From Campus to Capital
Insights from an illuminating discussion with emerging entrepreneurs
A few months back, I had the privilege of returning to my alma mater, MIT, to speak with students from across MIT and Harvard about fintech and venture capital. This presentation aligned with the first class of the semester for the business school’s FinTech Ventures course, and I was honored to be a part of it.
As I stood in front of the room and looked at a class full of eager minds, I was reminded of the boundless curiosity and entrepreneurial spirit that had once ignited my own journey. For me, fintech isn’t just a career choice – it’s my life’s work. The fintech industry offers an unparalleled scale of opportunities, a level of complexity that continually challenges me, and a unique chance to address fundamental aspects of human nature while solving complex problems.
While speaking to these students about fintech and VC, I couldn’t have been more impressed by their engagement and thoughtful questions. In this blog post, I want to share some of the standout questions posed by these bright students, along with the insights I provided in response.
Is it advisable for fintech startups to offer a range of products targeting different customer segments or to focus on a single product and service?
For fintech startups considering whether to offer multiple products for different customer segments or focus on a single product, the critical factor is the similarity between these products and their market strategies. The more varied the products and customer acquisition methods, the more challenging it is to succeed. If the products are similar and cater to closely related customer segments, targeting them simultaneously or in quick succession is more manageable. This approach works well when one customer segment naturally transitions into another, and both can be served with the same product.
However, when a company is just starting out, it’s paramount to concentrate on one thing and do that one thing exceptionally well. As the company grows and matures, it can expand its product offerings to serve multiple segments, but the initial focus is vital.
How much of a role do you think data and AI will play in being able to serve customer segments underserved by financial services?
In the realm of financial services, AI and data science hold considerable promise for better serving underserved customer segments. Their application can provide deeper insights into the unique risks associated with these groups. Historically, certain populations have been marginalized, often without valid reasons, but due to prevailing biases. By leveraging data science, financial institutions have the opportunity to remove subjectivity from decision-making.
While data science can be instrumental in removing human prejudice from decision-making processes, it’s crucial to acknowledge that these technologies could also inherit the biases of their creators. Therefore, responsibly harnessing AI and data science is essential, ensuring that they contribute positively and do not perpetuate existing biases. This balanced approach is key to effectively serving and understanding the needs of underserved customer segments.
Why hasn't the US adopted the super app model for financial services, similar to successful examples in Asia and Latin America, where one app provides various financial solutions?
The absence of super apps in the U.S. financial sector can be attributed to two key differences from many other countries. Firstly, the U.S. already has a sophisticated consumer financial services ecosystem. Secondly, a large majority of the U.S. population is banked and has access to financial services.
In contrast, super apps have thrived in regions where a significant portion of the population lacked access to financial services. In these countries, many people didn’t have pre-existing financial services, meaning super apps didn’t need to displace existing providers. Additionally, the existing financial service providers often catered only to the upper echelons of society, leaving a large segment overlooked. This gap allowed companies, especially large e-commerce firms, to step in and offer financial services to their customer base otherwise unserved by traditional banks.
In the U.S., however, the scenario is different. There’s a plethora of financial services products – both from traditional financial institutions and fintech companies – already serving a wide range of the population, and a continual stream of new products tailored to particular use cases. As these providers scale, they also look to expand their product offerings, crowding the field even more. Finally, the switching costs among these various products are often low, preventing lock-in. Consequently, the need or space for a super app diminishes, significantly reducing the likelihood that any single company can take on that mantle.
As early-stage investors, are you now more focused on companies that can achieve cash flow break-even sooner than in previous years?
Our focus as early-stage investors isn’t solely on whether a company can achieve cash flow break-even quickly, and that stance hasn’t changed despite shifts in the venture market. We prioritize assessing a company’s long-term financial viability, which can still mean raising and investing investor capital to build versus getting to profitability as quickly as possible.
When it comes to our founders, most aren’t aiming to build bootstrap profitable businesses from the outset. If that were their goal, seeking venture capital might not be the appropriate path. While bootstrapping can be a successful approach, it often doesn’t align with the objectives and dynamics of venture capital financing.
However, it is critical in this market that we ensure follow-on capital is available to fund our investments, as the capital markets are now much tighter than they were in the recent bubble. This comes from a combination of ensuring we have sufficient reserves – we’ve increased our reserve ratio as the market collapsed – and investing in businesses we believe will be able to attract later-stage capital. This doesn’t preclude us from investing in sectors that are out of favor or don’t yet have mainstream recognition. It does mean, however, that we’re very thoughtful about identifying the characteristics that will make those companies fundable or reasons we believe their sectors will gain broader interest in a few years.
Having said that, there are two situations when it does make sense for existing portfolio companies to focus on getting to profitability:
It seems highly unlikely that they can raise additional follow-on capital in the near term. In that scenario, pushing forward with a cash-burning plan is a recipe for disaster.
The company is very late-stage/pre-IPO (Series C and beyond). Investors at this stage want to know that companies can become profitable in the next 12+ months, as they believe there is little appetite in the public markets for companies with high cash burn and no near-term path to profitability.
There is no one-size-fits-all answer to this question. In a challenging market like the one we find ourselves in now, understanding the difference in growth and funding strategies is essential to charting the right course for any company. This is a core part of our discussions with both companies in which we are assessing a new investment and with existing portfolio companies.
Why does it seem that venture capital investors have become more conservative in their investments recently, despite it seeming like a good opportunity to invest?
A significant part of the seeming conservatism is actually just a return to normalcy. The investment pace, capital deployment, willingness to invest in unproven business models, and aggressiveness on valuations during the bubble years of 2020, 2021, and 2022 were very much an aberration, not the norm.
This return to normalcy has had several implications. First, the market crash significantly impacted the mid-stage and growth markets, creating a stalemate situation. Many businesses got funded both without proving they have viable economic models, and at valuations significantly ahead of their actual progress. Growth investors are therefore exercising more caution, scrutinizing the actual long-term viability of these businesses, and are no longer willing to pay the prices that prevailed during the bubble. This caution has narrowed investors’ interest to only a subset of these mid and later-stage companies. However, a valuation disconnect persists as founders are still seeking prices based on the 2021 market, resulting in fewer transactions across the board.
While early-stage investments remain more active, the overall number of transactions has also decreased, as investors are more selective and reassessing their criteria, mirroring the change in perspective at the mid and later stages. This shift is not just increased conservatism but a strategic recalibration in response to the recognition that the bar has gone up significantly for what types of companies will be able to garner follow-on capital in subsequent funding rounds.
The market is expected to reset, with substantial capital still available, particularly in the early stages. However, founders need to adapt to these changes, acknowledging that the current investment climate differs significantly from the recent past. This recalibration of investment strategies is a current consideration for many investors, including Deciens, reflecting a broader trend in the VC community.
Final Thoughts
Thank you to all the students who made this discussion so engaging. The questions they asked not only reflected the evolving nature of fintech, but also underscored the importance of continuing to evolve our thinking as venture capitalists and encourage the next generation of investors and founders to do the same. Continuous learning, adaptability, and strategic foresight are key in this industry.
Luckily, the future is bright. It’s up to the next generation of eager minds, like those I encountered at MIT, to chart its course.
