Thread by @dunkhippo33

Yesterday, we did our first "teach-in" @HustleFundVC where we teach each other about opportunities & common pitfalls in other industries.

I'm not sure if I'm supposed to share, but I thought @shiyankoh 's thoughts on fintech were super interesting...

1) First, about @shiyankoh -- she is WAY under the radar. She was an early employee and executive @NerdWallet. And she has invested in a # of fintech startups. And prior to that worked in finance and late stage VC. So she has breathed fintech her whole career.

2) Let's get the debby downer pitfalls out of the way -- these are the most common mistakes she sees fintech entrepreneurs making.

First and foremost, ppl don't think about their unit economics. (this applies to all industries)

3) But more importantly in fintech, where money is a commodity product, this is esp important.

How much does it cost to acquire a customer? How much is that customer worth to you? And perhaps REALLY crucial for fintech, how long until payback for that customer?

4) A fallacy of thinking amongst many entrepreneurs on LTV is they believe they can increase the LTV of their customer base by cross-selling.

E.g. ppl think they only make a fraction of a % on ABC service but then can upsell mortgages, other accts, ccs, etc.

5) But the reality is that most big financial companies cannot even do this well. Think about your own life as a consumer. Do you have a Chase checking acct, savings acc, loan, credit card, mortgage, etc? You probably don't have all those things.

6) So a good way to think about your LTV is how can I make money on my customer w/ my first product?

If you do end up thinking about cross sells, then you've got to be really good at fundraising and have deep knowledge of this space. This type of plan will take a lot of $$$.

7) Ok so how can you make money in fintech? SaaS rev, underwriting loans, investing $$, fees on AUM, etc.

If you're making low margin money, your cust acq has to be cheap, viral, organic and/or slow OR you have to be good at raising a LOT of money and dilute your co.

8) While we have many fintech companies who make their money on loans or fees or whatnot, Shiyan is a big fan of SaaS as an underutilized business model that would have much stronger unit economics. She rarely sees fintech cos think about that model and thinks it can be used more

9) Afterall, if you helping someone make more money (or save money), that is worth something, and they should be willing to pay you for that worth.

10) Switching gears: loans -- ppl often think that loans are an easy cust acq play. If you offer a loan, you will have EASY acquisition.

But you may not want those customers.

The tricky thing about loans is can you underwrite better than anyone else?

11) With loans, considerations include: Can you underwrite better than competitors AND collect better? Is your cost of capital low? Your cost of capital will never be lower than a bank's.

12) There is def opportunity with the vast amount of data that is created today to come up with better underwriting models than existing stodgy incumbents.

But your underwriting has to be way better given that your cost of capital will start out a lot higher.

13) Underwriting is tricky, because most ppl don't want to loan money on a model that is unproven. So you have to have capital to loan yourself to test out your own model yourself.

So again, this play takes some capital.

14) Eg in our portfolio: @gentemhealth loans $$ to drs to get them through billing cycles.

@KenzieAcademy & @AcademloHQ run ISA models. They only get paid on student placement.

But all needed to use their own cash to prove out their models BEFORE any 3rd party loans $$.

15) High valuations in fintech are not indicative of success for all the above reasons.

Companies w/ long payback periods / low LTV need to raise a lot of money. So almost by definition, that will propel the valuation of a fintech co. But it doesn't mean it's working.

16) And then you see a lot of "last ditch" efforts of ppl trying to frantically upsell addl products to get the LTV per user up. But as mentioned above, this is usually HARD.

So this is where companies either crash & burn OR are always on the funding treadmill.

17) Ok so those are all the debby downers.

Where are the opportunities that are not saturated?

A big one is emerging markets -- @shiyankoh spends a lot of time investing in fintech opps in SEA. Much more than in the US.

18) But what about US / CAN opportunities? There are still good ones. They tend to be "nichey". By nichey, I mean they are specific, but they can still be quite big.

Vertical-specific opportunities are good ones. Generally requires strong understanding of a domain.

19) tl;dr -- if you want to build a fintech co:

-Watch payback period, LTV, CAC
-figure out if you are good at fundraising; if not, can you build this w/ out a lot of $$? if not, charge for value (like SaaS) rather than AUM fees / interchange
-make $$ on your 1st prod

20) Follow @shiyankoh for fintech, hiring, and company building wisdom!

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