FINTECH FUNDRAISING NOW: AN INVESTOR PERSPECTIVE

A Fireside Chat

Ryan Gilbert, Founder and General Partner of Launchpad Capital
Dan Rogers, CEO of FintechForce

Hi Founders,

We’re in the middle of the fall fundraising season and it’s hard to raise a round right now. More than ever, investors are looking for great entrepreneurs and businesses that match their model, versus the bubbly market of 2021. We’re taking the time to talk with Ryan Gilbert, General Partner at Launchpad Capital, to understand the market and what makes a winning deal right now.

Ryan, thanks for taking the time today to share your thoughts on the current investment landscape and how founders can score a term sheet in this environment.

1. DR: Is anything hot right now? What types of deals is the venture community competing over right now?
   
   RG: Compliance and security are in focus. Global and domestic risks are forcing enterprises to ask tough questions about their blind spots, and they are investing in defenses to ensure the sustainability of their businesses.
   
   
2. DR: What segments do you think are interesting in Fintech or the broader market? Does this list change or evolve over time?
   
   RG: Banks and credit unions are under tremendous pressure to grow and retain deposits while complying with a myriad of regulatory requirements, maintaining tight security, and keeping existing customers happy. That’s a lot! Innovative technology solutions hold the key to better banking. We’re excited to focus on this huge slice of the technology landscape.
   
   
3. DR: Do you see AI in Fintech as a real opportunity? Is it overpriced already?
   
   RG: AI is already driving huge efficiencies in businesses of all sizes. It’s remarkable to see AI’s rapid impact in content creation, finance data analysis and customer service and we expect many more sectors to be positively impacted soon. It’s important to remember that AI wins are not the result of recent venture bets; the leaders were established years back. OpenAI is an 8-year-old company partnering with 48-year-old Microsoft. While it’s tough to say that the leaders are generously valued, I do worry that the vast majority of early stage AI bets will be deeply out of the money for a long time.
   
   
4. DR: When you find a company that looks interesting, what are the main criteria that a company has to meet before you consider drafting a term sheet?
   
   RG: The 4 Ts: Team, Tech, TAM, and Timing. It’s essential to understand each of these well and appreciate the way they interplay. We consider a term sheet to be an application by our team to join your team, so we also need to be very sure that we all want to work together and that we can work together. The human relationship factor is critical, even in an AI world.
   
   
5. DR: Presumably, investors have more leverage right now. How is that appearing in term sheets? Are you seeing crazy terms out there?
   
   RG: There’s a good and fair balance in the early stage markets today. Seasoned investors who are committed to the sector recognize that the best founders need to have sufficient incentives to engage and partner. Aggressive terms in favor of either party should be a bright red light to stop and run away. If incentives are not fair and aligned you’re laying a foundation for future problems. Life it too short.
   
   
6. DR: How do people get in touch with you if they want to share their company with you?
   
   RG: Warm introductions from our network are always appreciated. Please email hello@launchpad.vc. We look forward to connecting with you!
   

There you have it. Understanding where your next round of funding is coming from and the obstacles all investors are facing will help you find the middle ground and navigate through funding challenges. Knowing what investors need and aligning that with your startup can be a win-win for everyone.

HOW TO BUILD A SUCCESSFUL PAYMENTS NETWORK FAST

Four Rules To Get You There

Dan Rogers, CEO

I see more and more startups building bespoke “payment networks” in their specialized verticals.  I’ve experienced this a handful of times in the last 15 years and taken stock of the winners and losers.  Payments is a volume business, and while there is a lot of great new technology you can bring to accelerate payments and build new payments connectivity, founders tend to value the speed and ease of the new methodology setup and forget about the importance of volume.  So here are my rules for building a specialized payment network.

1. USE EXISTING RAILS AND INFRASTRUCTURE WHEREVER POSSIBLE.  Test your use case on well-worn rails.  Existing rails are compliant, stress-tested, and bank grade.  Some examples of existing rails include: credit rails (Visa, Mastercard, AMEX, and Discover), PIN debt (Jeanie, Star, and NICE), and closed-loop rails (gift cards).  I encourage startups to think of their initial launch as a minimum viable product, as opposed to the “build it and they will come” approach.  Prove you have a viable product that delivers exceptional value and inspires payment dollar volume: and only then invest in custom infrastructure.  This approach saves time and investment dollars in proving your business case.
   
   
2. FIND THE VOLUME.  Profitability in payments is all about payments dollar volume.  Successful payment networks spread their infrastructure and operations costs over billions of dollars of payment dollar volume.  This is how payment networks add value at very low margins (3%-5% gross margins).  If you’re operating a payment network at higher margins, eventually your customers will find a lower cost alternative to move funds.  The best way to accomplish massive payments volume is to find the 800 lb. gorilla in your segment, and partner deeply.  PayPal became the default option for eBay customers, Amex found American Express Travelers Cheque customers, Visa started with Bank of America, and Discover leveraged Sears customers.  The most successful payment networks are actually started by big companies with vision, opportunity, and a ton of customer cash to move.  Find your partner that has the most to gain from an innovative payments approach, and win 100% of their volume.  Once you have achieved that goal, expanding across your ICP becomes a lot easier.
   
   
3. INVEST IN COMPLIANCE.  Compliance is really expensive and many startups look at the investment as overhead.  If you’re building a regulated Fintech and expecting to move cash, it’s not optional.  I encourage everyone to think about compliance offensively.  At the end of the day, compliance spending is all about product acceleration and sales enablement.  Companies that fail to invest in compliance have slower product rollout and problematic growth.  More and more, the failure to invest and implement appropriate compliance programs leads to products and companies shutting down.  Regulators are actively looking at Fintech companies for non-compliance, so if your business has had any success, you’re already on the radar of regulators.  Do yourself and your investors a favor: invest in a good compliance program.
   
   
4. DON’T FORGET TO RECONCILE.  Most founders with exceptional motivation and vision have never heard of reconciliation.  They are appropriately focused on delivering an exceptional experience and unseen value.  At the same time, the very simple task of reconciling the inbound and outbound cash of your payment network to the penny every day is an absolute necessity.  The role is typically assigned to a staff accountant or settlement operations specialist – the lowest FTE investment on the team – and involves matching bank transactions and unsettled transactions with your system of record.  A startup doesn’t need a CFO or EVP of Reconciliation, but they definitely need a respected team member to reconcile that isn’t afraid to raise their voice when the cash flow doesn’t match up.  Time and time again, FintechForce’s biggest clients are startups that failed to reconcile their payment networks.  The cleanups are long and expensive, and could have easily been avoided with one capable hire.

Fast, reliable payments have been around for a long time, and startups can leverage them easily.  Every existing payment network executive wants to support your new, innovative payments volume.  Go to an ETA event or a prepaid event and talk to anyone.  Find a great partner in your vertical with lots of customers.  If startup founders and product teams can leverage these four rules, they can benefit from a proven path to success and grow with less risk.  Startups can also get to market and validate their MVP that much faster.  Good luck!