For any fintech startups, the allocation and calibration of resources will be amongst the many keys to success. For most, the first hurdle is to assign the tech decision maker – this could be one of the founders or a purposely-appointed CTO. It is this person’s responsibility to understand what constitutes the company’s core IP and technology assets, and what could be built or acquired at a lower cost by an external team or surrendering of equity (sweat equity or reduced fee structures).
What are the advantages and disadvantages for fintech startups?
We frequently see bootstrapped fintech startups work with developers in an equity share scenario, giving a share of the company in return for labour, i.e. sweat equity. The equity and amount of labour will vary and can be attributed to the founders’ ability to sell their project vision, but it can also hinge on many other factors such as talent pool available, timing etc.
For the startup, is it worth forsaking company shares to bring on developers? What could these shares be worth further down the line? At this point, the founders must understand they are backing a small number of individuals to execute successfully. There is clearly a risk in doing so.
Surely the alternative, outsourcing development to an external company, will be more expensive? This depends on the founders’ outlook and their ability to engage with the outsourced provider. What might look like a higher initial cost could reap benefits later on, when the company gains value and the founders have retained more equity.
For the founders, working with a sole developer as CTO, or a very small team, will require all parties to have a comprehensive understanding of the project vision and how it is to be executed (not to mention the CTO’s responsibilities, as outlined above). Many fintech startups never get off the ground because of this mismatch between vision and execution. They cannot agree on a suitable execution plan, or see the agreed one does not yield the anticpated results.
Initial technology cores, such as MVPs, are often “fluked out” tactically and may even be part of the reason why some players fall short of their ambitions of being generously funded: investors may well be impressed by the “fin” part, yet will fail to see how the “tech” part can deliver at some point in future.
Conversely, working with an outsourcing solution provider brings a different set of challenges. Very often the development team will be located at their own offices. Founders and the CTO may feel they lack that mix of personal relationship and effective communications they could enjoy with an in-house development team.
The communication of the project specifications must be robust in this scenario, although those founders who integrate with an outsourcing solution provider during their early days might be better positioned to collaborate on the vision and enjoy a smoother process when scaling. Either way, business vision rarely has legs without at least a pledge for strong execution and vision.
SCALING / SPEED
In many instances, we see founders working with a developer who has committed to work during their own time, outside of their full-time job. This has its cost benefits for the founders, but can hinder them in terms of time-to-market and ability to pivot and adjust quickly during the product development phase. This is especially true where user feedback is key to the product and the company moving forward.
In some instances, it can be argued that an outsourcing solution provider can be slow, especially where the fintech startup is not a key focus to a development team that is juggling the demands of a range of clients. Like choosing the in-house developer, choosing an outsourced team to partner with is a crucial decision and one that, in both situations, requires a great deal of due diligence.
Things get even more dramatic with the production-quality platform. Once funding is secured, it will assist the fintech’s development and growth: this is not just about scaling operations and delivering good customer support, but developing and effectively using tools that enable decision makers to capture insight. This includes present and potential markets, spotting hidden opportunities and risks on the horizon. Unlike the MVP, if ever, this kind of architecture cannot be fumbled to and left to chance: it needs to be carefully planned and executed.
More often than not, these platforms are a blend of mostly off-the-shelf products plugged together by 20/30% of bespoke code. It’s nothing exotic, but it’s hard to get right without prior experience of business domain modeling, enterprise architectures, data science, user experience design, etc.
This is where a specialised outsourcing provider, with hands-on expertise in the financial services world and its technology underpinnings, could become very useful. They will deliver, not just on the cost-saving part, but most importantly on the quality assurance and risk avoidance aspects of a project.
COMMUNICATION / DISCIPLINE
The line of communication is either between the founders and his CTO (in-house) or the founders and their (outsourced) project manager. The CTO might be sat beside the founders which makes this line as direct as it can be. Alternatively, the CTO may work from home in the evenings and on weekends and this could present its own challenges.
Within the outsourcing solution, it is important for the founders to have a direct line of communication with the project manager (PM). The performance and accountability of the project manager is often tied to how well the founders manage the relationship, the performance of the PM, the ethos and support he has from his employer and his own character. The founders must be comfortable with this before embarking on a project.
Being clear about the skill set possessed by the potential in-house CTO (and his subsequent team) is very important for the founders – they should be comfortable with the experience and skills of the individual and have relevant case studies or work examples to rely upon. To do this the founders need to have a basic understanding of IT development and go through a suitable interview process before bringing a CTO into their business.
The skill set of the outsourced developers will also need to be vetted in a similar way if the founders choose this route. Again this can be done through an interview process with the business owners and project manager. The founders can also rely on previous case studies and contact past clients to assess the work of the company.
INTELLECTUAL PROPERTY / TRUST
Quite often we speak to founders who are concerned with their IP and seeing this replicated by developers and competitors. As mentioned above, it’s always worth reminding that 20/30% of the product will be bespoke code and the patenting process is somewhat evanescent in the software world.
IP law on software has been a hot topic in recent years and a patent is by no means absolute protection, especially when it comes to the “inventions” underlying a computer program. The .gov website is even cautious around patent advice, admitting that the process can be very expensive.
It’s worth observing the “unicorns” of the fintech world when considering IP. Of the top 35 unicorns, less than 25% have filed for one or more patents. This means that the average fintech is far from IP-intensive and more centered on commodified software technology than the mythology one would want to believe.
Apart from a core of IP or technical solutions that they may well (and should) keep in-house, well nursed by the CTO or an inner sanctum of skilled employees, the vast majority of the technology ecosystem that serves a fintech is nothing too strategic, nothing that hasn’t been done before and, most importantly, nothing that cannot be outsourced if the quality/cost benefit were to be there.
Rhydian Lewis, CEO and founder of the peer-to-peer lender RateSetter believes that banks don’t yet know how to incorporate innovations into normal business. For that reason, he says, fintech startups generally don’t have to worry about having their ideas copied or stolen by banks:
“Good intentions are not enough, banks need to change their ability to take new innovation to market if they want to see a return on their investments in the fintech community.”
This is not to say that the fintech cannot mitigate risk. This could be done by surrendering equity to the IT team to generate loyalty and project buy-in. However, it is more important for the fintech to partner with the right people, something that is perhaps easier said than done.
Identifying and creating, or using a team, that understands financial technology is the safest way to protect the long term success of the fintech – where the correct tools help the fintech to identify risks at an early stage and spot the potential avenues to expand, helping them to beat the market curve.
SALE / EXIT
The ambitions, drive and perceived exit point of the founders will be many and varied. Does an in-house team make a business value greater to a potential buyer? Some buyers will not engage if the business uses outsourcing solutions for fear over the rights to the product and its underlying technology.
How do founders navigate the sale and exit of the business? Many founders tend to believe that they need to have an in-house team to solidify the value of their company. A savvy outsourced team will realise this and be willing to offer the founders reduced working costs in exchange for equity. Or they might place consultants into the business and structure the consultants as employees with an agreement on procedure during a sale.
There is no correct answer to the quandary faced by the tech start-up. Across the wide range of fintech startups, there will be situations where one solution fits better than the other and vice-versa. Very often the success in execution will come down to the mix of personalities involved just as much as it does to individual developers’ CV or the collective reputation of an outsourced team.
And if contracting an external team is the best option, it needs to be a good one who has prior experience and is open to the idea of working for part equity exchange. And cost effective.
Vanni Torelli is the CEO of Gluon Consulting and a software practitioner with 20 years of experience building enterprise applications. He spent the past 10 years specialising in high-performance, distributed, scalable platforms that deliver business value to the financial services industry.
He has consulted and worked for Barclays, Credit Suisse, BNP Paribas, Nomura, BGC Partners (Cantor Fitzgerald), Bluecrest Capital, and GAM Asset Management.
Steve Findley is a relationship manager with Gluon Consulting. Steve has over ten years’ experience working within finance across London and Sydney in commercial banking and marketing.
Fintech startups, if you’d like to know more, please get in touch with Steve at firstname.lastname@example.org