Enthusiasm for certain fintech investments is said to be cooling among venture capitalists and private-equity firms already.
So the natural question is, how can enterprising online lenders and other startups survive, much less grow?
We put several entrepreneurs and experts on the spot at the Empire Startups Fintech Conference last week in New York. Here is a roundup of their advice.
1. Spend cautiously. "As a startup, you have to use your cash wisely," said Stephane Dubois, the chief executive and founder of the market data API company Xignite, which recently completed a $20.5 million funding round. "You don't want to run out, especially as it's probably going to get harder and harder to raise [money] in the second half of the year."
One common mistake: startups often spend too much on office space. "You'll probably regret spending so much money on just getting an office, later on," he said.
2. Geography matters. Matthew Harris, managing director at Bain Capital Ventures, said he always asks out-of-town startup entrepreneurs why they are not based in New York. "Many defining companies are in New York," he said. "New York has so many incumbent advantages for fintech companies."
Pascal Bouvier, venture partner with Santander InnoVentures, agreed. "I would love to say geography is not a vector of success in this day and age where we're connected 24/7 anywhere on the planet, but it is," he said. "The network value of being in a large city cannot be quantified. In financial services and fintech, you have so many different stakeholders that you have to deal with — incumbents, regulators, third parties — that have a touch point on workflow in process."
Bouvier does not see New York as the only choice — he also counts Singapore and London as fintech centers.
Being near potential customers and funding sources is important, said Scarlett Sieber, senior vice president of global business development at BBVA. "If you're in a place that's not one of the Tier 1 cities for fintech, having access to capital and getting on their radar can be more challenging," she said. That said, "If you're in a really small area that doesn't mean you won't be successful. Dwolla is a case in point."
3. Take regulation seriously. Many at the event stressed the importance of building good relationships with regulators. "Try to establish a partnership over time," said John Ramsay, chief market policy officer a IEX Group, an alternative stock exchange designed to discourage high-frequency trading that opened in October 2013. Ramsay worked at the SEC for 14 years before joining the exchange. "Don't expect the regulator to deliver clarity right away," he said.
Stuart Lacey, founder and CEO of Trunomi, noted that startups need to speak in a way regulators can relate to. "Regulators typically want to put a round peg in a round hole and a square peg in a square hole," he said. "Throwing words around like 'disruption' and 'completely rethinking' and the kind of things that typically go in your deck won't go over well. Get an understanding of how they're built, who they are, and … speak their language and engage in a very open dialogue."
At the e-billing startup Viewpost, the first person founder Max Eliscu hired was the chief privacy officer of Royal Bank of Scotland. "We knew it was going to be an issue, [and] we had to make compliance and regulation an aspect of what we were doing or we wouldn't go far," he said.
However, he also cautioned against regulators directly. "Most people would suggest that if you're not regulated, approaching regulators and asking questions probably is not a good idea. Rather, you can go to regulators through counsel, through advisers who have direct relationships. It's an anonymized way to get feedback and guidance to help you understand: are you stepping too close to the line? are you at risk?"
4. Say goodbye to your personal life. "People have a fantasy about the excitement of being an entrepreneur," Eliscu said. "The reality is, it is intellectually stimulating, it's incredibly rewarding, but it is not easy. It's an enormous amount of work. Work-life balance is not real for founders of startups, and I think people need to be honest with themselves about whether they really have the constitution to be founders."
5. Make sure the business plan is practical. "Once an entrepreneur came to me who had what he thought was a really good idea about starting a gaming studio, a place where people would go to play games," Eliscu said.
But the person had no retail experience, no knowledge about point-of-sale systems and no idea how to run a business.
"My advice to him was, go get a job at Starbucks for six months, get trained on how to be in retail by somebody who's really exceptional at it," Eliscu said. "It doesn't matter what you do — mop their floors, clean the bar. Learn the elements and the fundamentals of the business you want to start while getting paid to do it. Don't learn that on the back of your investors' capital."
6. Vet the people you surround yourself with. "I spent a couple of years getting to know my co-founder, the [chief financial officer] I brought on board," said Caren Maio, CEO and co-founder of Nestio, a maker of leasing and marketing software for multifamily landlords and brokers. "You don't always have the luxury of dating before you get married, but doing everything you can to assess not only the type of person, but is this person's skill set complementary to mine, is so helpful."
She also recommended hiring people who are smarter than you. "It's how I learn," Maio said.
7. Find strong, established partners. "The key to longevity is a willingness to partner with incumbents in the industry who have been doing this much longer but need fresh ideas and innovative products to take to their existing clients," said Jason Zaler, fintech partnerships lead at PwC. "It's to recognize that particularly on the consumer-facing side of fintech, the direct-to-consumer model is a very steep hill to climb without partners." Many startups have changed their tune in the past 15 months, he said. "The distribution that they thought might be optional or nice to have is now a need to have." In some cases they realize this too late, he said.
8. Do it because you love it. "I still spring out of bed every morning and think, 'I love what I do,'" Maio said. "And I literally cannot imagine doing anything but this."
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.