I’ve met with lots of fintech entrepreneurs over the past four years and invested in a handful of their ventures. The first batch were apps built on Uphold’s API — by far the the most flexible and powerful API of any digital money platform. More recently, I’ve been meeting fintech start-ups that have nothing to do with Uphold — Ethereum and Bitcoin apps mostly. Here are the first three questions I always ask and why.
Who Loves You?
Technology that solves problems and scales gets adopted, goes viral, justifies Uber-size valuations.This truism is even truer for technology that solves problems people have with money.
For most of us, money has more nerve endings embedded in it than anything except family. Money problems hurt. And the less money you have, the more they hurt. Conceive an app that relieves money-related pain and the Internet will beat a path to your door, followed by angel investors, VCs, and Techcrunch.
Not so long ago, bitcoin was seen by many as miracle morphine for the quotidian agony inflicted by banks and other financial service providers on consumers and businesses. It was a beautiful dream: Internet-compatible money accessible by anyone with a networked device, with no toll-taking, risky intermediaries required for its transfer or storage. That the most successful fintech startups — Coinbase, Bitstamp, Localbitcoins — were all in the business of buying and selling bitcoin only seemed to affirm that the dream was real.
Unfortunately for fintech entrepreneurs looking to build those 10x better mousetraps — those seeking to address the pain (cost, delay, risk, uncertainty) of remittance for immigrants or correspondent banking for businesses or check-cashing and overdraft fees for the working poor — bitcoin has been a disappointment and a dead-end. The road to fintech glory is littered with the corpses of bitcoin-based remittance, payment, and lending apps.
Who loves you? It’s another way of asking about the pain that a start-up is addressing, because love, gratitude, net promoter scores, and virality all naturally follow from taking away someone’s pain with your app.
Who loves you? “Bitcoin speculators” is a fine answer to the question. By addressing the pain of acquiring a digital asset with a moonward trajectory, the aforementioned bitcoin exchanges have created huge value for their investors.
Where’s the Money?
Fintech means managing digital assets on behalf of clients, wether cryptocurrency or the digital representation of traditional assets like fiat currencies and precious metals. Bitcoin can be managed directly by a fintech start-up or via third-party storage services. That’s not the case with fiat. The analog cash substantiating cloud-based digital assets needs to be stored somewhere, usually at a bank.
Which bank? In what country? Under what terms? These are all important questions, as is the auditing protocols confirming that those real-world assets match the digital assets being moved around by the fintech app on behalf of its clients.
Immutable databases and decentralized blockchains hold the promise of transparency and traceability, as well as real-time risk disclosure that the legacy financial system famously lacks (remember the great bank collapse of 2008?). But underlying any non-crypto digital fiat and precious metal assets are old-fashioned ledger entries and gold bars held at those very same famously risky and failure-prone institutions.
If a fintech entrepreneur can’t explain the back-end fin-ops that allow his or her clients to on-board and off-board money between their app account and their bank account, that’s a big red flag. As is a lack of established audit policies designed to ensure transparency and prevent fraud.
What’s the Law?
I’m an attorney (I went to law school anyway) and so I’m always curious about the law governing any fintech app’s operations. As an investor, I don’t mind if a startup operates in a grey area like Uber, Airbnb so long as security around the crypto assets is done right and the above-mentioned transparency and third-party verifications for non-crypto assets are addressed. But it’s important that fintech entrepreneurs be able to speak cogently to the law and regulations governing their startup’s activity, not just wave their hands around or talk about the unimpeachable credentials of their Chief Compliance Officer.
Because financial regulation is toothy in the developed world, especially in the U.S., I have a strong bias for fintech start-ups that solve big problems in the developing world where digital assets are either unregulated or lightly regulated and where the cost of compliance is much lower.
Have a fintech start-up and looking for an angel investor? Drop me a line at tim@cloudmoneyventures.com.
