Learning to Fly Through Fintech Valuations by Understanding The “Fin” and “Tech” Models

In the ever-evolving landscape of finance and technology, the term 'fintech' has emerged as a pivotal intersection. Entrepreneurs are challenging established financial services with innovative solutions, emphasizing the importance of understanding both the "fin" and “tech" components for accurate valuations.

The "fin" in fintech denotes companies focused on financial services. These entities act as system integrators, harnessing the latest technologies from other organizations to lower customer acquisition costs (CAC) and increase customer lifetime value (LTV).

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Within the "fin" space, offerings encompass credit cards, improved loans, and subprime mortgages. While this reduced barrier to entry fosters innovation, it can lead to a crowded landscape, resulting in intense competition and potentially lower long-term valuations.

Notable startups employing the "fin" model include insurtech companies and lenders leveraging technology to enhance their offerings. Additionally, Buy Now, Pay Later (BNPL) firms like Klarna and AfterPay thrive on network effects for sustained growth. Neobanks such as Varo and Chime employ a "land grab" strategy to attract consumers overlooked by traditional banks.

Despite notable achievements, "fin" firms often face challenges in matching the gross margins of "tech" fintech companies like Bloomberg Terminals. Their growth trajectory tends to be linear, in contrast to the exponential development seen in successful tech corporations.

Tech companies, on the other hand, focus on developing new technologies to address existing problems, aiming to enhance client experiences, rectify legacy issues, and boost LTV. Innovations in technology enable these organizations to outperform competitors and justify substantial investments in growth, leading to an exponential-growth company model.

Examples of fintech "tech" enterprises include API-based services like Marqeta and Plaid, which empower firms to issue and manage their payment cards or connect financial accounts. Terminals like Bloomberg provide traders with real-time data analytics and financial news for informed decision-making. Additionally, decentralized finance (DeFi) startups are revolutionizing investment strategies.

These companies sell operating systems to various financial sectors, solidifying their role as crucial partners in business operations. This symbiotic relationship creates virtuous cycles and network effects, offering long-term value and significant margins.

Regardless of the "fin" or "tech" model, the ultimate valuation goal is to maintain a high franchise value. The methods employed to achieve this value distinguish these models.

While "tech" companies may initially burn more cash, they become cash-rich due to their high LTV and unique technology. In contrast, "fin" enterprises grapple with lower LTV and heightened client attrition, necessitating continual client acquisition and growth through low CAC.

In valuing fintech, it is crucial to differentiate between "fin" and "tech" models, understanding that successful companies in each category may expect linear and exponential growth, respectively.

Whether you're an investor or evaluating a fintech venture, discerning the true business model is paramount for accurate valuation. Always seek guidance from a licensed specialist for specific financial advice.