So You Want To Build A Full Stack Startup In Fintech?

A recent article in The Economist noted that fintech is “arguably the hottest spot in a bubbly funding environment for startups.” For the last few years, investors have dumped remarkable amounts of money into fintech startups. From payments to lending and investing, these smaller companies have caught the attention of industry incumbents, who also have been pouring money into these new entrants. To many of us, this is not new.

With the passing of new rules for Regulation A+ implementing Title IV of the JOBS Act two months ago, people have been quick to describe this new regulation as a “game-changer.” Others have described the new rules as opening up “mini IPOs” and “democratizing” crowdfunding. In a nutshell, there’s a lot of hype out there about the industry and how regulation is no longer as much of a barrier as we once thought. More than ever, fintech entrepreneurs are hoping to create the next big success story like we saw with Lending Club’s IPO, Northwestern Mutual’s acquisition of LearnVest, or achieving a $5 billion valuation.

There’s just one problem with all of this: It’s just not that simple. If you believe that regulation is no longer an issue for fintech startups, you’re on the fast track to the deadpool.

There’s a misconception in the market today that it has never been easier for fintech startups to get started and get to market. Investors are ready to write checks and consumers are ready to jump on board. The reality is that if you want to enter fintech, much less succeed, it’s going to be a long haul.

There’s a misconception in the market today that it has never been easier for fintech startups to get started and get to market.

Recent regulations may make it sound easier for startups to circumvent older laws, but the truth is that fintech entrepreneurs need to understand and embrace regulation as a critical pillar in building their startup.

If we’re really going to disrupt big finance, we need more entrepreneurs who fully understand how to navigate regulatory waters, and how that work will affect their startup more broadly.

Understand Your Regulatory Stack

Chris Dixon describes a full stack approach as letting you “bypass industry incumbents.” While fintech startups are trying to accomplish exactly this, you can’t begin attacking industry incumbents unless you understand the regulatory landscape and learn how to use regulation to your advantage (or at least manage the risks).

In fact, you shouldn’t worry about bypassing regulation. Instead, you need to embrace it as a core function of your startup. Treating regulation just like customer acquisition, engineering or recruiting pays big dividends down the line. Think about what your regulation infrastructure should look like. Which strategy and which tactics will help you succeed with regulators?

For example, if you are in the lending space, the typical market structure might look like this: You have your marketplace of lenders and investors at the bottom. Above that, in increasing order of difficulty and market breadth, you have state-level legislators, then NASAA then the SEC. Each level has its own set of rules and you must forge a strategy for how you might use regulation to your advantage at every stage of your startup’s expansion and development.

The way you manage the process at each stage will have implications for later stages. You may need to trade off a suboptimal customer experience or fast growth, for example, to win regulatory approval en route to a better customer experience and faster growth later.

Even something as simple as regulation in a specific geography must be carefully considered. For example, where you choose to base your startup is one of the most important decisions you will make. There may be state-level laws that are favorable (or damaging) and it’s up to you to find those. Uber still faces many regulatory challenges at a local level in several cities. And one of the many reasons we moved our company from Raleigh to Atlanta was because Georgia-specific regulations were beneficial to us.

Be Strategic About The investors You Select

Fintech entrepreneurs should look for investors who understand their regulatory landscape as well as they do, if not better. Instead of emphasizing deal volume and pressure to meet the typical industry metrics, assess investors who understand the true metric of success. Regulations may also shift or delay, which may impact the product roadmap and timeline. Partner with investors who understand those risks and can help mitigate them.

We don’t acknowledge this enough, but sometimes the best startups are built in nontraditional ways through bootstrapping or finding a few strategic angel investors. This actually imposes constraints that help entrepreneurs think differently.

The Daily Dot recently raised $10M in new funding, and in the company’s letter, CEO Nick White says, “VCs need their investments to sell or IPO in a certain time frame to get a return for their own investors. That’s great for certain kinds of companies…even beyond that, I fear that the series A, B, C, D game of unicorn horn-measuring that early stage companies get sucked into is unhealthy.”

I realize that VC money is pretty cheap right now, but when it comes to building a company in a regulated market, investors who believe in your cause and understand how regulation will affect your business can get you a lot further than an enormous A round.

Balance Regulatory Expertise and Technical Expertise

In today’s ecosystem, startups can be engineering-driven to a fault. But in fintech, industry expertise is just as valuable, if not more, as engineering talent. In-house regulatory expertise reduces uncertainty and brings clarity to your team when they don’t understand why you are waiting to build certain features of your platform, or why you can’t launch just yet. Dependencies on third parties such as law firms and consultants are risky, especially when the going gets tough and frustrations inherent to the process run high.

It’s also important that you work with regulators, not against them. We’ve actively worked with regulators to implement the Invest Georgia Exemption, and that process has proven mutually beneficial for the state as well as our company. Your participation in the process keeps you ahead of competitors who unwisely choose to sit back and wait for a verdict.

And that should really underscore the point here. If you have sufficient regulatory expertise on your founding team, you can turn these regulations into a competitive advantage. You may not be able to shape every single law, and you may not like the outcome of every single decision, but you can outmaneuver your competitors in an area that affects all aspects of your business.

If you want to build a full-stack fintech startup, you simply can’t do it without regulatory expertise. Your strategy needs to cut across all facets of your business, and your entire team, from founders to engineers, marketers to investors, needs to be on the same page.

If you can do all of that, you’ll still face regulatory challenges. But those challenges will impact your business far less than they will your competitors.