The fintech area is considered to be one of the most promising for the launch of new startup companies. But at the same time, it is also the most demanding and complex. As The Next journalist Matthew Hughes successfully put it, if you compare the launch of any other startup with an attempt to score a three-pointer with your eyes closed, then successfully launch a fintech startup - it's like to score a three-pointer with your eyes closed, hands tied behind your back while being intoxicated.
Before starting a fintech startup (and any other project though), you need to understand what difficulties you have to face. Do not underestimate the pace of customers adoption of the product. It often happens that startupers forget about the end user, developing a “perfect” product, which inevitably leads to problems after the product sees the light of day. As a result, quite often startups have to spend additional resources and time trying to convey to people the fact that the product they created is designed to make life easier for customers and they really need it. And therefore, do not forget that the product being developed should be ideal specifically for the end user, and not only for the creators themselves, whose judgments about its usefulness may be incorrect.
In order not to get into trouble, it is very important to conduct market research in advance and take into account other factors, despite the fact that these stages can be very time-consuming and resource-intensive. Actually, in this article we will try to make out the most important steps in the process of creating a fintech startup. Are the efforts worth it? The statistics below illustrating global investments in the fintech industry are more eloquent than any words. In 2018, the amount of investments reached 111.8 billion dollars and analysts predict even greater growth.
The most important aspects of creating a fintech startup
Consider the laws governing fintech
For fintech companies, it is especially important to understand whether the product complies with the rules and laws governing activities in the financial markets. That is why fintech innovations must be discussed with a competent lawyer. First of all, it is necessary to decide in which markets the project will be promoted. For example, working with EU residents will requires the fintech product complience with GDPR requirements, and in the case of the USA and Canada, completely different regulatory laws have to be taken into account. Having decided on geography, it is necessary to obtain legal advice on the peculiarities of national regulation, and if possible, involve a legal advisor in the project.
The overhead of consulting in this area is very high, but without it you will lose much more than you save - 3 out of 4 projects fail due to difficulties in obtaining a license or violation of the law. Dura lex, sed lex.
Moreover, technologies are developing rapidly, and quite often the state does not have time to introduce regulation in time. A good example is cryptocurrency, which 10 years ago was known to a narrow circle of specialists, and now millions of people around the world are following its course. It is important to understand that if there are no rules and laws in relation to an innovative product, in the future the state may introduce them.
Effective regulation is not a whim of the state (of course, if there is no lobbying), but a tool for the safe, reliable functioning of the market. If there is a norm, you must first understand why it exists, and not look for workarounds. An example is laws against money laundering or fraud. An easy and convenient payment service will simplify the life of users, but at the same time it can become a basis for criminal activity, so it is important to strictly observe the law.
Choose a technology and company that will help to implement it
Despite the advent of the fintech era, banks resisted the new competition - the development of the financial and technological industry had little effect on them. This way you can characterize the first phase of development of the industry. Nevertheless, there are many prerequisites for significant changes in the sector, due to which fintech is evolving, expanding its borders and going beyond payments and loans. The so-called second version of fintech (fintech 2.0, as it was called in the FinTech 2.0 Paper: Rebooting Financial Services report) will be based on cloud technologies and will partly result from the transition to open data.
While some fintech companies today focus on the race for unicorn status, fintech 2.0 provides much greater opportunities for dramatic global changes in the infrastructure and functioning of the entire financial sector of the economy. To realize the capabilities of fintech 2.0, banks and fintech companies must cooperate, complementing each other.
Technological innovations by their nature are being introduced relatively quickly and allow fintech companies to make significant progress and reach a new level in a relatively short period of time. For this, it is especially important to determine the technology and find a company that will develop it. In the best possible scenario, the development company, if it certainly has sufficient expertise, will offer you IT consulting services and will actively participate in the selection of technology for the best final result.
Identify potential partners and investors
Interest in fintech startups from IT giants and banks led to new investment flows and the emergence of incubators. Large investor enterprises can lead your startup to success. You will be on all covers! Just like Elon Musk! Look for venture capital funds that are close to you in their spirit, draw up a business plan, outline development prospects and conquer peaks with new valuable connections and money!
However, do not forget that if you take at least one wrong step, you can lose all control, and all laurels will go to investors. After all, if in the case of PayPal everyone knew that Elon did it, then you are still unknown to anyone. Moreover, an investor with a bad reputation can also scare off future partners and customers. Therefore, if you need a stable source of financing and your business reputation is important, treat the process of selecting partners with all responsibility. Try to negotiate with friends, family or find a business angel, so you can be sure that no one will take the startup for yourself. If you understand that you can’t do without investors, then look only for professionals in their field. They will help accelerate business development, deal with your risks and operational problems.
The basis of competition in the fintech market is investment money. According to CB Insights, as of 2019, 39 fintech companies have raised about $1 billion from venture capital funds. Their combined valuation reaches $ 147.4 billion. According to data of 2016, consumers use from one to three applications to manage their finances. But every year their number is growing due to new directions. However, to return these investments and earn a lot of money, fintech startups need to spend a lot of money. In order for them to start work, already in the early investment rounds they need more than $1 million. Let’s summarize the costs of launching a startup: to create a prototype of a product or service, a startup needs initial investments in the amount of $ 50 thousand to $ 100 thousand. When a startup has the right idea and a successful prototype ready to be launched in the market in order to attract customers, it is necessary to receive investments for growth in the amount of $ 250 thousand to $ 2 million.
Below you can see the approximate volumes and stages of financing fintech startups in order to better understand how much money each stage will require. Distribute the received funds wisely.
|Startup Lifecycle Stage||Source of capital||Amount of financing||Evaluation||Funding basis|
|1||Just an idea||Bootstrap, F&F, Angels\Seed Funds||$50-100 thousands||$500-1500 thousands||Attractiveness of idea and market size|
|2||+ Strong team||Bootstrap, F&F, Angels\Seed Funds||$100-250 thousands||$500-1500 thousands||Educational potential of the founders|
|3||+ Demo prototype||Angels\Seed Funds||$250-500 thousands||$2-5 millions||Successful business model|
|4||+ Validated product MVP||Angels\Seed Funds\VC||$1-1,5 millions||$5-20 millions||Consumer Acceptance|
|5||+ Quick user acceptance of the product||
|$5-20 millions||≥$50 millions||Estimates of growth, market share and revenue growth|
|6||+ Capital growth for viral growth over a long period||
New rounds (В, C, D, E)
Venture funds will begin to make some of the decisions
|$20-100 millions||≥$250 millions||Maintained by constant rapid growth and market share, leading to profitability|
|7||Stable growth||Stable growth||≥$100 millions||≥$500 millions||Profitability\cash flows|
Who has already succeeded?
There are many examples of successful fintech startups. Here are just a few of them.
Currency Cloud is a UK-based payment startup. It works with business clients and offers cross-border money transfers - faster and cheaper than banks. The startup was launched in 2012, has 125 corporate clients and processes operations for $15 billion annually.
British startup WorldRemit challenges money transfer companies. It offers at a low price to send money around the world - for this you need to know the number of a bank account or mobile wallet. It is enough for the recipient to set up an account on his phone and accept transfers without leaving his home. Potential WorldRemit clients are two billion people living in developing countries.
This startup calls itself a "social trading network." It allows you to monitor successful traders, copy their strategies and successfully invest around the world. The eToro platform supports trading in currencies, commodities and indices. It is already used by more than 4 million people in 145 countries.
Funding Circle lends to small and medium businesses in the UK. As of the end of 2019, this startup has issued loans worth $8 billion. Funding Circle has 48 thousand investors, including the British state-funded business bank.
Now you know what you should consider when developing a fintech startup. Despite the fact that with the advent of new players, competition also intensifies, it is rather a good sign for new financial and technology companies that have not yet appeared, as it indicates that investors are ready to invest huge amounts of money in fintech enterprises. This serves as a catalyst for the growth of startup evaluations. But why stop here? After all, you can become a unicorn! Fintech companies such as Stripe, POWA Technologies, Avant, Prosper and One97 have already joined the ranks of startups worth more than a billion dollars. Practical tips for creating your own unicorn, read in our article How to become a unicorn startup in 2020: 5 key points for your success.