BOULDER, CO (January 27, 2023)
For our Summer cohort, we are adopting a Fintech thesis specializing in infrastructure tools and vertical SAAS products. Our Investment Associate, Sylvia Bouloutas has written a white paper that dives into details of the history behind products in our upcoming thesis, as well as more specifics around the types of products we are excited about in the FinTech space. Ultimately, we continue to look for rockstar founders who are passionate about the problem they are solving and teams that align with the values of Techstars. If you feel you’re part of a startup that is a fit, apply here or schedule time to virtually meet with Sylvia.
See complete white paper below:
Hi everyone — Syliva here. I’m an investor at Techstars, and more specifically, I work with the Techstars Boulder program, the original accelerator founded in 2007 by Brad Feld and David Cohen and run today by the incredible MD Elle Bruno. Techstars Boulder has a long vintage of success, and has invested in 170+ companies who have raised over $2B. We run two remote-first accelerator programs a year — a Winter and a Summer cohort. For our next class starting in the Summer, we have decided to pursue a predominantly FinTech thesis, focusing on B2B applications leveraging AI/ML tools and cutting-edge technology.
In order to better understand what themes and trends we are watching in the market today, let’s first take a look at the history of financial services and contextualize how, and why, FinTech innovation started.
The concept of money and a financial system has been a part of human civilization for thousands of years. As far back as 9,000 BC, cattle were used as a trade item and defined the early barter economy.
Actually — let’s fast-forward just a bit.
The beginning we are interested in occurred in 1998 in Palo Alto, California — a time known as the dawn of the internet.
Enter Peter Thiel, Max Levchin, and a company called Confinity. Confinity was originally created to develop security software, but eventually transitioned to offering a digital wallet service that provided low-cost payment options for both businesses and individuals. The following year, this company was renamed PayPal and is recognized as the first digital payment platform. As part of its early user acquisition strategy, Paypal focused on facilitating online payments for eBay customers, who previously had to use checks and money orders sent through the U.S. Mail to make payments. Within the first three years of operation, the company processed a whopping $3B in payments.
And this was just the opening act. The FinTech industry continued to evolve and grow in the years following the dot-com bubble of the late 1990s. The next decade and a half saw a period of significant innovation as many new startups emerged pledging to disrupt traditional financial institutions and offering new and more convenient ways for consumers and enterprises to address financial management. Companies built products specializing in areas such as personal finance, investing, payments and money transfer, e-commerce infrastructure, lending solutions, and more.
Innovation, however, was not without limitations. Despite the promise of new technology, many emerging businesses struggled to gain traction and faced major challenges. Product adoption rates were low, particularly among older demographics and smaller businesses. Users were hesitant to embrace products built for financial transactions due to concerns around security, lack of familiarity, and simply preferences for traditional banking methods. There was a noteworthy lack of regulation and oversight in the industry during this period. As startups developed and grew, there was an increasing need for clear regulatory guidelines and rules to ensure the integrity and stability of the financial system. But the rapid pace of technological change made it difficult for regulators to keep up, and there were often gaps in the regulatory framework for new technology entering the market.
Regardless of obstacles encountered by new businesses during this period, the innovations and advancements made by these companies laid the foundation for many modern financial products and services that continue to transform the industry and shape how we think about financial services. In recent years, we’ve seen a lot of innovation around the use of blockchain technology and digital currencies, and the increasing adoption of mobile payment systems. Other exciting developments include advancements in virtual and augmented reality for financial education and immersive banking experiences and the use of biometrics for secure authentication and identity verification.
Today, we see a significant opportunity for new AI-powered financial technology products to revolutionize the B2B market. Products can either be sold directly to businesses as independent offerings or can be developed as intermediary software that connects businesses together. Specifically, we’re noticing B2B fintech innovation in:
Comprehensive products tailored for SMBs/SMEs and entrepreneurs
Vertical specific solutions
Infrastructure & API tools integrating into existing systems
While large corporations often receive a lot of attention, the vast majority of businesses in the US are small businesses. In fact, 99% of all US businesses are small businesses. These 32.5 million businesses are essential to the US economy and are seen as representing the American dream for many entrepreneurs. Small and medium businesses (SMBs) and small and medium enterprises (SMEs) however struggle greatly with financial management. Business owners rely on outdated and cumbersome financial tools that are slow and require manual input. Without the ability to hire a CFO or other financial decision-makers, entrepreneurs struggle to effectively manage the financial aspects of their business, leading to financial strain. Small businesses and entrepreneurs may face many economic and logistical challenges:
Invoices are written on paper
Business owners wait weeks (sometimes months) to get paid for services
Cash flow is inconsistent and limited
High levels of paperwork and administrative tasks
Poor tax compliance
Business and personal finances are mixed together
This is where FinTech solutions come into the picture. There is a large market for intelligent tools and financial products that disrupt legacy systems for SMBs and SMEs, and improve financial management for small business owners across a variety of industries. FinTech startups provide small businesses with access to advanced financial technologies and services that were previously only available to large corporations, leveling the playing field and enabling SMBs to compete at a larger scale. FinTech solutions also help small businesses streamline financial processes, reduce costs, make more informed financial decisions and ultimately, provide the tools and resources to succeed in an increasingly competitive business environment.
Securing small business financing
Obtaining a business loan can be a difficult process for small business owners, with a lengthy application process and a high rate of denial. In fact, four out of five small business owners are typically denied financing. This is because of a number of reasons: a lack of collateral, poor or insufficient credit, large debt or low income, and/or inadequate capital investment. FinTech lending solutions offer alternative forms of funding to help improve the financial health and freedom of SMEs and SMBs. These solutions provide small businesses with access to the capital necessary to grow and thrive, even if the companies do not meet traditional criteria for a business loan. In many cases, FinTech lending products are faster and more convenient than traditional loan processes, making it a valuable option for small businesses in need of funding.
We see space for new FinTech startups implementing AI tools to offer —
New ways of credit scoring and the use of intelligent assessment of creditworthiness with real-time analytics of other data points. AI solutions analyze data about a business’s financial history, operations, and market conditions to create more accurate credit scores.
Manual processes associated with SMB lending (reviewing loan applications, underwriting loans) are automated by AI tools, helping lenders process loans more quickly and efficiently.
AI solutions evaluate data about a business’s finances and preferences to create customized lending products that meet specific needs.
AI products offer improved risk assessment by analyzing a wide range of data sources to assess the risk of lending to a particular SMB. Lenders are able to make more informed decisions about which businesses to lend to and at what terms.
Establishing more ways to pay
Currently, the process of making B2B payments is often slow, cumbersome, and reliant on paper documents. It typically takes an average of 14 days to process invoices, which often require two to five approvals, and most payments are made using paper checks or cash. Other payment methods such as ACH payments, wire transfers, and credit cards are also used. FinTech payment solutions provide small business owners with a competitive advantage by offering streamlined and secure digital payment systems, enabling them to serve more customers efficiently.
AI has a tremendous ability to impact the payment space —
AI analyzes data from past payment transactions to identify patterns or anomalies that may indicate fraudulent activity. Companies use these tools to protect themselves from fraudulent payments and reduce the risk of financial losses.
Manual tasks associated with B2B payments (reconciling invoices, processing payments) can be automated by leveraging AI tools, resulting in a reduction of time time and resources required to make payments and the risk of errors.
Data around a payment history and transactions are leveraged to create customized payment solutions that meet specific needs.
Accounting, Tax, and Payroll Management Tools
Sophisticated software tools help small business owners with many important management tasks. With the help of FinTech services, business owners pay bills online, streamline enterprise resource planning (ERP) and accounting processes, manage accounts payable and accounts receivable, keep track of bookkeeping, improve spend management, handle treasury tasks, and even stay on top of taxes.
There is a massive opportunity for AI to impact the space by offering —
As with payments processing, AI applications automate many of the manual tasks associated with accounting, tax, and payroll management (data entry, invoicing, tax compliance) SMBs save time and resources and reduce the risk of errors.
Accuracy is paramount, especially when it comes to accounting and tax management. Products leveraging AI tools analyze data and identify patterns or anomalies that may indicate errors or potential problems. SMBs improve the accuracy of financial data and reduce the risk of errors.
AI solutions are used as a management and organization tool, helping business owners analyze and store financial data in more sophisticated ways and make sense of financial information.
By examining past financial business data, AI-enabled products make predictions about future financial trends and needs and help SMBs make more informed decisions about financial planning and strategy.
Vertical Specific Solutions
Small business owners have a number of options when it comes to tools and software to help them manage financial operations. While there are many general tools available, we see value for startups that are building products and services that are tailored to specific niches and communities. Companies are building solutions that are more closely aligned with the needs of customers, as opposed to creating broad software tools that might not fit the needs of every business. Many startups are either leveraging specific financial tools or are Software-as-a-Service (SaaS) companies that are monetizing through financial technology and are FinTech-adjacent. In other words, they are using FinTech to help drive business, whether that be through offering financial products and services or by using FinTech to power core products and services. Some examples of verticalization we’ve noticed in different industries leveraging financial tools —
Project management software, allowing architects, engineers, and contractors to collaborate, track progress and manage timelines
Digital tools for scheduling, budgeting, and cost estimating
Platforms that connect contractors with suppliers to manage procurement, invoice and payments online
Solutions that digitize and automate the tendering process, contract management and project close-out process
Trucking and Logistics
Transportation management tools connecting shippers with carriers
Routing optimization using AI solutions
Real-time tracking and monitoring of cargo
Freight payment and financing platforms
Online platforms for property search, listing, and transactions
Digital tools for property management to track rent payments and maintenance requests
Mortgage and loan origination platforms
Crowdfunding platforms for real estate investing
Lease agreement tools connecting landlords and tenants
Precision agriculture technologies (drones, sensors, big data analytics) to optimize crop yields and increase farm efficiency
Online marketplaces and trading platforms
Digital platforms for procurement and supply chain management
Financial services for farmers and agribusinesses (crop insurance, loans)
Payment platforms allowing for secure, electronic claims and payment processing
Software to help patients manage out of pocket costs and insurance claims
Low Churn: Founders can design products and services with a specific group of customers in mind and directly contribute to building an intuitive and user-friendly experience. This often results in higher customer retention rates and lower churn.
Low CAC: Verticalized startups spend around 22% less on sales and marketing than their horizontal counterparts.
High Conversion Rate: Verticalized companies typical have a higher conversion rate because of targeting marketing strategies towards a specific niche. Verticalized startups also have a higher chance to upsell their customers, driving revenue growth.
Competitive Advantage: Focusing on a specific niche can help startups differentiate themselves from broader-based competitors and establish a strong competitive position in target market.
Trust: Verticalized startups develop a deep understanding of the unique needs and challenges faced by target customers and provide more tailored and effective solutions. This ultimately results in increased customer trust.
Potential for partnerships: Because startups are only targeting a single niche community, they are able to cultivate relationships with other companies in the target industry, potentially leading to partnerships and future collaborations (and even investment).
The best way to think about API solutions is to envision an API as a set of pipes that connect different software systems, allowing them to communicate with each other and exchanged data. In the FinTech industry, APIs are used to quickly and easily connect with and build on top of existing financial infrastructure and facilitate the integration of traditional financial systems with technology.One example of API use is through mobile payment systems. APIs allow apps to connect with traditional financial infrastructure (bank accounts, credit card networks), enabling users to make payments and conduct financial transactions. As a result, API payment products increased the convenience and accessibility of financial services for consumers, as end users no longer need to visit a bank branch or use a physical credit card to make purchases. APIs also include the development of online lending platforms, which use infrastructure tools to connect borrowers with lenders in a more efficient and cost-effective manner. Algorithms and data analysis are used to assess the creditworthiness of borrowers and determine the terms of loans, making the process of obtaining a loan faster and more transparent. In addition to enabling the creation of new financial products and services, API innovation has also led to the automation of many traditional financial processes. For example, APIs have been used to automate trading and account management, reducing the need for manual intervention and increasing efficiency.
Thanks for reading! It’s been fun having you here, but it’s time I go do actual work now and invest in some awesome founders. Stay tuned for more content. And, as always:
If you’re working on a startup in the FinTech space and are interested in joining an accelerator program, reach out: firstname.lastname@example.org
Sylvia is an Investment Associate at Techstars Boulder. Prior to working at Techstars, she has experience working as an early-stage investor at Knightsgate Ventures and co-founded a FinTech startup