In 2021, few industries received more venture capital investment than fintech, and many industry observers predict 2022 will be another banner investment year for the sector.
To guide you through the opportunities and challenges presented by this level of activity, I recently interviewed Travis Hedge, Co-Founder of Vouch Insurance (YC S19) on Burkland’s Startup Success podcast series. We discussed trends in the Fintech startup sector, how talent demand is impacting the industry, why you should look at your company through the lens of de-risking your business, and how the best investors support Fintech startups.
- The trends in Fintech for 2022
- The growing appeal of the Fintech sector and competition for talent
- The importance of de-risking your business
- How the best Fintech investors provide value to the business
What’s Coming for Fintech?
As we look ahead in 2022, I couldn’t help but ask Travis what he saw looming on the horizon. What keeps him up at night? What gets him excited? What is on the roadmap for Fintech in 2022?
The first thing he said? There is a world of opportunity in Fintech.
“There’s just this massive world of opportunity for Fintech, and the talent market is absolutely recognizing that.”
— Travis Hedge
The good news: Traditional Fintech (think payments, debt, realty tech, etc.) as well as the new crypto- and NFT-enabled version has pretty bright future. The less-good-news: a tremendous amount of talent is flocking to the fintech market right now, which is making it time consuming and expensive for startups in the sector to scale.
In addition, there continues to be a dislocation in terms of how capital markets are thinking about this category. We’re in an interesting moment where valuations and fundamentals are blurred by an almost unprecedented degree of FOMO, risk appetite and incredible technological advances.
During our conversation, Travis pointed out that 2022 is likely going to be a year where capital markets become constrained in terms of funding – this may have already started – and this constraint will ultimately separate the strong, sustainable business models from the get-rich-quick, jump-on-the-bandwagon ones.
Balancing Talent Acquisition
With the influx of talent in the Fintech space, is it becoming more expensive to hire good talent? Like any market dealing with supply versus demand, wage inflation is hitting all corners of Fintech in a couple of ways.
First, you have to pay up for great talent. There’s no way around that, particularly since the pandemic has caused many highly qualified employees to re-evaluate their lifestyles, work/life balances, their worth to the enterprise and the compensation they receive. In a seller’s market for fintech talent, prices (salaries, bonuses, options, tokens, etc. lumped together) are reflecting this reality.
“Getting the balance right between building a technology company or a financial services company, in terms of the talent you’re hiring and where you’re deploying your scarce resources, is one of the trickiest parts of building a Fintech business.”
— Travis Hedge
Secondly, companies in the Fintech space are having to ask the question, “are we building a technology company doing finance, or a financial company using technology?” Because getting the balance right between those two is going to be key moving forward, and how much labor tightness a fintech startup feels depends on how they answer this question. Hint: VCs and other investors are awarding valuation premiums to the former over the latter, but that’s where it’s hardest to hire.
De-Risking your Business
As we head into the third calendar year of the pandemic and, at least until recently, continued frothy valuations, many businesses are looking for ways to insulate themselves from risk. Travis and I spoke at length about risk and how, at least for Vouch, he and his co-founders have approached ways to “de-risk” a business:
1. Accept the Risk
The name of the game is risk tolerance. You can choose to say “we accept this risk as a cost of delivering the product that we’re committed to delivering.” You don’t avoid it, you acknowledge it. The risk exists, you know it’s there, and you adapt to it.
2. Manage or Mitigate the Risk
This means taking whatever steps you can to lessen the impact of a risk through new controls, policies, or procedures. You’re okay with taking on some risk, but you’re attempting to mitigate or manage this risk. This is where it pays for founders, working with their CFO, to game out a bunch of what-if’s to see the true impact of a risk on the business.
“The key advantage you have as a startup is to move faster, but you have to give yourself the structural advantages, in a category like insurance tech, to actually do that in practice.”
— Travis Hedge
3. Avoid the Risk
Some risk is, for lack of a better term, too risky. Yes, you might “win”, but you’re opening your company, your systems, and your customers up to immense costs if you’re wrong. It can’t be mitigated, so you avoid it.
4. Transfer the Risk
In some cases, your company just isn’t set up to handle the risk. In those instances, you may need to transfer the responsibility for that risk to someone else. For example, say acquiring talent is one of your big risks. Maybe you have to bring in a recruiting firm to help you take on some hiring risk.
According to Travis, de-risking is the best framework for launching a startup. That’s because it’s exactly how investors will view your company. If you can provide mitigating factors for the inherent risks visible in your business, it will become more attractive to investors.
Qualities of Great Fintech Investors
My conversation with Travis also touched on what he believes the best Fintech investors have in common. Interestingly, in his experience, they don’t spend a lot of time in the nitty-gritty details of the business. They aren’t necessarily subject matter experts or wellsprings of amazing product ideas.
Instead, the best Fintech investors are great at asking the right questions and keeping the founding team intellectually honest. They know when to push back on assumptions and ensure that there’s strong evidence backing up a course of action.
Plus, they’re great at connecting you to the resources you need to succeed.
As Travis says, “Investors sit in a very privileged position where they can see what works and what doesn’t across different companies. From this vantage point, they can give you extremely targeted advice, save you tons of time, and recommend different tools and service providers and help you connect the dots.”
That’s how investors earn trust and respect over time.