Venture Capital Approaches to FinTech Investing

At the April FDIC sponsored conference on FinTech, a panel of three venture capitalists discussed how they evaluated their investments in this area.

The first firm said they look for opportunity that supports an already existing capital commitment. That is, they prefer that fintech’s partner with established firms to make their services better.

This approach requires a “partnering mindset.” This means knowing a real problem to solve that is scalable and could become an industry standard.

An example of this approach was the potential to transition in credit underwriting decisions from local “soft” knowledge to “hard” information, that is, how I type in my web browser.

A second speaker said their approach was about the “perimeter” of financial services. Was it best to be a “landlord” offering all lines of business? Or is it better to be best in class and then integrate across different financial “verticals.” The example given was the evolution of Credit Karma’s business model.

The third approach was data-centric. The firm looks at investments where there is a data cluster (generic or proprietary) and an algorithm (AI process) to analyze the information for solutions. The ideal business opportunity is generic algorithm on top of a proprietary database.

The three questions the venture funds would use to evaluate a pitch are:

  1. Are you an expert in the problem? If so, what would a customer, with the problem, say about your solution? Go and ask.
  2. Is your business model credible: what is the quality and speed of the product launch? Is it scalable? What are your sales and market skills?
  3. Can you distinguish between a differential “promise” and differential “execution”? The firms want both to be present.

As a cooperative member, my question was whether credit unions should develop and own their own fintech innovations, or whether they should buy or partner with others where they do not own the intellectual property? How that question is answered, would determine how one works with new startups.

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