With our first Q&A dating back to 2013, we are excited to launch a new interview series: Scaling Enterprise FinTech- in Europe & Beyond.
Why do we need another interview series, and why now?
Over the last few years, several “disruptive” B2C FinTech players are moving to (or adding) a B2B or B2B2C model. SaaS offerings inspired by or packaging B2C market trends are targeting banks or insurers (a kind of “Enterprisation of Consumer”), and even financial institutions are spinning off or acquiring B2B tech plays.
However, scaling B2B FinTech is a different ballgame, with (almost) no “freemium”, complex sales of up to 24-36 months, startups taking longer to get to Series A, founders (mostly) bringing in strong domain and tech expertise but often lacking sales and go-to-market knowhow, and US (or Asian) markets often the key to unlocking scale.
Scaling Enterprise FinTech brings together insights on nailing sales, (US) go-to-market and fund-raising from the founders, investors and financial institutions behind Europe’s leading B2B FinTech scale-ups.
The first interview in this series featured Eugene Danilkis, Co-Founder & CEO of Mambu, conducted on 24th June 2020 at Mambu’s headquarters in Amsterdam.
Hi Hans, good to meet you. About a year and a half since we last met. Let’s get right on with the interview. Tell us a bit about yourself, both at work as well as at leisure.
Hans de Back
Sure. Okay, so my name is Hans de Back. I’m a General Partner at Finch Capital. I am Managing Partner at Finch Capital since 2015. I’m based in Southeast Asia. So we as a FinTech VC we invest in two regions, Europe and Southeast Asia. So I’m responsible for our Southeast Asian activities. Radboud is looking after Europe.
My background is that I’ve been an entrepreneur myself from 2000 till 2011, but in the mobile marketing and advertising space. So I’ve built companies together with two partners all the way from a startup to an IPO to a listing. So I think it’s an entrepreneurial experience in the companies and I have leveraged that experience in the companies we invest in. Then from 2011 till 2014 I’ve been an angel investor. I moved to Singapore in 2011 and started investing as an angel in in technology companies with a very broad focus, ecommerce, social media, but also FinTech and that’s where I started to work with Radboud. We did some deals sharing and co-investments, and then decided to set up Finch Capital. So that’s a bit about my work.
Yeah, so what what I like outside of work is, I like to run. That’s an easy way to exercise. I cannot commit myself or force into team sport. So yeah, just sneakers in your suitcase. And, you know, when you’re traveling, it’s easy to take them out of the suitcase and start running this route. Sometimes running away from your problems.
Okay, so a bit about the fund itself. Sure. I think you did say you started to set it up together with Radboud.
Hans de Back
Yeah, yeah. 2014 we started, we started Finch Capital, and so we currently managing two funds. The first fund is about 50 million USD and the second fund is 140 million USD. And I think where we differentiate ourselves is that we focus we were from the beginning focused on FinTech.
So in contrast to a lot of other VCs who have more kind of a general investment approach, we immediately focused on FinTech, because that’s where we saw the opportunity, had also to do with personal background, so I’ve made the investments in FinTech companies prior to Finch, and Radboud was a McKinsey partner and heavily involved in consulting a lot of finance institutions. So that’s one.
Secondly, we invest in early stage. Early stage for us means pre-Series A up to Serie A. We believe that as VC you can make the most impact in that very specific area. So we considered that as our sweet spot we see that a lot of the FinTech companies required not only the cash, but also a real hands on approach from from their VC, and that’s what we deliver. So we are a very active investor?
Thirdly, we bridge Europe and Southeast Asia, so initially, we brought European companies to Southeast Asia. So we helped them to expand to the Southeast Asian markets. And in our second fund, we made direct investments in Southeast Asian companies.
The fourth differentiator is that we are more focused on B2B2C, so we invest more in what we’d call collaborative business models rather than better business models. So Collaborative for us means FinTech company wants to partner up with financial institutions or fast versa. So those that said the four differentiators.
Now we have offices in Dublin in London, London, Amsterdam, Singapore, Jakarta, we have about 10 professionals on our payroll. So we have a relatively small outlet. But we also are surrounded with a very strong network of, of entrepreneurs. So if you’re new to our investment strategy, what I mentioned before is not only about putting in the capital, but really help the company with operational challenges. That could be hiring, product development, but also building partnerships with finance institutions. And that’s where we can rely on our network. So if there’s a specific need required, and we can really leverage the network of people around us to accomplish what we invest in, so they can, you know, take for example, board positions. So that’s what we do.
But as a VC, we’re also collaborative ourselves. So we work a lot with other VCs. So we normally take the lead in the deals, but we work with with other VCs, to create deep pockets because FinTech companies in general require a lot of capital. So it’s important to have a very strong cap table, not only for the expertise and the money, but also the distribution network you’ve been building without a VC. So in that respect, we are also very collaborative ourselves and work with VCs but also with corporate VCs.
Excellent, okay. We’ve come to the right place. So I think there’s enough with what you mentioned, given the Southeast Asia and Europe focus- kind of bringing together these I think in general, one can say the Southeast Asian market has been more of a green field as well, it has had more B2C approaches compared to B2B or B2B2C in the beginning at least. Whereas here we’ve seen in Europe as well as in the US a lot more companies which started off B2C, but went more B2B or B2B2C. So how do you see that- because a lot of our conversation will be about this part – so how do you see that coming together or converging from going from B2C models? What have you seen in Southeast Asia as well as how do you see it to be going forward?
Hans de Back
Sure. So I think if you if you’re new to FinTech, so we strongly believe that innovation of FinTech in general took place in Europe. Attitude to say payments- I feel a lot of payments companies came out of the Netherlands. Of course, one of them is Adyen, now a unicorn based here in Amsterdam. Then there are challenger banks like N26, Revolut, etc. There’s a lot of innovation about payment, remittance, lending actually took place in Europe. And of course, US is the biggest market, but we really believe that innovation is really taking place in Europe.
However, what we’ve seen in the early days of fintechs, let’s say back in 2011-2012, is that most of the VC money- about 90% – went into those competitive business models. So it was all about fintechs challenging, fighting banks, replacing a financial product or even replacing a bank like a challenger bank. In mobile we have seen over time, a couple of things. And that’s also the belief we had from the beginning.
And as always, we’re more focused on the collaborative business more than competitive business model, is that the the fintechs are dealing with a couple of challenges from the beginning almost. One is onboarding of customers. So what we’ve seen is the cost of acquisition of customers is going up rapidly. There’s a lot of competition around the digital channels. So cost of acquisition went up.
Secondly, is of course the the regulatory environment – what we have seen as regulators in general in Europe, for example – in Germany the BaFin, in the Netherlands the AFM – sort of they came in and started regulating the FinTech companies.
Thirdly, It’s the lack of trust, it’s a lack of brands and fourth is the distribution network. So I think those four elements were actually hampering the growth of the more or less what would be B2C business models. So that was a reason for most FinTechs to partner up with financial institutions that experienced fintechs from the beginning as very disruptive or as a threat. But what we have seen is that, over time, financial institutions have been embracing financial technology companies, are now innovating themselves from the inside out, so to speak, right. So they use FinTech technologies to start with a partnership to innovate more or less themselves and to tap into a diverse audience which say traditionally do not easily get into like the millennial base, for example.
So that’s a bit of what the trend we’re seeing. And if you look now to the VC capital, so about, it’s now 60%, that goes more into the B2B2C type business models. And I think post-COVID that will only grow, right, and the balance will be more comparatively small. So the whole let’s say, the investment strategy for VC is changing and shifting from more competitive to collaborative, so from the direct to consumer to B2B2C for the reasons I mentioned.
Got it, got it. You’ve answered a couple of questions I had in mind already. Just kind of zooming into this particular trend of B2C models first trying on their own, some of them succeeding- just about a handful- succeeding enough that they can even scale beyond Europe, etc. But the rest, which are switching from B2C, to B2B2C or B2B models, in some cases, as a white label software product, just like the old times- do you see that transition happening in a way where you know, the founders or whoever to make the transition- it’s a different mindset and different sort of way of thinking when you’re going B2C? And then it’s, and you know, you’re being egged on as somebody disruptive and so on. You’re gung-ho about that. And then to move to the B2B2C model, how does that happen? Do you see that happening successfully? What does it take for founders to make that move?
Hans de Back
Yeah, that’s a good question. So I think, to start with the first part of your question, so let’s say that’s called the DNA or the mindset. There’s significant differences of course, if you start a FinTech company, and your approach is direct to consumer, or B2B2C, that’s a totally different mindset, and it requires also a totally different setup of your company, right?
So I think if you were to do direct to consumer, it’s more building the brand. And when you have the expertise to build a brand, it’s about your onboarding channels. It’s about the digital channels you’re going to use to onboard customers. So it’s about the marketing and it is all about retention, right? So how do you keep your customer satisfied and happy and how do you avoid churn. Then also, the challenges a direct to consumer company running into is, is of course all kinds of KYC, fraud issues, right? Regulatory issues are what I mentioned before, so that’s something a direct to consumer company that’s going directly to the market has to deal with.
And if you do it B2B2C, you work with a strong partner, then that partner can assist you in your onboarding of customers, avoiding fraud issues, dealing with regulators, etc, etc. So then it’s a completely different mindset. So if you do B2B, there the focus is more on product market fit- so how relevant is your product for the department you’re working with. It’s about the sales process. So as a small FinTech company, how do you do sales to big corporates? Right. How do you keep the client happy and how do you make sure that your digital products are also relevant for this partner long term. So how sustainable is your product.
So there are different issues, different challenges. So shifting from direct to consumer to B2B2C is not that easy. What we’ve seen so far is, I think on both sides, in both models, product market fit is of course, extremely important, right. So and in that respect, you need to be focused on adoption rate. And also, how quickly can you scale up your product, but I think in both models, those are let’s say the relevant questions and also those are the issues and challenges you are dealing with.
I think the big difference is if you look to how they do sales to a big corporates, right, and do we have the people, do you have expertise on board to deal with those corporates- so it’s not only know your sales, making sure that your products are providing the benefits for this company, not burning too much cash in that whole sales process, right? Because if your product is not relevant, you can burn a lot of cash on the sales. Right. So that’s one, but secondly it is how do you maintain relationship, how do you work with corporates going forward? So you have your back office.
This is completely different than the back office of a direct to consumer company, right? And also, how flexible are you in, in product development, or how should product development look like, because those big corporates require probably a lot of adjustments. You know, it’s not one general product which you deliver to a couple of banks, they require very specific products, it requires also a lot from your product development team.
So if you have if you go down to the market it’s just one product which fits all, right, and if you go to more B2B2C, you have to tailor your products for those very specific financial institutions, which has a huge pressure and you the users can be demanding for the product development team. So those are the big differences I see. So it’s not an easy transition.
Totally, yeah. And it kind of goes back to the question because it’s starting to sound like the world I used to be in. So like up till 2012, I was responsible for a lot of sales and business development for some of these financial software companies, as they were called at that time, simply.
It was really a long sales cycle, the long relationship building and complex sales processes, and I think what has changed now is probably at that time, we were being evaluated just like any other providers, so the procurement department would come asking for five years revenue history, how many locations do you have, can you serve us in these five cities or time zones, but I think now the question would be- have you seen that change if it is enterprise FinTech or enterprise B2BC sales? Have you seen something change on either side? So in terms of the sales team or the type of salesperson or this type of mindset, founders are bringing in into this kind of a company and on the other side, at the buyers side as well. Have you seen that change? Or is it just the same?
Hans de Back
No I will seen actually a lot of change. I think that what we have seen with FinTech companies in general is that they upfront make the decision- do I go for a direct market approach i.e. B2C or do I choose to work with financial institution, i.e. will I be a a provider of technology to FI’s in general. I think that’s the choice they make up front. So it’s becoming less optimistic. Right? And that has to do with the fact that the market for B2B2C is becoming big.
You know, those are the two drivers of innovation also at the FinTech agenda, no surprise for FinTech. And it’s also relevant for financial institutions. So you see a lot of new technology, new solutions, new products, actually coming out in the last couple of two years based on IoT and artificial intelligence. And that also changed the mindset of the financial institutions.
What I mentioned before, banks in general are more collaborative, do not see that FinTech comes as, as a real disrupter or as a threat, but as where they can aid for their internal innovation, right. And so that has definitely changed the mindset of the of the financial institutions and how that works in practice is that you have really good innovation teams within banks, who scan markets, who interact with fintechs, who test products – so I think that for FinTechs it has become also the much easier to test a product with the finance institutions than I’d say a few years back. Of course, a lot has to do with with regulations- so PSD2, the whole open banking as well, right so the whole banking development that also creates for fintechs the opportunity to work with finance institution is much easier than say a few years back.
And then if you look at the on the side of the FinTech companies as I mentioned before is that they upfront make decisions- will it be a direct to consumer model or a B2B2C business model we can come to the market with? What is our go to market approach? And from the beginning they hired and design their teams around that go to market approach.
Okay, so either based on the experience with portfolio companies or otherwise, what you’re seeing in the market, what does it look like building a successful B2B or B2B2C FinTech company these days?
Hans de Back
So, yeah, so what does it take? So I think first of all, it’s a deep understanding of if your go to market is B2B2C, it’s a deep, deep understanding of let’s call it the innovation agenda of financing institutions, but you really have to understand- okay, what are the problems, what are the challenges that they’re faced with and can I provide this solution, right?
So product market fit, I think that’s what is really important and you cannot be optimistic about it- you really need to figure out upfront, what is the product that the financial institution is looking for, what is the product market fit there.
Then what I mentioned before, it’s also understanding how finance institutions operate and how the decision making process in a certain financial institution works. So if you want to sell products- who is the person you want to talk to, but how does the decision making process really works from there- it’s about what I said, having the right team in place. So if you have the DNA setting of the team, we look at also the persons who have worked for financial institutions in the past, or have worked for big corporates and have sold enterprise software to financial institutions, for example, so, sales guys, I think that’s really important to have those on board.
Thirdly it’s about the product roadmap that makes sure that you are not only sufficient with understanding Okay, how’s the product roadmap of the bank looking like and can I develop or adapt my product to it – if you can match it with and sync that with the with the product roadmap of the financial institutions.
So I think those are important elements. Because at the end, it’s about quickly figuring out the Product Market Fit, Be very efficient in your sales process. And then when you have the contract and maintain that relationship and build a sustainable relation with a financial institution and lead also to long term benefits that results in revenue, of course and increases your valuation.
And typically, what are you looking for when you invest at your stage- so I think that’s mostly series A or a bit earlier?
Hans de Back
Yeah. So we use about 20 different criteria before we invest. Yeah, of course, it’s a kind of top down method. So we in our LP base, and also outside of our LP base, we have a large network of financial institutions. So we understand their problems. We have a clear view about their innovation agenda, which was referred earlier, right. So when we invest, we understand the problem that the financial institutions are dealing with, and what we do, is we look for the solution. We will look for the FinTech company- best in class- who solves this problem, right? And so that’s what we’ll start with.
So it’s not the other way around and we look at companies that we didn’t start with, if we make an investment that we then started looking for clients. We already have the customer and we bring the customer more or less to the company we invested in? Right? So that’s step one.
Step two is of course, we look at the team- we look at which is you know, basic criteria of everybody, which is very important because it is early days, you do not have much data points yet, right? So the team is super important. Do they have the knowledge of the financial services industry? Do they have the context, have they done it before or a second time, how strong is the tech team, how strong is a sales team, etc, etc. So team for us is a huge criteria of course.
Secondly, we look at the product Market Fit. We look at how big is the problem- if the problem is small, even if you solve that issue, the growth potential of this business and scalability is limited. We look at also adoption rate of the product. So, how quickly can you know can a finance institution work with this product is more or less done and scalability. So, if the product is a success and then finance institution thinks Hey, this is indeed solving my problem, can we scale this up into the most international scale up, and is the company and the product ready for scale up, so you do not have a delay in that resepect. Of course we look at the exit market, we look at how much capital is required to grow this business but those are the more standard criteria that every VC is using.
So because this space – B2B or B2B2C – you can also look at it as a pure vertical SaaS type of model. Do you end up evaluating it as well from very SaaS type of metrics? And I guess the broader question is, should founders be let’s say, if they are a SaaS company selling into financial institutions- are they better placed in working with investors who are very SaaS experts or with investors like yours, where there’s more financial services expertise, understanding of the problems, customer base etc.
Hans de Back
Yes I think I definitely do not underestimate the complexity of SaaS models and also selling a specific product, but at the at the end, that’s the expertise which is available within almost every notable VC. And if you go to all the larger VCs in Europe or in South East Asia, these days, they have that specific expertise.
And I think it’s all about the network of financial institutions, right? So it took us about seven years to build th network. It’s about getting the trust of those financial networks, it’s working with them, it’s providing them partnerships, it is provided them acquisition times etc. So those are long standing relationships which took a lot of effort to build. And I think that’s the what I referred to before as the competitive advantage we bring to the table if we invest in the company. We have those relationships, we have more or less the partnership lined up where we can leverage the companies we invested, and in the end, you know, if you look to a company where we invested, you can help them with the product development with the hiring, with their operational agendas- but I think that’s where every VC can step in.
I think where you can be a huge differentiator is bring them new partnerships right and help them to build those partnerships with the financial institutions. It leads to a quicker test of the product market fit. It will give them of course, hopefully, more sustainable revenue because that’s what we see in B2BC- it’s difficult to get in, but if you’re in, those revenues are very sustainable because that solution will be integrated into the whole let’s say the back office of the finance institution and it is, in general very difficult to replace, right. so it results in a more or less long term relationship and therefore also revenue- so I would value let’s say the network of financial institutions and bringing those partnerships I felt is more than let’s say that specific SaaS expertise which is more or less available within every VC.
Got it. Anything in terms of metrics, you look at for, let’s say, what does it take for a company to raise series A in Europe right now in the B2B2C space?
Hans de Back
Yeah, so we use when we invest all the criteria I just mentioned- product market fit, adoption rate, scalability, etc, etc.
I mean more about the specific metrics.
Hans de Back
Indeed, we definitely look at the user economics or we look at, of course, the, the data points available whenever we come in is, is pretty limited. So what we normally do is we before we invest, we establish a relationship, and that can be a six months or 12 months let’s call it a trial period, where we work together with the FinTech companies who bring them to the financial institutions. So we try to collect as many data points as possible, to do a kind of validation of the product market fit, and which enables us to form a fair opinion about the product market fit, about adoption, about scalability.
And of course user economics in that respect is important. It’s about the retention rate- is the customer happy with this product? So there’s some definitely some KPIs, we look at. And important, is of course, what is the cost of a scale of the scalability of the product? Right. So how much capital is required to scale up this product. What I said before we try to get an understanding about that perspective, product roadmap- if you scale up, what is the effect on product development and how is the roadmap in that respect looking like, how much cash is required to execute that roadmap? So those let’s say we are definitely going to be asking for.
Ok. After that, usually would you see companies at series A already looking at international markets. I mean in this particular case, it would end up mostly being the US or Asia Pacific. But you see already at Series A companies expanding internationally?
Hans de Back
Yes if you look to – again, this is a difference between direct consumer and B2B2C. I think with B2B2C we see FinTech companies in general scaling up faster if there is product market fit, right. There is a we see quicker scale up than if you go directly to the market scaling up, as a direct to consumer company requires a lot of cash. Every market is different, you have regulation or the things that I mentioned- the regulation, the brand, the marketing channels have to be build etc, etc. So, a FinTech business is not an ecommerce business- ecommerce in general is much easier to scale right, and to scale out of your domestic market.
FinTech is totally different. So if it’s a B2B2C, we see that that scale out or scale up, is much more efficient and takes it on the back of the partnership. If you work with a finance institution, most banks are international, have an international distribution network, and an international reach, where you can benefit from.
So in the B2B sector, we see Series A businesses scaling out of the domestic market much faster than if it is direct to consumer. Although one of our selection criteria we are using is that the domestic market should be big enough to want to do a validation of the product, because it doesn’t make sense to scale – even if it’s a B2B2C – to scale out of the domestic market if you have not done a proper validation, right, and secondly, from let’s say a valuation perspective, as an investor, as a VC, that the company should be able to generate sufficient revenue and therefore, to create sufficient value, which gives us a proper return already in the domestic market they’re active in. So, as a VC we find a board that, that the FinTech company from a growth, and from a valuation perspective, is not too dependent on expansion, because there’s expansion risk, right. So that’s how we see it.
So last, but not the least, so you’ve been putting out some great reports. I think that was one end of last year or beginning of this year- The State of European FinTech – and then you were have the first if not or one of the earliest ones to put out the COVID assessment on FinTechs, so I would definitely love to get your insights specifically for this type of startups in the B2B2C space. I think you mentioned in passing that it would be something which grows in terms of share of venture capital flowing in, but how do you see the impact, and what should companies be thinking about?
Hans de Back
Yeah so landing platforms are in general both in Europe as well in in Southeast Asia in a difficult position, right. Sso we see across the board and here are some of the figures coming up. It’s for those companies also more difficult to get debt on board, so the lender side to fuel the platform with that is becoming more challenging. But in general, specifically in B2B2C what is post COVID the biggest problem, the biggest challenge is, of course, a slowdown in sales.
So what we have seen so far is that the the financial institutions were sitting on the fence looking at how things are developing. I don’t want to say that they canceled innovation, but let’s say signing up a deal with a new FinTech partnerships, that’s where we definitely saw a slowdown. So that was the immediate impact of COVID.
What we have seen and say, specifically, Europe and Europe is getting back on track. If you went to the Netherlands, if you go to Germany, if you go to the UK, and the Nordic area- yeah, people are more or less going online, so to speak. So we see also that our FinTech companies are realizing more traction online on their sales process. So that’s let’s say the short term.
What we think long term is that we call the digital only strategy of financial institutions. I think there will be fast forward because of COVID, and I think it depends a bit on the markets you look at. So in Southeast Asia, you know, the financial inclusion topic is, of course, a big thing. The whole banking situation is still a massive issue, about 60% of the population doesn’t have access to financial services. I think this whole COVID situation, push the banks even harder to innovate themselves to automate certain processes and digitalised product offering. So that’s what we definitely see in Southeast Asia.
And I think in Europe more or less the same- all the banks want to spend on simple AI and also IoT – I think you’re going to see some very interesting business models popping up and which provide FinTech companies great opportunities to sell to financial institutions. So I think the whole innovation and the digitalisation of the financial sector, and what we see is that they’re simply going to be fast forward because of this whole COVID situation. So for FinTech companies, a bit depending on the sector you are in, is a overall a good thing.
Great! Probably one of the last things I would like to understand- what’s the plan? Where is Finch capital headed and what do you see in the next six to 12 months?
Hans de Back
Yeah, so, we are currently in the process of raising our third fund, so we’re gonna raise a separate fund for Europe and a separate fund exclusively for Southeast Asia. Our investment strategy for both funds will be more or less the same, so we still set the focus on FinTech. It’s B2BC and it will be more in Southeast Asia. And however, if you look to the opportunities in Europe, we are also looking at more AI, DeepTech, IoT-driven solutions, so we definitely deviate from this FinTech-only focus, we definitely look at other technology tools where we can invest in in the areas I mentioned. However, we are going to look at those opportunities through the lens of a financial institutions, right, so let’s say, artificial intelligence- there are some products out there specifically around KYC which are relevant for finance institution. So yes, we will be raising our third fund.
Sounds great- all the best with the third fund, and thanks for taking the time Hans- it was a pleasure. Looking forward to share with you the interview and – hopefully soon – the Handbook as well.
Hans de Back
Cool. Thank you.