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Fundraising for fintech infra is different
Fintech infra and embedded fintech are so unique that much of the generalist fundraising advice out there doesn't apply to them. Here's what I've learned from many pitches for infra opportunities.
Fintech infrastructure is the area I’m most excited to invest in. This spans everything from embedded fintech (payments, banking, lending, insurance, etc., all as-a-service) to pure infrastructure solving “undifferentiated heavy lifting” (risk tooling, payments orchestration, financial and compliance ops, specialized billing, etc.).
So I’ve seen a lot of Pre-Seed, Seed, and Series A fintech infra pitches recently. And I’ve realized that there’s a lot of great generalist fundraising content out there, but much of it doesn’t apply well or at all to fintech infra.
Fintech infra is a special beast
Fintech infra is a hybrid of enterprise-y B2B products and equally complex, mission-critical developer infrastructure. On top of that, it’s sold into the regulated and risk-bearing world of financial services.
It often starts with a complex sale followed by a painstaking implementation and roll out. Especially in embedded fintech, many products are B2B2X, so even once the infra is implemented, the platform must drive adoption with its underlying customers.
Unique in the B2B category, fintech infra providers often share risk and economics with their customers. See “The best fintechs turn risk into leverage”. This is even clearer in embedded providers, but it’s also true for pure infra companies, which are often bulwarks against financial, fraud, or regulatory risk for their customers.
How the best fintech infra founders fundraise
(1) Quality trumps quantity in customers and revenue. There’s a lot of content saying you need $X revenue to raise a Seed or $Y for a Series A. These are helpful guidelines, but I’ve found quality of revenue and customers matters much more than absolute revenue. I’ve seen companies raise successful seeds or even Series A with single-digit numbers of customers. What matters most is a clearly validated ideal customer profile (ICP) and a tight go-to-market process. Even if they had lower revenue, there was a clear story and early data points to prove these customers would stick around and expand usage. This is more powerful than a larger number of customers and/or revenue from questionable ICPs and shallow usage.
(2) Don’t be afraid to fire customers (and talk about it). There’s a big opportunity cost to every sale and implementation as an early stage infra provider—so it’s critical to serve the right customers. Being stuck with an imperfect customer, even if they’re generating revenue now, will hinder your learning and growth. Be honest with yourself if a customer isn’t a good fit. Don’t be afraid to “fire” them, and when pitching, use that to explain how you’ve honed in on your ICP.
(3) Show that you can catalyze, not just sell. Fintech infra often solves problems that are important but not urgent. It’s easy to push infra projects to the next quarter and the next one and… There’s only so much demand gen and brute force outbound you can do until you’re simply waiting for customers to have buying intent. The best infra companies have discovered ways to shorten the sales process and make their solution a near term priority for customers. This is specific to each market and company, but some examples I’ve seen are changing the shape of a product to make adoption easier or unique bundling and co-selling with existing platforms. If you’ve discovered such a strategy, or even the inklings of one, it’s a significant edge, so talk it up!
(4) Don’t be afraid of professional services. Professional services get a bad rap. They’re lower margin and less scalable than software revenue, and can signal unaddressed product gaps. However, there’s a big difference between using them strategically and as a product crutch. A common mistake is to downplay this work, especially if it’s unpaid. Another mistake is to make sweeping statements that unpaid or even paid professional services entirely will go to zero over time, because founders think that’s what investors want to hear.
Instead, be upfront about the time and resources spent in professional services-type work. Show you understand the economics of it and have a realistic plan to manage those over time. Don’t paint an unrealistic picture of future product-led-growth, but have a plan to use professional services correctly to close deals and learn faster. Showing you can thread that needle will powerfully demonstrate the strategic thinking needed to win in fintech infra.
(5) Are you a creator or a converter? It’s helpful to think of infra companies as either creators (enabling a novel behavior or an existing behavior in novel places, e.g., banking-as-a-service providers enabling neobanks and vertical SaaS) or converters (replacing an incumbent solution, whether that’s an existing vendor, internal tooling, or headcount). Companies in these different categories should frame their TAM and strategies differently.
Creators must explain what’s changing, or better yet what change they’re both riding and driving, that allows them to create and then capture an emerging market. Explain how the world will look as you create the market, both qualitatively through your early customers and extrapolating that quantitatively into an attractive future TAM. Converters on the other hand are in a relatively more zero-sum world, where the TAM is clearer but crowded with incumbent solutions. The pitch should focus on competitive dynamics, your relative merits, and why the market needs another player in an already busy space.
Creators are generally more attractive because they can grow with and help grow their underlying markets, but converters can still build big businesses as well. The key thing is to recognize which market you’re in and frame yourself appropriately.
(6) Recognize and explain different levels of unit economics. Embedded fintechs have particularly complex business models, because they share economics and risk with their customers. Infra providers have one set of unit economics with their platforms, who have another set of unit economics between them and their end customers.
Think of a lender that’s embedded in a marketplace to offer credit to sellers. Even if the lender<>marketplace economics are attractive, the overall economics will suffer if the borrower’s economics are unattractive. There’s more to this than economics (see “Embedded fintech’s iron triangle”), but you should show that you’re aware of, have control over, and are balancing the risk and economics between your customers.
(7) Talk to fintech-focused investors. This one’s self-serving as I’m a fintech-focused investor—but everything above becomes much easier when you’re talking to an investor who’s actually built and actively invests in fintech generally and infra specifically. Business models and the playbooks for building early-stage companies are moving so quickly that it can be difficult for a generalist investor to grok a space like fintech infra. This is especially true at Series A, where the company is likely at an inflection point but may not resemble a “typical” Series A profile in significant and subtle ways. Explaining your strategy and results is easiest if the investor has some pre-existing context.
Every company and fundraise is different, but fintech infra is even more different. I hope this helps fintech founders avoid the otherwise well-meaning but off-base general fundraising advice and raise successful rounds.
Fintech infra and embedded fintech are the foundation of the next decade of generational companies in fintech. Successful fundraising is just one part of that journey, and I hope this makes things a little easier.
If you’re building fintech infra or embedded fintech, I’d love to hear from you: mb @ matrix.vc