Episode 506: Fintech Running Just as Fast As It Can
Aug 24, 2023
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The podcast discusses hot topics in the fintech industry, including open finance and the Interagency Guidance on Third Party Due Diligence. They also explore the regulatory environment for fintech companies and banks, the importance of consumer controls in open banking, and the interdependence between fintechs and banks. The speakers reflect on their experiences in the fintech industry, discuss the concept of anchoring to all-time highs, and explore the revolutionizing property management company, Mind. They also touch on the consequences of being wrong and share their summer reading preferences.
Returning to disciplined investments and de-risking businesses is crucial for success in the fintech industry.
Cash reserves and foundational strength are key determinants of a company's survivability in the changing market environment.
Focus on one S curve and invest resources wisely to increase chances of success.
Deep dives
Difficulties in navigating the changing regulatory landscape
During the peak madness of the fintech boom, there was a crowded space and intense competition for deals, causing a reevaluation of pricing and terms. At times, there was a sense of questioning whether the approach was right or if others were onto something. However, there was a recognition that being disciplined and maintaining a learning agenda was crucial. The change in dynamics and the shift towards narrative-based investments and revenue arbitrage led to a deviation from the previous approach of de-risking businesses and stages. This deviation raised concerns and forced a reevaluation of investment strategies.
Reverting back to the pre-boom approach
Returning to the pre-2017 approach, characterized by disciplined investments and de-risking businesses and stages, is essential. By adhering to the five major statements: problem, solution, go-to-market motion, founder market fit, and financial, it is possible to determine the viability and potential of a company. Companies that raised substantial capital at high valuations may face challenges, particularly if they struggle to adjust to the changing market environment. Cash reserves and the foundational strength of a business will play crucial roles in determining survivability.
The impact of changing dynamics on narrative-based companies
The narrative-based companies that raised significant capital based on future outcomes may face challenges if they were unable to maintain cash reserves or adapt to market changes. It is important to evaluate the bones of the company, the foundational strength, and the ability to adjust to new circumstances. Companies that raised substantial money early on and have managed their cash wisely may have more flexibility and options for survival. The ability to generate proof rather than anti-proof, and the willingness to reconfigure the business to weather changes, is vital.
Flight to quality and efficiency
The market correction has sparked a flight to quality, with a focus on metrics that truly matter. The goal is to build a business with a minimum size team that can accomplish the mission efficiently and effectively. Staging ambition and de-risking in stages is crucial in garnering the attention and support of subsequent rounds of funding. It is essential to reevaluate the team composition, compensation, and motivation, ensuring that alignment with the mission and equity remains strong. While the times have changed, maintaining discipline, cost-consciousness, and adaptability are timeless principles.
The danger of pursuing multiple S curves simultaneously and the importance of focusing on one S curve at a time
Many companies make the mistake of investing in multiple S curves simultaneously, which decreases their chances of success in any one of those curves. It leads to distractions, burning through cash, and talent being spread too thin. It is important to focus on one S curve and invest resources wisely.
The challenges of going back and reevaluating business ambitions and strategies
When businesses have sold a big vision but need to de-risk and reassess their ambitions, they face challenges. Anchoring to all-time highs can limit their thinking and prevent them from realistically evaluating their progress and potential. They need to refocus on what they have learned and build from there. This involves refactoring the business model, doing fewer things with fewer people, and focusing on building product, learning, and scaling.
In This Episode
John Pitts, head of Policy at Plaid, and Jason Henrichs were recently talking about open finance and the Interagency Guidance on Third Party Due Diligence -- no doubt these are hot topics in your house like they are in ours -- and the idea to record some Hot Takes came to life. In the time it took to ship out Breaking Banks hot sauce, the Federal Reserve Bank decided to do its own hot take and create a supervision program for “Novel Activities.” Jonah Crane, partner at Klaros Group, former regulator in residence at the Fintech Innovation Lab and longtime regulator at the US Department of Treasury joined in on the fun and Dara Tarkowsi, partner at Actuate Law and host of Provoke.fm's Tech on Reg podcast accepted the challenge to co-host with Jason for the first half.
Then, if that wasn’t hot enough, in the second half, Frank Rotman, co-founder of QED Investors, 5x Forbes Midas Touch investor and Jason talk about building in the upcycle vs. building in the now cycle. Frank brings the heat and great insights!
https://youtu.be/hHK1Ey_v7OA
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