The Finterview - Fintech Exposed episode 20.
In a world where the convergence of finance and technology is reshaping traditional banking paradigms, the persistent high failure rate in venture capital (VC) investments presents a perplexing challenge.
In this intricate confluence, we are joined by Elliott Limb, a distinguished expert in finance and technology and the CEO and co-founder of Cubed. With a diverse background ranging from pivotal roles in renowned financial institutions like Barclays, Citi, and Lloyd's Group to embracing the transformative journey of fintech at Cubed, Elliott helps us understand the complex ecosystem of fintech innovation, addressing the crucial factors that contribute to the high failure rate in VC investments.
In this article, we will explore the complexities of venture investments within the fintech sphere, discover Cubed's distinctive approach to business growth, and navigate the art of timing in fintech expansion. We'll also scrutinise the evolving perspectives of major financial institutions, the role of tech giants, and the critical centralisation vs. decentralisation debate.
Keep reading for the key takeaways from the episode or 🎧 listen to the full podcast here.
From musician to Fintech mogul: the Elliott Limb story
Elliott Limb, with roots in computer science and software engineering, took an unexpected detour as a musician before being drawn to the banking sector. His knack for maths and IT saw him in pivotal roles at Barclays, Citi, and Lloyd's Group.
As fintech emerged, Elliott embraced it, leading at Mythis (now Finastra) and later with his venture CoBA. His significant tenure at Mambu, which soared in revenue under his watch, influenced him to co-found Cubed. Aimed at promoting scalable success in fintech, Cubed counters the old banking approach that often curbed innovation.
For Elliott, the high failure rate of venture investments is unacceptable, and he envisions a proactive nurturing of innovation.
Causes of high failure rate in VC investments
Elliot discusses why venture capital investments have a high failure rate. VCs typically focus on a small percentage of their portfolio to yield substantial returns, often overlooking the need for more substantial success rates. The fundamental issues arise from:
- Due diligence: many VCs sometimes overlook in-depth scrutiny, especially regarding prospective investments' Go-to-Market (GTM) strategies.
- Herd mentality: there's a tendency among VCs to invest where others are, assuming sufficient due diligence has been performed by the earlier investors.
- Financial model: the prevalent model doesn't necessitate more than a 25% success rate, and this rate is accepted as normal. Elliott questions accepting this norm, emphasising its detrimental impact on the pace of innovation.
- Board composition: as startups progress through funding rounds, the diversity of board members diminishes. Typically, these boards consist of individuals with similar financial backgrounds and metrics. Elliott stresses the need for board members to offer tangible value in thinking, building, or operating.
- Founder challenges: entrepreneurs, especially first-timers, grapple with evolving responsibilities. Without apt support from investors in critical business areas, their potential remains untapped.
Elliott believes that while VCs and entrepreneurs might chase opportunities perceived as significant, decisions should be based on more informed perspectives.
Navigating growth: how Cubed aids businesses
Cubed collaborates with companies from their initial seed stage to their IPO, offering extensive support and education at each phase of the standardised funding cycle. The firm employs a unique "cube model" and various playbooks to assess companies' trajectories and predict potential barriers to sustainable growth. They serve as operating partners, delving deep into each business's operational aspects and providing valuable insights and actionable strategies to foster scalable development. Not merely advisors, Cubed's team actively engages in implementing actions alongside companies.
Offering more than a consultancy
- Investment role: cubed also invests in early-stage companies, addressing the liquidity scarcity in pre-seed to series A stages and establishing foundational models for predictable growth.
- Connector role: with an expansive network, Cubed fills senior and mid-level roles in client companies and builds partnership agreements, connecting companies with a substantial investment community and distinguished VCs.
Cubed's unique pricing model combines cash and equity, focusing on companies they believe will succeed, aligning their success directly with their clients. The team, composed of experienced operators who have held C-level positions in various companies, distinguishes Cubed in building relationships and propelling businesses forward.
The art of timing
Startups often grapple with when to implement formal processes, risking premature rigidity or undue flexibility. It's not about adopting a Series D company's protocols early on but knowing when to integrate them. Elliott underscores this by suggesting a balanced approach. Founders should consider these processes but delay their integration until later stages.
- Early-stage companies should monitor forecast accuracy. This metric helps when seeking investments and scaling the business.
- Recognise genuine product-market fit. Avoid mistaking 'friends and family' endorsements as market approval.
Elliott introduces the 'cube model' for growth, a tool that adjusts its focus as startups evolve, ensuring consistent alignment with the company's current and future needs. By predicting growth and mastering the cyclical nature of this model, startups can achieve more accurate and sustainable expansion.
Big banks' perspective on Fintech
Historically, banks might have felt threatened, adopting a 'kill or cautiously engage' attitude.
- Shift in approach: banks and fintechs are adopting more collaborative methods. Previously, banks operated at their own pace, contrasting with the rapid speed of fintechs. This gap has narrowed significantly, with both sectors aligning in culture and mindset.
- Cultural convergence: the difference in culture between traditional banks and Fintechs, evident in their attire and approach, is closing. Banks are transitioning from ego-driven ecosystems to more inclusive, collaborative ecosystems, focusing on shared values and outcomes.
- Role of regulators: regulators, like Mass in Singapore or ADGM in Abu Dhabi, are pivotal in driving innovation. However, misalignment among regulators can hamper innovation in areas like the US.
- Banking innovations: some banks have experimented with 'speedboat' projects, testing new technologies in smaller settings. Challenges persist in integrating these innovations into their larger systems due to trust and customer segmentation issues.
- Barriers within banks: while bankers have evolved, internal functions like procurement remain impediments. These sectors, stuck in traditional methods, often resist innovation despite the external push for change.
- Innovation hubs: banks have established innovation labs or incubators globally. However, there's a debate on how much these institutions genuinely assist Fintechs in growth and solution development.
Elliott emphasises that while strides have been made, much is needed to achieve true synergy between banks and fintechs.
Shaping future banking strategies
The banking sector's approach to fintech offers insightful perspectives. Some banks view fintech as an 'innovation channel', leveraging it to identify promising technological solutions and acquiring them to enhance their offerings.
Bank buying strategy: is it ideal?
Elliott believes that while acquiring fintech firms might benefit banks in the short term, it doesn't necessarily drive genuine market innovation. If the price is right, this strategy might suit the bank's immediate goals and even the fintech founders, but it lacks a visionary outlook.
Future of banking: the trust factor
Historically, banks have been the guardians of trust with significant capital reserves. However, with tech giants like Amazon and Apple possessing larger capital reserves and garnering more trust from younger consumers, the traditional banking trust token is under threat. As these tech companies potentially gain consumers' trust over long-established banks, it prompts a re-evaluation of the bank's role in the future.
Instead of simply enhancing their current services, banks should strategise for the long term, recognising the massive disruption awaiting the industry. The question arises: in an era where tech giants have both trust and capital, what will a bank's fundamental role be?
The future of banking and payment innovations
Historically, banks acted as the primary gatekeepers of domestic and international payment schemes. Although fintech has made strides, such as directly connecting to faster payments, banks largely maintain their stronghold. Yet, when did we last witness a genuine innovation in payments?
Elliott argues that technology advancements, like the shift from MT to MX, haven't brought significant benefits to consumers.
Open banking attempted to change the landscape, but its implementation lacked consumer understanding. Meanwhile, cash payments, card transactions, and wire transfers remain the standards for moving money. But what if banking could cater more personally to individual beliefs and values?
Imagine choosing payment pathways based on a bank's carbon footprint or opting for banking services in line with personal preferences. Perhaps, like some advocate for green banking or relationship banking, where services differ based on individual needs. Despite attempts to innovate, significant change hasn't taken root since the inception of ATMs and credit cards. The industry must embrace this hunger for innovation or remain vulnerable to disruption.
Impact of regulation and liquidity on innovation
Exploring the intricate terrain of fintech reveals substantial hindrances stemming from stringent regulations in the UK and Europe. These regulations, primarily focusing on the capitalisation of fintech businesses, significantly impact overall bank liquidity, compelling fintechs to safeguard customer funds and limiting their operational fluidity. Here, a notable contrast is observed with traditional banks, which can freely leverage deposits to fund various payments.
Market liquidity & innovation:
- Big banks' dominance: big banks, being the ultimate providers of market liquidity, hold significant control, constraining innovative advancements in the industry.
- Global adoption delays: despite their inception over a decade ago, innovations like contactless payments witness delayed global acceptance, with the pace of innovation seemingly at a standstill.
Elliott Limb envisions a radical transformation in the definition and operations of banking in the next decade. The slow adaptation and integration of innovative solutions are evident, with sectors now slowly acknowledging the extensive applicability and convenience of evolved payment methodologies, exemplified by the belated widespread adoption of contactless technology. The reluctance to share innovative strategies in banking circles hints at an existing protective mentality, potentially hampering collaborative growth in the industry.
The impediment of innovation in consumer banking
Addressing the stagnation in the innovation of consumer banking, it's imperative to discuss the lack of bespoke customer experiences. Elliott Limb highlighted that despite the advancements in the fintech sector, delivering tailored financial services to individual consumers is noticeably absent, particularly in the SME market. This sluggish pace of progress relates to the traditional banking model's enduring rigidity and the industry's inherent resistance to change.
Tailored customer experiences:
- Consumer-centric approach: many banks claim a consumer-centric approach yet fail to truly comprehend and meet individual needs, leaving a significant gap in consumer and SME financing.
- Lack of customisation: traditional banks offer standardised services to many rather than tailored solutions, creating a disconnect between the service provider and the consumer.
- Bespoke experience: a few neo-banks, like Starling and Monzo, strive to offer more customer-oriented services, but the overarching industry norm remains largely unaltered.
Elliott believes that a radical overhaul in the approach to consumer banking is crucial. He argues that the absence of innovation and the industry's slow adoption of available technological advancements obstruct the realisation of a truly bespoke banking experience.
Incorporating unique customer insights, consumer education, and efficient implementation of open banking can bridge the gap between the current services and the evolving consumer needs, facilitating an environment where financial services enhance individual lives. The sector's reluctance to embrace change and innovate swiftly is arguably maintaining the status quo and preventing optimal consumer satisfaction.
Integrations: evolution and limitations
In the last decade, Fintech software has evolved to integrate multiple service providers, offering user-friendly interfaces. This shift, as described by Elliott Limb, promotes a "composable banking" model. Entities focus on their core strength, partnering with others to optimise efficiency.
While such advancements allow for rapid implementations, the pace remains stifled. Traditional banking frameworks, regulatory confines, and a hesitant approach towards innovation by banks are culprits. Big tech firms, however, offer a glimmer of hope by reimagining financial solutions, though challenges persist. The industry must reassess its standards and push for genuine, game-changing innovation to truly progress.
Why haven't tech giants dived deep into banking?
In banking, we've often speculated why tech behemoths like Google have hesitated in fully committing to the sector. According to Elliott, there are distinct reasons for their reservation:
- Regulatory hurdles: the daunting maze of banking regulations can deter even the largest tech companies. Navigating these regulations isn't seen as the most lucrative route.
- Powerful incumbents: the banking industry is dominated by influential players. Engaging them head-on isn't the most appealing prospect for tech giants.
- Avoiding additional scrutiny: as giants like Google are already under the magnifying glass for issues related to privacy, adding financial services can exacerbate the scrutiny, especially if data breaches occur.
However, this hesitation might not be permanent. With their robust technological capabilities, vast capital reserves, and established customer trust, tech giants might eventually push into banking significantly. For traditional banks, this means they must innovate, adapt, or face obsolescence.
… Bonus track! Elliot’s views on centralised vs decentralised banking. Click here to find it out more.
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