of startups around the world, I’m always astounded that in every deal, different VCs focus on different things. I’ve been fortunate to invest in several fintech unicorns from the early stage. Here are ten counterintuitive (and hopefully occasionally controversial) strategies for successful fintech investing.
1. The Moat and the TAM Equation For Fintech Investing
Conventional wisdom is that moats are key.
But financial services is one of the largest markets in the US economy, roughly 20% of GDP. Taking a consumer and small business (”SMB”) lens for now: most products are not that differentiated over time. Among the largest fintech success stories, many have won because of: a superior product (e.g. simple API with Stripe), better value proposition (free bank account at Chime, a former portfolio company) or unique go to market (e.g. Guideline partnering with Gusto). This can often be complemented by serving an underserved but massive customer segment (e.g. Nubank).
My view is that while moat matters and can be defensible over time (particularly for enterprise startups), the Total Addressable Markets (TAMs”) in financial services are so large that product differentiation and sales velocity matter even more. Robinhood is a massive business, but with a service that many others offer today. Ramp was not first to market in the spend management category but moved very quickly in launching products.
Yes, incumbents (and other startups) will inevitably copy you. But only if you’re too slow to grow and iterate. And as we will see in the unit economics section, fintech can generate moats from scale.
2. An Engaged Attitude With Regulators
Fintech is “Fin” first. I personally am wary of any pitch that does not work with a spirit of openness and transparency with the regulators (perhaps it is one reason I have not been a crypto investor over the last decade!) I am of course biased as a former regulator myself.
I look for entrepreneurs that do more than comply with the letter of the law, but respect it, and the reason customer protection exists – even if they don’t agree with it.
The best founders I’ve worked with have engaged with regulators with an attitude of openness and engagement.
3. Younger Is Not Necessarily Better For Fintech Investing
As I discussed in Out-Innovate, the stereotype of the hoodie-wearing, 20-something fintech founder is giving way to seasoned entrepreneurs with years of industry experience. Certainly, there are examples of generational founders solving companies young. Stripe for instance is a strong example in fintech (and Meta in social media).
However, many successful fintech founders bring domain expertise honed over decades. This is of course, tied to the attitude point above.
In fintech, I often overemphasize understanding why a particular founder is uniquely qualified t