February 11, 2016
Tenuous Problem-Solution Fit
Every successful product/service has to create value for its users by solving a real problem.
Many startups build their businesses based on assumptions which are not proven. This can be linked to scarce initial interaction with a potential customer segment which can generate a mis-understanding of the problem to solve for that segment. This mistake turns to be the first step towards the creation of a product which doesn’t have a clear, strong value proposition.
We have identified 2 symptomatic elements of dangerous leadership:
1. CEOs are too focused in the business and not enough on the business (i.e., Incapacity/ lack of time to fuel the strategic vision, etc.)
2. CEOs fail to identify inter-functional and critical issues.
No One Owns Business Processes
A good product idea and a strong technical team are not a guarantee of a sustainable business. One should not ignore the business process as an important issue for a company just because it is not someone’s full-time job.
Three are three possible cases to consider:
1. Stupid spending not based on ROI which is linked to excess of cash after a significant funding round
2. Inability/delay in raising capital at the right time
3. Uncontrolled and untracked cash burn
Lack of Compliance
Lack of compliance is a direct consequence of non-structured processes in place. This is particularly frequent in the FinTech space due to stringent regulations.
Poor compliance can generate legal issues, operational slowdown and uncontrolled heavy cash burn.
Unclear/Absent Marketing Plan
We have seen that most of the FinTech startups focus most of their efforts (time, money and human resources) on software development overlooking the marketing plan. Marketing is a particularly (underestimated) critical function in this space because it has the tough job of understanding and creating multiple value propositions for the multiple stakeholders who exist and interact in the space.
Lack of Knowledgeable Investors
The common mistake that FinTech Startups make is to choose (or be chosen by) investors/VCs who don’t have a deep and broad understanding of the specific FinTech segment in which the startup is involved. This can turn out to be an irreversible path towards failure.
Attention on How to Compete
We have identified two scenarios:
1. FinTech startups try to establish their competitive advantage based on intellectual property. In today’s tech-driven fast-adoption environment, businesses should not rely only on IP. IP can always be bypassed, and is usually expensive to protect.
2. Many startups decide to compete on price and not on value. In specific circumstances this approach works, but there is equal probability that it will cause a low-cost, low-value trap where no one will come out as the winner.
Tough Business Environment
The financial environment is not easy. It requires domain knowledge and a clear understanding of the underlying industry dynamics. Many startups fail at a very early stage because they underestimate the complexity of the space.
The Barrier to Entry Trap
Many startups fail to properly evaluate the forces that determine the FinTech sector’s attractiveness. At first sight, the weak barriers to entry could advance a florid environment. Once inside, they instead discover a sad surprise:
1. High bargaining power of both suppliers and customers
2. High level of direct rivalry
3. Low level of clarity on the real problems that need to be addressed
Even though a specific product is solving a solution, it is possible that the market is still not ready for it because of different reasons:
1. Existence of a cheaper solution
2. The value gap between the new product and the existing one doesn’t justify the associated switching costs for the customer
3. The switching costs are too high for a customer who is in a lock-in with a competitor
Symptoms to look at:
Startups register a less than 50% acquisition rate among early adopters.
Harsh Legal Environment
Financial laws and regulations are extremely specialized, detailed and strict. We have often seen startups that overlooked the constraints in the legal environment, face subsequent disastrous effects on their businesses:
1. High legal fees
2. Interruption of operations
3. Customers’ risk/damage exposure