More banks have been considering alliances to make fintech work for them. This involves picking and choosing among many fledgling players. Kelly Williams’ article that follows is a good guide to any bank considering such a relationship, because it gives a taste of the other side of the desk. It’s also potentially helpful to any bankers who think they have their finger on the next PayPal or Square. Williams’ observations might just help you actually hit your target. This is one of three articles on fintech partnering. You can find links to the other two at the conclusion.—Steve Cocheo, executive editor and digital content manager
I’m a fan of the television shows, “Shark Tank” (ABC) and “All-American Makers” (Science Channel). Both shows feature aspiring entrepreneurs pitching their product or service to skeptical investors.
I enjoy how quickly the investors identify weaknesses and faults in the entrepreneur's product or business model. But on each episode, an investor will like at least one idea. Then the investor haggles with the entrepreneur (usually for about 30 seconds) on the capital infusion amount and the investor’s stake in the company. They shake hands, everyone is happy, and then they go make millions together.
Ah, if only it were that easy for fintech startups.
My employer, William Mills Agency, has represented hundreds of fintech companies. We’ve seen startups with (in our opinion) marginally acceptable products or services thrive. And we’ve also witnessed companies with (again, in our opinion) incredible ideas fail—miserably.
What happened to those unfortunate failures? We’ve seen a pattern of fatal errors, which this article will summarize.
Many issues concern basic common sense. Yet we continue to see many fintech startups make the same mistakes.
Here are 10 deadly mistakes fintech startups make, as well as some simple solutions to avoid them.
Mistake 1. Underfunding the startup.
Raising insufficient funds is a killer—and it usually strikes much quicker than the unsuspecting startup expected. Once a startup realizes it needs additional funding, the leaders fail to take into account the amount of time before their company will actually begin to receive the additional money from the investor.
The time lag from a letter of intent to an actual check can be three months to one year. Further, investor infusions never come in one lump sum.
In the meantime, no matter how good the product, no prospect will buy from a company that is on financial life support. During the vetting process, financial institutions will demand assurance that the company is strong and viable.
Too often we’ve seen company founders who thought the rules of funding simply didn’t apply to their company because they had enough to self-fund. Once their personal coffers dried up they either didn’t have any connections with the right venture capital firms … or it was too late.
Likewise, we’ve seen startups that think their product will sell itself. They have a buddy at a bank who promised to buy from them. They think that once that sale happens, there’s no need to budget much for marketing.
But either the deal dies or is delayed for so long that the company fails.
Solution: Before I start any do-it-myself project I’ve learned (the hard way) that it’s going to cost me twice as much and take three times as long.
Smart fintech startups should use similar logic. Seek and make multiple funding connections early; never depend on that first promised deal to carry your company to the next deal, and build in a healthy budget for marketing.
If you don’t need the money, great—no harm done.
“As a basic rule of thumb, you need to start raising venture capital at least six months before you need it,” says Sean Banks, partner of Atlanta-based fintech venture funding group, TTV Capital. “By the time you go out and pitch the VCs, get a VC interested for a second and third meeting, get to a place where you get a term sheet signed and you’re working on full due-diligence and deal docs—normally from step one from when you pitch the VC to when you get a term sheet, is going to take from 45 to 75 days. “
Once you have that term sheet, says Banks, you’re staring at another 90 days to close. That time is filled with due diligence, background checks, reference checks, reviewing capitalization, and production of investment docs by the outside counsel.
“So,” says Banks, “you’re talking six months.”
It is equally important to find the right investors that can bring more than just money to the organization.
“There are a lot of venture capital investors who have decided that fintech is the space they’d like to get some exposure to through their investments,” said Banks. “But fintech is a different animal. We liken it to bioscience. If you don’t have a PhD in your fund, then you don’t want to do a bioscience fund. Likewise, if you don’t have somebody who understands the regulatory complexities and the nuances of how money movement works in your fintech venture fund, then that’s not the folks you want to have put money in with you.”
Banks stresses the need for investors with industry connections and experience, either as a banker or a bank investor.
Mistake 2. Underestimating the length of the sales cycle.
Too often fintech startups think their product or service will defy the rules of time when selling to financial institutions.
Yes, banks are doing their best to keep up with all the fintech disruptors. But the truth is that financial institutions are typically and notoriously slow purchasers of anything new.
Solution: If you’re selling fintech to any financial institution— be it small community or money center bank—expect a long, arduous sales cycle with multiple setbacks and delays.
Even if you’ve got a champion inside the bank, they’ve got to sell your solution up the chain of command.
Fintech players need patience, plus tenacity. They must also be realistic: Build the longer sales cycle into the startup’s business plan—18 months minimum.
Mistake 3. Not understanding the market.
As PR and marketing specialists in the fintech space, our firm has been privy to top-secret stuff under development. And we’ve often seen startups think they’ve got something new, when it’s already being done by another company.
A little homework would have revealed that the solution was already available and heavily entrenched in the market—provided by either another vendor or through the bank’s own IT department.
A related mistake: Developing a solution banks aren’t at all interested in purchasing.
How is this possible? “But our fintech startup’s gizmo solution is really cool and we are certain that bank customers will demand it if only given a chance.”
Solution: Too many startups are blinded by their own arrogance. They’ve sold themselves into believing their solution will completely change the way the financial world operates, and that they don’t need to work within existing parameters.
The “if we build it they will come” approach doesn’t work in fintech if you don’t play well with others.
“The fintech entrepreneur should not look to completely disrupt the existing fintech ecosystem,” says Banks. “The best bet for success is to partner with the ecosystem. The ecosystem is not very good at innovating and they are currently very receptive to outside ideas for innovative products. Partner with the existing ecosystem for your product. Let them help you take it to market and grow a big business that way.”
Banks adds that fintech entrepreneurs must understand that there are reasons that procedures and policies and compliance and operations are in place.
Startups must talk to everyone, especially bankers, about what they are up to and gather opinions long before reaching the financial point of no return.
Mistake 4. Failing to devise a sound sales strategy.
A single quote summarizes this mistake: “Our solution is so great it will sell itself. So we really don’t have a sales strategy.”
Solution: Many brilliant fintech startups were ruined by terrible sales and marketing efforts, and the mistakes always started at the top.
It is the CEO’s responsibility to lead the most well-planned and aggressive sales and marketing campaign as possible. But the reality is that fintech startups are often the brainchild of software techies that have limited sales and marketing skills.
So, if you are a techie, the first step to success is to acknowledge that you don’t have a knack for sales and marketing, and that you need to surround yourself with the right resources early in your startup process.
Sales and marketing is never an afterthought. No solution is so great that it will sell itself.
Mistake 5. Don’t put all your sales chips on “Bob.”
We’ve heard this kind of statement a great deal: “Bob is our guy! He knows the presidents of three banks that he assures us are done deals, so we don’t need more sales support for this year. After Bob makes those sales, we might start our sales recruiting efforts.”
Solution: “We are very sensitive to testing the sales and marketing when we go into a business,” said Banks. “That to us is often more critical than the technology. We like to see a sales- and marketing-focused CEO, because our belief is that from the top down, building a sales-centric organization will end up being the one that wins—versus all sales put on one salesperson.”
It’s always a great idea to have other salespersons ready in the wings, just in case your star salesperson decides to quit. Too often startups pick up a seasoned sales representative who is really just there until a larger, established organization makes an offer.
How does a startup hang onto winners? By giving their salespeople compelling reasons to stay committed to the venture. Offering equity stake incentives helps.
And sales staff should know the firm’s long-term objectives. What’s the exit strategy? Is the company a potential acquisition? Do employees know how they will be rewarded when the exit event occurs in five years?
Mistake 6. Don’t blow your shot with a poor start.
“We’re still working out all the kinks in our pricing and product offering and we’re still trying to identify our true target market, but we’ll figure that out as we move ahead in our sales process.”
Solution: If your organization is still trying to figure out what it is and to whom you’re selling, don’t make it up on the fly.
You’ve only got one chance to make a great first impression. Financial institutions have little confidence in companies that can’t effectively convey what they do; why their prospects should buy; and exactly how much it will cost—in time and money.
If needed, spend more time on R&D to build a viable offering. Never let your salesperson hit the road with a product or service that is, or appears, incomplete.
Mistake 7. Skimping on the sales prep schedule.
Also heard a great deal: “Our first sales meeting with a prospect is next week. Bob, please get started on a sales presentation.”
Solution: Fintech players often put years of blood, sweat, tears, as well as their founders’ life savings into ventures. It is their masterpiece—their vision. And they want to tell their story the best way.
Successful startups don’t cut corners, and they most certainly don’t wait until the last minute to build a sales deck. Every element of their sales presentation is as polished, perfected, and prepared as a Shakespearian play.
Great sales presentations don’t just happen overnight. It’s hard to say exactly what’s in a bad sales deck, but everyone knows it when they see it. The digital world continues to chip away at everyone’s attention spans. The 50-page PowerPoint bullet presentation is dead. Brief, simple, but well-produced videos or animations that are self-explanatory are the new norm.
Mistake 8. Keeping things under wraps.
“Our solution is ready, but we want to stay under the radar until we’ve gained momentum,” can be a natural attitude.
But it’s not right.
Solution: CEOs of successful fintech startups never fly under the radar. In fact, once their company takes flight the most successful fintech startups do their best to fill up the entire radar screen through aggressive public relations and bold marketing.
Yes, there may be sales setbacks and implementation hiccups. But it is more important to establish first-to-market advantage though PR and marketing than wait until new entrants come along and fill the news and marketing void.
Mistake 9. Not having your website ready when you hit the circuit.
“We are presenting at Finovate next week, but our website is still under construction.”
Nothing looks more bush league than a startup company with a homepage that only says, “Coming Soon,” or “Under Construction.”
Remember, your website is your storefront. You want to give prospects compelling reasons to enter your store, spend time, and come back frequently until they make a purchase.
If your site isn’t ready when it should be, the home page message might as well say: “Sorry you found our homepage. We’re not ready for any business.”
No matter what the product or service offering, every fintech company’s website is its most important sales and marketing tool. According to research conducted by the CEB Marketing Leadership Council, on average, customers are nearly 60% of the way through the purchase decision-making process (from information they’ve compiled on the web) before even engaging a sales representative. Financial companies want even more knowledge, insight, and market validation before making a purchasing decision.
Likewise, according to Demand Gen Report’s 2013 B2B Buyer Behavior Survey, nearly two thirds, or 64% of respondents, said a vendor’s content had a significant impact on their buying decision. According to the survey, 34% of respondents strongly agreed that the winning vendors provided a better mix of content to guide them through each stage of the researching and decision-making process, indicating that diverse and useful online content can largely influence the success of a deal.
Before your fintech startup makes its first sales call, build your website. It should provide product and service information that answers 90% of all your prospects’ questions.
Mistake 10. Thinking the product is standalone, that there is no need for the blessing of any of the core providers or anyone else.
In 2013, Matt Harris of Bain Capital Ventures, speaking at a Technology Association of Georgia Fintech conference, said, “Small fintech vendors will have a harder time selling to banks without partnering with one of the big cores.”
It’s harder yet today with concerns about cybersecurity and—at present—increasing regulation.
For many financial institutions, the core processing providers are their technology gatekeepers. Nothing passes through without the core provider’s blessing.
Solution: Before a company reaches its startup event horizon, it must make a strong effort to form partnerships—or at least alliances—with the cores.
Yes, there is a chance that the cores may already have, or are developing similar solutions as your startup. However, we’ve often seen cores purchase fintech startups if their solution was superior to that of the core.
Startups should also seek validation with industry consultants, analysts, and media. Keep in mind that these groups influence the cores as well as the financial institutions.
Planning… Execution... Perseverance.
Sounds like three words for a motivational poster. But without all three of these elements even the best fintech startup will never succeed. All too often enthusiasm and overconfidence regarding an idea obscures the basic business fundamentals.
The fintech mountain is littered with wreckage of startups that weren’t watching where they were climbing.
About the author
Kelly Williams, executive vice-president of Atlanta-based William Mills Agency, the nation’s largest PR & marketing firm for financial services organizations.