Financial technology has never been a more exciting or innovative category — especially in New York City. Oddly, tech is not the driving force in many of these ventures. The Blockchain and Bitcoin notwithstanding, most of what we’re seeing now is financial product evolution and the unbundling of the large bank. Most of these companies could have been built 20 years ago.
Outside cryptocurrency and a few tools that enable better trading decisions, most of these startups developed a proprietary model to score the credit risks of potential customers and paired it with a clever go-to-market strategy that will appear to a new class of debt holders.
In the consumer space, this could be financing for home flippers, school loans, high-deductible health plans or even Uber drivers who want to buy new cars as a means of earning income. On the B2B side, companies have formed to help small business get financing by creating obscure products, like securities based on accounts receivable financing.
As a seed-stage VC that invests across many categories, these are hard businesses to assess. The industries they serve are varied, obscure and almost impossible to do due diligence on. Their technology typically feels like a black box that requires blind faith in their assertions. On the surface, this would make them seem unattractive.
But often these businesses have made hundreds of thousands of dollars in “transactional volume,” with promising metrics, like repayment rates and customer acquisition costs. So, from the standpoint of initial traction, there is evidence of a product market fit, and they look attractive.
In finance, size matters.
Almost all of these startups make sense as businesses, but I think founders and investors need to spend time thinking through two key questions. First, as an investor, would I want to buy the debt OR the equity? Do I want to be a customer or an investor? Second, from the founder standpoint, would it be better to take venture money or run the business from cash flows and keep the profits — the typical approach for Wall Street finance firms.
via techcrunch.com