Confessions of a FinTech Junkie

While I don’t like to admit it, I think I’ve finally become “that grumpy old guy”.  To be clear, I’m still in my 40s and am generally upbeat.  But, I’ve finally ticked all the major boxes that would qualify me as a curmudgeon.

Box #1: In my early 30s I called the cops on a neighbor who was racing his motorcycle at 3am.  I felt like a heel but wanted some sleep.

Box #2: About 5 years ago, sitting on a plane I (nicely) told a mother that she needed to control her child.  In my defense, the child was about 3 years old and kept putting his drooly hands on my laptop, my shoulders, my hair, etc.  Not cool.

Box #3: I’ve started to play the “remember when” game all the time.  Remember when everyone wasn’t pausing for selfies every 3 seconds?  Remember when new college grads understood that they had to work their way up the ladder and didn’t complain about it?  Remember when you drank some orange juice when you felt sick instead of “researching your symptoms” on WebMD and convincing yourself that you’re about to die?

And I’m definitely becoming an elder statesman in the FinTech world because in my work interactions I’ve also started to play the “remember when” game.  In fact, just this week I had multiple conversations with various 20+ year veterans in the space about how the most recent generation of FinTech companies should review the lessons learned from last generation’s innovators.   And of these lessons, we all agreed that they should pay special attention to what’s been learned on the topic of “growth”.

To put it simply, there are usually three phases of growth and each has its own characteristics and cadence.

Phase 1: Test, learn and burn

Phase 2: Revenue your way into scale

Phase 3: Cost your way into a healthy business

In Phase 1, every iota of energy needs to be focused on figuring out product/market fit and if the unit economics of the product make sense.   It’s about maniacally executing a well designed learning agenda.  It’s about interpreting early market/test results.  It’s about figuring out which levers matter and how hard they should be pulled.

Phase 1 is also about burning cash.  There’s no way around it because at this stage the business by definition has very few customers and revenue can’t overcome the fixed costs of supporting the product.  While every dollar matters for all the obvious reasons, the goal should be to maximize learnings rather than minimize burn.  Test, learn and burn.

In Phase 2, a business should be focused on scaling aggressively in order to build market relevance and overcome fixed costs.  But, aggressive scaling doesn’t mean mashing the accelerator with no constraints.  Decisions should be made based on the learnings from Phase 1 and not be speculative in nature.  In the formative days of Capital One we used to talk about how this phase of a product’s life felt like cheating because we learned enough in Phase I to know what the results were going to be in advance of spending our marketing dollars.  Cha-Ching!

Phase 2 is also about building out the capabilities of the team and operational processes such that the results are repeatable.  Selling widgets starts with making consistent widgets to sell, and this is a piece of the growth story that’s routinely being overlooked by today’s hyper-growth lending start-ups.  My observation is that many lending companies that I’ve diligenced over the years grew or are growing faster than they should.  It’s not uncommon for a hyper-growth lending company to tap pockets of customer demand at the margin, and it’s precisely these marginal customers that have less robust economics and more volatility associated with them.  Increasing repeatability and reducing volatility is almost always more important than an extra 10%, 20% or even 50% growth rate.  Volatile revenue is garbage and nine times out of ten will destroy value and create distracting fire drills.  Do the work and analyze what the last 10% or 20% is actually contributing.  It’s not an easy exercise but ALWAYS worth the time and effort.  Revenue your way into scale is a good mantra to espouse but only if the revenue is stable and robust revenue.

The transition from Phase 2 to Phase 3 is really interesting because it usually comes as a wake-up call vs. a choice.  Most successful businesses grow at a 45 degree angle straight up until the day that they suddenly hit a wall.  WHAM!  Sometimes the wall is a direct result of a shock to the industry or the economy.  Sometimes the wall shows itself after an internal breakdown in processes or controls.  And sometimes the wall is erected by the competitive landscape and appears as a slowdown in the growth rate of the business.  Welcome to Phase 3!

The Phase 3 playbook is usually quite obvious but not without pain and suffering.  The leverage in this Phase typically comes from refinement vs. trail blazing.  It comes from ripping costs out of the system and jettisoning marginal projects, tests and even people.  It comes from renegotiating contracts and focusing on cost-efficient-widget-making.  Costing your way into a healthy business is almost always an inevitable stop on the way to greatness, so when it arrives embrace it, deal with it, and move past it.  I wrote a few posts  earlier in the year that lightly touch on this topic: Thriving, Surviving or Dying and What Happens When The Cash Runs Out.

So how does this tie to my earlier comments about being in “remember when” mode?  It ties to my comments because I find myself sharing stories (both good and bad) and lessons from the past with less experienced operators.  I find myself remembering back to a time when being great meant growing top line at 20-40% a year with 20%+ ROEs for 10 years in a row.  I remember when hyper-growth was punished and consistency was rewarded.  I remember when the resilience and quality of revenue mattered more than raw growth numbers.

Don’t get me wrong, early stage lending companies need to grow at 2-3X a year in order to achieve relevance and overcome fixed costs.  But, my lamentation is around the growth advice that some investors are giving to entrepreneurs and that many entrepreneurs are glomming onto.  Grow, grow, grow!  More is better!

In many cases there doesn’t seem to be an appetite for discussing the right growth rate if it’s sub-100%.  In many cases unit economics take a back seat to top line revenue growth and vertical economics.  And in many cases the hard work around attacking costs is replaced with a view that “we can grow our way into our cost structure”.

My advice is simple.  Learn first.  Grow when you’re ready.  Become operationally excellent.  Embrace the inevitability of a wall.  Build a great business by attacking costs and improving the bottom line.  Rinse and repeat.  And don’t let anyone fool you into thinking that building a lending business is a land grab (as justification for their growth advice).  We live in a consumerist society so the opportunity to lend money will be there tomorrow if it’s there today.  Patience you must have my young Padawan.  Patience.