Unicorn recipe unveiled in Team8 report

A new report from Israel-based company builder and venture group Team8 shows it’s a good time to be a fintech startup, provided you do the groundwork. The report analyzes 270 fintech unicorns from 40 countries. It found the most popular verticals to produce fintech unicorns are payments, banking and lending, crypto and blockchain, and insurance.

According to CB Insights, 20% of unicorns are fintechs, just behind the 30% that are enterprise techs. Producing a fintech unicorn, on average, takes 5.9 years. Only 31% of American fintechs that raised their seed rounds between 2016 and 2021 later secured a Series A.

Unicorn timelines vary by fintech sector

Insurance fintechs saw the shortest path to unicorn status at 4.6 years, yet only 9.7% of unicorns occupy this space. Two of the quickest were Lemonade at two years and Next at three. Unlike payments, insurance is heavily B2C-focused; its companies need a deep understanding of consumer psychology.

The average banking and lending fintech took six years to become unicorns. For every SoFi, which took roughly four years, there is a Mambu that took longer.

Capital markets and wealth management fintechs faced a longer unicorn road – 7.6 years. Again, there’s a range, with Robinhood and Revolut taking three and four years, respectively, while eToro took a decade.

Unsurprisingly, crypto and blockchain unicorns only took an average of 5.2 years, buoyed by plenty of hype. Ripple hit the target in two years, and Fireblocks three.

Payments are popular, attracting 27.1% of unicorns. That’s the good news. The less good news is the unicorn path is longer at 6.7 years. Stripe took four and Wise approximately nine.

“Achieving unicorn status in the payments industry is not straightforward,” the report states. “It requires significant revenue streams from high transaction volumes, which take time to reach. Moreover, intense competition and shrinking profit margins further compound this challenge. Several companies in the payments industry have faced difficulties due to these obstacles, but those who succeed, thrive. 

“A notable example is Checkout.com, a UK-based fintech unicorn, which took 13 years to win its unicorn title and is now valued at over $11b. Despite the competition and challenges they face, new startups are aggressively tackling the payments space as they see an opportunity gap in the market to transform the industry digitally. And the data supports this.”

If your goal is to build a payments unicorn, increase your odds by focusing on B2B, which is the focus of 71% of payments unicorns. There are plenty of outdated models and processes to disrupt, as many are still check-based.

“We’re seeing in times of less stability and more troubling macroeconomics trends that investors wanted to focus on B2B, and there are good reasons for that,” Team8 partner Galia Beer-Gabel said. “If you look at the financial industry today, while a lot of fintechs, great fintechs, are out there and more to come for sure, many of the customers are (still) with the incumbents.”

Beer-Gabel said big banks’ assets under management have grown over the past few years. That’s a clear sign of room for disruption.

“I think there’s a great opportunity for fintechs today… in supporting the incumbents in their journey to leverage their great assets and result in a better user experience for US customers.”.

Overall, Pitchbook found that 70.1% of fintech venture capital went to B2B fintechs, up from 40.1% in 2019.

The effects of embedded finance and open banking

Embedded finance, open banking and finance, and the data economy lower barriers to entry. Embedded finance allows non-financial firms to easily integrate financial products and broaden their product offerings as they seek new revenue streams. Open banking, finance, and data foster personalization and enable companies to understand consumers better.

“These last two trends around embedded finance and open banking significantly contribute to the democratization of financial services, making it much simpler for companies to integrate financial solutions – without building them from scratch – and allowing incumbents to expand their offerings,” the report states. “It is now much faster, cheaper, and easier to build fintech products, and this is something entrepreneurs need to factor into when thinking about their next venture and constantly evolving competitive landscapes.”

How smart companies adapt to tighter funding times

Much of the data in the report comes from fintech’s salad days, where funding was comparatively easier to attract. It’s not like that anymore, with fintech investment cut in half from 2021 to 2022 and again from 2022 to 2023.

Galia Beer-Gabel sees many fintechs adjusting to tighter times.

However, companies are still being built, leaving Beer Gabel optimistic. Many of the “visitors”, both entrepreneurs and investors, have left, leaving the pros to build better bets. As the noise subsides, it reminds her of the immediate post-2008 period that spawned some iconic companies.

“We’re seeing very driven founders that are looking for the right problems and are being much more realistic about it,” Beer-Gabel said. “They are looking not only for big problems to solve but also ways to build a sustainable business.

“We’re back to the basics. Prove the concept, show that there’s a market for what you’re developing and demonstrate the appetite of customers to pay. I could not stress enough the importance of validation in the early days. Spend time as a founder talking to potential customers, really making sure you understand the pain points.”

Generative AI brings positives, negatives and challenges

Personal financial management is seeing a resurgence in interest. Beer-Gabel said many good companies have tried to improve financial wellness, but few have succeeded. Improved data access, including through open banking and Generative AI, brings more personalization and conversational possibilities. She envisions a time when consumers get Alexa to help with major purchases and retirement planning.

However, Gen AI also makes it easier to commit fraud, with many scammers focusing on the weakest link – individuals. Protecting individuals and businesses becomes a challenge. Beer-Gabel sees opportunities for fintechs to help financial institutions better protect themselves, whether due to future regulation or as a reputational safeguard.

Gen AI has VCs like Beer-Gabel changing how they look at startups. VCs often consider a company’s unique intellectual property. With innovation changing so rapidly, in part thanks to Gen AI, founders must also articulate their plans for protecting their secret sauce.

Fintech is coming full circle

Beer-Gabel sees the fintech industry coming full circle. Initially, success came from unbundling financial services and developing proficiency in a sliver. Those who became successful are now looking to add services to retain customers. That multi-product approach connects software and workflow automation with BNPL, payments and FX to create a comprehensive and compelling proposition.

“If you look at the future, I think what we’re going to see gradually more and more is the boundaries between the business models and the verticals, gradually dissolving,” Beer-Gabel said. “If you already have the customer, how can you best service them?”

Beer-Gabel also sees players taking different roles in the industry. She sees it in Banking-as-a-Service, which, while under scrutiny, has a sustainable business model.

“If you ask me whether or not BaaS is a sustainable business that will stay around, the answer, in my opinion, is absolutely yes. It will change. It will evolve. 

“There are a lot of problems right now, but the need for middlemen and players that can streamline, other players offering financial services remains very relevant.”

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  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.