PayTM’s IPO may have disappointed public market investors last November, but its early backers still got a nice return on the most valuable fintech startup’s IPO Turkey. Early-stage fintech investors looking for the next PayTM need to focus on four key factors — and these aren’t necessarily the priorities of investors in other tech sectors. In our experience, seasoned founders, proven monetization, a real “moat” around the product, and a comprehensive tech stack are key considerations.
India is becoming world famous for its unicorns. According to TechCrunch, we now have 81 — double the total at the end of 2020 — and startups raised $39 billion in the past year. Of these, fintechs were the most funded, raising $10 billion last year, up from $3.2 billion in 2020 and $4.3 billion the previous year.
However, abundant capital alone does not guarantee that every company you invest in will one day be worth a billion dollars. Identifying the right investment opportunities requires a solid set of criteria based on business fundamentals and a long-term view. While we have built our portfolio of 17 fintech investments in India, Flourish has developed its own industry approach to this.
Fintech is different
We often start with people: in fintech, founders with the experience and ability to manage complex regulatory and risk challenges in the financial industry typically have 10 or more years of industry experience. This means that we tend to look for seasoned founders with extensive real-world experience, rather than young entrepreneurs whose main asset is a promising idea.
For us, it is essential that the products of start-ups meet real and clear needs – and that there is evidence that they can be monetized. We obviously want to see strong user base growth, but a “value hook” that is already generating revenue from payments, loans, or other products is essential in fintech. For example, apps that provide credits are measured on the value of their loan portfolio, which provides useful insights into how the product can be monetized in the future.
We also ask if the founders identified an underserved market area or a new way to serve customers. Assessing the differentiation of a fintech’s business model naturally involves understanding user behavior. If the new product plays on the habits of existing customers, this is a positive indicator of strong future demand. If it requires customers to do something new, it will face greater challenges in achieving widespread adoption.
Similarly, a product or service that can be communicated simply to customers, without using jargon, is more likely to appeal to them. And if it aligns with the requirements and priorities of regulators and policymakers, it also ticks an important box for us.
A whole package
The primary technology preference underlying our investments is scalability. We want to see the digitization of the entire customer journey, from taking out a loan to buying. This requires comprehensive technology for end-to-end digitization – any fintech proposition that depends on analog processes is likely to encounter difficulties.
We also believe that successful investors should have a clear idea of what they are trying to accomplish. At Flourish, we want to support entrepreneurs whose innovations contribute to a fairer financial system. This year we are going deeper integrated financing – a key investment theme for us – and start exploring the potential of decentralized financial infrastructures to reduce transaction costs and improve financial inclusion.
Private equity and venture capital firms investing in Indian fintech will not find the next PayTM every time. Early-stage investing is an inherently high-risk activity and the time and performance constraints faced by many funds add to the challenge. So, investors like Flourish who are lucky enough to be able to provide long-term capital have a real advantage for any fintech investor: that of patience.
Written by Anuradha Ramachandran, Chief Investment Officer, Flourish Ventures
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