The Fintech Entrepreneur's Need for Speed
Your success as an entrepreneur is often measured by how fast you grow. This is especially true in the world of venture-backed startups where the predominant attitude is the faster, the better. Your ability to grow fast is how you’ll be judged by your investors, your employees, the people you’re trying to hire, your competitors and the media.
In fact, the need for speed can sometimes become an obsession, especially for Silicon Valley entrepreneurs. You hire, expand and raise capital as quickly as possible. You iterate and innovate as fast as you can.
Growing fast, even at a breakneck pace, is how you become the next star of the startup world, the next Snapchat, Blue Apron or Facebook. This was even reflected in Facebook’s famous mantra -- “Move Fast and Break Things” -- although Mark Zuckerberg has said publicly that Facebook is backing away from that slogan.
Fast growth is certainly not foreign to me as a startup entrepreneur. I started BlueVine, which offers working capital to small and medium-sized businesses, in July 2013. A few months ago we published an infographic illustrating how we’ve grown in the last four years. It features an exciting image -- a hockey stick graph, demonstrating a sharp rise in the volume of working capital we’ve funded since we began.
That certainly makes us and our investors happy and proud. But there’s one important lesson I’ve learned as an entrepreneur. In fintech, growing too fast can be dangerous. In some cases, it can even be fatal. In fintech, the need for speed must always be weighed against the importance of smart and sustainable growth.
Do we want to grow 100 percent to 200 percent year over year? Yes, we do. Do we want to grow more than 300 percent in a single year? Only if we can be sure that we’re on a path of smart, controlled growth. Otherwise, the answer is no. That’s too fast for us. That type of growth would actually make me -- and our investors -- nervous. I suspect other fintech entrepreneurs share my perspective, primarily those in the lending sector.
Through technology and data science, fintech companies are dramatically changing the way people, businesses and institutions access and manage their finances. For small business owners who have grown frustrated with slow processing times and the stringent requirements imposed by banks, a company like ours means fast and convenient ways to obtain capital.
But while we’re disrupting an industry long dominated by banks, fintech startups can’t exactly be like other tech companies either. We clearly can and do move faster than banks, but we can’t solely optimize for fast growth.
For fintech companies, three factors must always be front and center -- data security, risk management and compliance. While we strive for speed and innovation, we can’t afford to completely embrace Facebook’s “Move Fast and Break Things” mantra.
We are dealing with extremely sensitive private and financial information, and our customers expect us to securely store, handle and maintain that information. If Facebook suffers a system glitch and loses some of my photographs, I’d surely be upset. But that’s not the same as a fintech company “misplacing” $200,000 of my money. We can’t just tell a customer, “Oh, sorry, we miscalculated your balance. But no big deal.”
In addition, the arena we’re operating in has strict rules and regulations meant to protect consumers and small business owners. You cannot overlook regulatory or legal licensing requirements because they seem unnecessary or burdensome to you. In fintech, moving too fast and breaking things can land you in big trouble.
That’s what happened with Square, the mobile payments company, which got hit with a hefty fine in Florida for operating without a money transmission license.
Caution is critical for fintech lenders for another reason. While you want to grow your customer base and originations as fast as you can, you want to make sure most of the money you’re lending actually comes back. Giving away money is easy. Deciding who to give it to and making sure you get it back is the challenging part.
Of course, losses due to bad loans are a fact of life for financing companies. You inevitably encounter borrowers who cannot or will not pay you back. In fact, I found this out shortly after launching BlueVine in 2013. As I recalled in an earlier column, nearly every other customer in our first month defaulted. Early on, higher losses are an acceptable “tuition.” However, as you scale, you cannot afford to rack up excessive losses.
Managing credit risk is a core competency for fintech lenders and doing well requires discipline. Loosening underwriting standards in attempt to grow faster can severely derail a financing company as the recent turmoil in lending start-ups underscore. CAN Capital and CircleBack Lending were forced to stop issuing loans due to mounting losses. Funding Circle also dramatically scaled back its lending at one point due to higher-than-expected losses.
Our margin of error is small. We always need to think before we act. When you grow too fast, you lose control. In fintech, you cannot afford to lose control.