Within the broad conversation about technology’s potential to advance social good is a niche dialogue about the power of financial technology (fintech) to reach customers who have been excluded from or poorly served by traditional financial services. At Accion Venture Lab—the seed-stage investment initiative of the global nonprofit Accion—we believe in the transformative potential of fintech startups to reach the three billion financially underserved people around the world.
Startups are uniquely positioned to catalyze innovation in their sectors, but they face a number of challenges. To survive, any startup must excel at product development, pricing, sales, marketing, business development, strategic planning, and talent acquisition and retention. Startups striving to provide inclusive financial services face additional sector- and market-specific difficulties. They must clear regulatory hurdles that tend to be murky in emerging markets and onerous for financial services businesses. Their customers often lack verifiable identities, objective credit scores, and established financial histories, which makes verification difficult and due diligence expensive. There are rarely any reliable or relevant market or customer data to use in product design, customer engagement, acquisition, or underwriting. Underserved customers often carry small balances and have lower transaction sizes, making profitable unit economics hard to achieve. Inclusive fintech startups also face ecosystem challenges: Talent pools can be shallow, and there may be no local institutional investors, mentors, or incubators that can properly support startups at the seed stage.
Accion launched Venture Lab to address capital and support gaps for fintech startups reaching long-neglected customers. After reviewing almost 2,000 of these companies, investing in 33 of them, and achieving two successful exits, we have learned a few essential lessons for impact-focused startups:
1. Identify your highest-value customers and target your product to them. Having a good solution is practically worthless if you don’t have someone to sell it to. Our portfolio company Konfio uses digital data and innovative credit algorithms to provide financing to micro- and small businesses in Mexico. We helped them segment their customer base and identify their highest-value customers: Those who needed Konfio’s service, could benefit from the company’s value proposition, and were the most likely to repay their loans. Konfio could thereby identify the right loan sizes, duration, pricing, and terms, and ultimately design better products that generate more demand. Knowing your target customer allows you to understand the value proposition your product offers, and why it is more compelling than alternatives. You can then customize product features and marketing messages and channels to reach that consumer.
2. Maintain operational focus. Sometimes coming up with a brilliant idea is the easy part, and transforming that idea into a working product or service and meeting milestones is the struggle. As soon as we finalized the term sheet with our portfolio company Lulalend, a South African startup that provides quick and transparent online lending to entrepreneurs, we helped the team prioritize essential operations. Our process of building a 100-day plan, defining and prioritizing milestones, and clearly delineating ownership and responsibility for important tasks ensures that a team is focused on the most critical issues.
3. Obtain the right capital from the right investors. A fundamental challenge for early-stage fintech businesses is to find the right capital at the right time, but startup founders must also consider what an investor brings to the table beyond just capital. Investors should provide sector or market expertise or relationships and networks that can help the company access talent, customers, or capital. For startups in the lending space, accessing debt at the early stage is particularly difficult. Banks and other debt providers typically balk at providing debt to applicants who lack a long operating history or haven’t reached breakeven. It’s a vicious cycle: Early-stage lenders are unable to raise the debt capital to build their loan portfolio due to their small book size, but they cannot grow their portfolios without access to funds to drive their growth. Often that restricts them to lending out very expensive equity. We worked with our former portfolio company Varthana, which provides specialized loans to affordable private schools in India, to help connect them with local and international debt funders so their growth wasn’t constrained by their inability to raise wholesale debt.
4. Develop your team and use it effectively. Having the right team in place allows startups to increase efficiency, lower costs, and retain talent. Hiring strong team members is just one necessary step; startups also need to ensure that teams are appropriately placed and engaged. Our portfolio company Artoo’s tailored intelligent lending platform for micro- and small business lenders initially required retooling the service for each new client. Artoo was sometimes losing time when the sales team, which had developed a relationship with the client and learned its needs, turned a contract over to the engineering team. By benchmarking Artoo’s organizational structure against its peers and considering industry best practices for sales organizations, we helped them redesign their sales team, creating a hybrid model that combined sales and engineering personnel and assigning new roles to reduce redundancy.
5. Establish good governance. Good governance is key to satisfying regulatory requirements and establishing credibility with new later-stage investors. We’ve joined many of our partners’ founding board teams in order to achieve these goals. We worked with our portfolio company Tienda Pago, which provides small businesses in Mexico with access to credit, to establish reporting and other basic governance elements, including a regular meeting schedule, agendas, and minutes. We also helped Tienda Pago develop a compensation plan for future hires, so that the company now has a framework to bring on senior talent and compensate them appropriately while still maintaining long-term viability. Board members can offer more than strategic and operational guidance: they can also introduce their networks to the startup leadership and forge connections that facilitate growth.
We at Venture Lab are particularly excited about the potential for inclusive fintech startups to leverage the right support, capital, and insights to accelerate social progress and realize significant financial and social returns. But even though our experience is in the fintech space, we believe the lessons we’ve gleaned—about product-market fit, operational focus, investor match, team-building, and governance—can offer value for impact-focused startups in any sector.