How can fintech startups outlast the VC winter?

The decade-long summer of free money is over. Venture funding declined by $90 billion (53%) in the third quarter of 2022 from a year earlier and fell $40 billion (33%) compared to the second quarter, per Crunchbase data. That makes Q3 2022 the slowest quarter for VC funding since the start of the pandemic.

However, in spite of all the crazy stories this year, there are real opportunities for aspiring fintech startups to become the new heroes of the multitrillion-dollar banking and embedded finance industry.

In particular, I’m hearing that investors are reluctant to fund future potential unless it comes hand in hand with concrete customer traction. So if you’re building a fintech idea and you need funding today, it’s vital to get your product into the hands of customers quickly.

How will you do that? By gathering feedback, using it to sharpen your focus and prioritization and ultimately rewarding your customers for helping you.

Here are three tips for achieving those goals:

1. Get feedback and insights from your customers with a working product.
2. Aim high for the long term, but don’t work on anything except your minimum viable product (MVP) in the short term.
3. Always remember the problems you’re trying to fix for people and reward them for choosing you.

It’s critical to gather feedback and insights from your customers

In this operating environment, startups have a better chance of impressing investors if they can point to tangible results.

What does that look like in reality? Prepare for these common questions before you head to an investor meeting with your pitch deck:

• Who are your users?
• What are the problems you’re trying to fix for them?
• What do they like and what do they want?
• Where are you going to meet them?

The only way to find these answers is to ship something real — a working product that people can interact with and use. That means everything you’re building right now should be in service of getting an MVP out the door.

I’m not saying, “Build it and they will come.” Far too many tech companies shut down shop because they were making solutions in search of problems. It is really easy to slow yourself down by thinking too far ahead in terms of what you need to create.

For instance, if you’re building a consumer fintech startup, do you really need to build your own payments processor? In my experience, that would take 10 to 20 engineers, about 18 months and millions of dollars, and they’d likely end up building something that may never see the light of day.

Eighteen months is a very long time in an environment where fintechs and embedded banking startups can get to market in three months, if not faster, according to Bain & Co. research. Moreover, speed begets opportunity: The study expects embedded finance transactions in the U.S. to surge to $7 trillion over the next four years, up from $2.6 trillion at present.

In other words, sprinting to your MVP is not just a matter of getting to the next funding round. It can spell the difference between establishing yourself as a competitor or ceding the field to more nimble entrants.

But how do you move fast when there is so much to account for?

Aim high, but don’t create more work for yourself right now

Among the factors that make fintech such a unique opportunity are the $7 trillion market looming on the horizon and the seemingly rock-bottom customer acquisition costs.

While traditional banks and established companies can expect CAC to be in the $50-$200 range, we have seen startups with CAC closer to the $5-$10 enjoyed by Square’s P2P neobank, Cash App.

That’s possible because startups building for a niche or underserved user groups find it easy to acquire new customers when they deeply understand their needs and wants. As a result, they are poised to offer financial products at the exact moment it makes sense.

This ability to quickly onboard excited users who want something new is hugely beneficial and enables startups to invest in building their products instead of using cash to market them.

However, the cost in time and resources required to create all sorts of experiences for new followers will pile up fast. Startups in this sector have to offer a standout front-end experience while connecting to banking infrastructure, which can be anywhere between “clunky” and “predating the modern internet.” And, the products must stand up to the rigors of compliance and regulatory oversight.

On top of that, customers have far higher standards for user experience and personalization than ever, and most traditional banking apps are missing the mark.

In fewer words: The MVP for an embedded banking app needs to do far more than an MVP for any other sector.

It’s an extra-tall order. The best thing you can do is stop yourself from making it any taller than it needs to be. In my role, I have advised and built financial ideas with thousands of people using our platform.

Here are their core targets and products:

• Financial security.
• Debit capabilities.
• The ability to track balance and spending.
• The ability to send money to friends and family.
• Link to external accounts.
• Apple Pay and Google Wallet support.
• Rewards.
• Overdraft protection.

This should be the core of your MVP. Also, since such features are being increasingly commoditized by banking-as-a-service software, it’s far easier to build them upfront or partner to get them as fast as you can. Anything else can wait.

One interesting counterpoint: Do you need to implement peer-to-peer (P2P) payments? If you are building a consumer- or business-facing app and you depend on user growth (not user “conversion” from an existing pool of embedded finance users), then, yes, you will need P2P payments. But if you are doing embedded finance and already have customers, it’s like a homegrown payment processor, and so isn’t mission critical.

What about investment capabilities or financing major purchases through embedded banking? Those are long-term goals not MVP features. Our current funding climate and go-to-market pressure are not likely to sustain the effort it takes for a fintech to get these features off the ground, much less earn enough trust from users to see widespread adoption.

It’s already hard to build finance and embedded banking startups, especially when you factor in the compliance aspects. Don’t make it any harder when building the first version of your product. If you’re pursuing these features because you want to create virtuous circles in your users’ lives, there are likely easier ways to do it.

Focus on what users truly need

Everything else being equal, embedded banking startups and new fintechs will live and die on the basis of the user experience they provide. I promise you, JPMorgan isn’t losing sleep over your bare-bones checking account app. Traditional bulge bracket banks will eat you alive unless you give users a compelling reason to move their money to your platform.

What is going to bring your users back for the next transaction? Think about loyalty reward stamps from Five Star car washes, or the old Subway Sub Club cards. You won’t be wrong if you thought of those loyalty programs as analog banking apps.

Here’s a more recent example:

At Uber Money, we thought about what mattered most to our drivers. We discovered the biggest motivators were cash-back rewards for fuel and discounts on auto insurance. This discovery guided us as we sought banking partners who could support those rewards. Engagement took off, because the rewards we chose were directly relevant and adjacent to the daily work of our users.

That wasn’t the only benefit. Over time, we discovered that drivers used Uber Money to gain financial footholds that made a real difference in their lives.

I doubt this would have happened if we hadn’t created an ecosystem to directly benefit the driver and reward them for engagement.

Small steps now, big strides later

Startups that are still in the early pages of writing their story are on the hook to produce results so they can fund their next chapter. Consumers have high expectations and investors are justifiably picky about deploying their capital. The SaaS whiplash era is real.

But if you read OpenView Partners’ report, the qualities they’ve identified that insulate startups from the worst of the whiplash sound quite a bit like the traits of a well-run fintech startup. You are tapping into a strong, preexisting community and your discoverability is high by definition, because fintech and embedded banking are woven into the natural moments in which customers need services.

The trends expanding the total addressable market of fintech and embedded banking aren’t going anywhere. People want affordability, greater financial access and tangible rewards. The biggest advantage of these apps is the genuine value they can bring to communities in a way that big banks never could.

You can design an experience for your niche that will save them money or time. Your users can build credit and financial stability while you build their trust in a financial product that is relevant to their lives. By drilling down to a lean, mean, meaningful MVP, startups can position themselves to reach the next leg of their journey.