Why Fintech Startups Fail?

As an entrepreneur you may have big dreams for your fintech startup, you may even get started and manage to secure funding through prestigious investors. But there are certain factors that many fintech entrepreneurs get wrong in their approach, which result in the failure of their fintech startup ventures.

The Wall Street Journal reports that up to 75% of VC backed fintech startups fail. This is a very big number and what makes it even more significant is the fact that these fintech startups fail after they secure funding from VCs.

If you are an entrepreneur, then you will understand that getting your startup to the stage where you can secure funding through VCs is not an easy task. Startups that make it to this stage pass through multiple tests and trials. These startups have:

• A good central idea
• Established mission and objectives
• Financial fundamentals have been worked out
• Venture capital funds have given these startups the green light
• They have a basic customer base, which they can build upon

So where do these startups go wrong?

From this point onwards, if a fintech goes wrong, it can only be because of some very serious mistakes in the strategy and planning, that even the banks and investors failed to see. In this article therefore we are going to look at some of the key mistakes that fintech startups make, that result in such a high rate of failure among fintech startups.

Mistake #1: Choosing the wrong investor | Why Fintech Startups Fail?

Entrepreneurs are defined by their risk-taking ability. They can not only bring together factors of production to manifest their ideas but it is the risk that they are able to undertake, that defines them. This however does not mean that entrepreneurs always have the required experience for the idea that they are trying to build up into a company.

This lack of experience becomes even more pronounced when you look at fintech startups. Fintech startups bring together two very complex worlds of finance and technology. Thus any entrepreneur going for a fintech startup needs to have the required knowledge and experience in both of these industries.

This however is not so common. It is hard to find young entrepreneurs who have got multiple years of experience in the finance and tech sectors. In order to make up for this lack of relevant knowledge and experience, entrepreneurs turn towards investors who can not only finance the startup but also provide much needed technical guidance, experience and insight.

Now why fintech startups fail is because entrepreneurs choose the wrong investors. If a bank or any other investor finances a fintech startup, without having the relevant experience and knowledge of the concerned sector, then the startup will get the funds but not the technical expertise (aka smart money), required to scale the business up from thousands to millions of customers.

Therefore for entrepreneurs, it is absolutely vital to do their homework before looking for investors to fund their startups. It is possible that an investor who does not have the right experience may be interested in your startup, going for such an investor will bring in the funds but not the technical expertise. In such a case it may be better to seek more suitable investors or go for the costly option of recruiting experienced professionals to get that technical and competitive edge.

Mistake #2: Compliance issues | Why Fintech Startups Fail?

As stated above, entrepreneurs seldom have the required skills and experience. It is simply not possible for a person to have knowledge of every aspect of the startup, this is why they have to hire qualified and experienced professionals.

One major area that gets overlooked because of the lack of technical expertise is (drum roll) compliance with local regulations and laws. Fintech startups are very different from startups in other sectors because they are locked into two sectors at once. This means that compliance issues are usually more complex for fintech startups as compared to “classic” startups.

They not only have to abide by the regulations that govern the tech sector but also the rules and regulations that govern the finance sector. What usually happens is that fintech startups either run into grey areas or due to lack of foresight or simply due to changing circumstances, get trapped in compliance issues that can become existential threats.

For example, many countries do not have fintech regulations that are up to date. Bitcoin is banned or outlawed in many countries and where it is not outlawed, the law is silent. A fintech dealing in bitcoins in such a country can try to take advantage of the grey zone but what if in future that country regulates against the use of bitcoins? This is what happened in Pakistan in 2014 when the country banned the usage of bitcoins. Startups and investors ended up not only losing their funds but also had to face court proceedings.

The country has however recently reversed the ban but cryptocurrencies are still not legal in Pakistan, which makes this a grey zone. Now starting a fintech in a grey zone is extremely dangerous because you do not know which way the laws and regulations will settle.

Similarly, fintech is a constantly developing and advancing industry. The creation of new technologies and solutions means that laws and regulations will need to be constantly updated, this is why it is very important to get professional and experienced financial and legal experts on the team from day one.

Mistake #3: Focusing on the wrong competitor | Why Fintech Startups Fail?

Many fintech startups make the mistake of incorrectly identifying the conventional banking industry as their main competitor. While it is true that the fintech sector has the potential to set up an alternative financial system that can rival the conventional banking system. It is however wrong to identify the banks as your main competitor.

Banks and other financial institutions are the beneficiaries and one can even call them the architects of the conventional financial system. Fintech startups can claim to rival them but they must also look at the ground realities. Regulations and laws are mainly supportive of conventional financial institutions as compared to fintechs.

Blockchain has been around for ten years and mass adoption is yet to occur. This shows that the conventional banking industry simply has access to vast sources of finance and bureaucratic power that fintechs cannot compete with right now.

Look at how economies always bail out big banks and big businesses instead of startups. The March 2020 financial collapse resulted in quantitative easing where central banks stepped in to save big businesses and corporations first. How many corporations have gone out due to the pandemic induced recession? And how many small businesses and startups have failed? It is clear that fintech startups as of yet, cannot afford to directly compete with the conventional banking system even though they have got the technological edge and expertise over them.

The best strategy, for the time being, is, therefore, to create disruption and avoid competing directly with financial institutions, instead focus on creating synergies through meaningful partnerships. Fintech and the conventional financial institutions can both benefit from each other by working together, instead of identifying each other as competitors.

Avoiding these mistakes can help fintech startups reduce their rate of failure and scale up their customer.

Do you agree? Any thoughts? Please comment below!