Scaling the fintech opportunity – Y Combinator partner on investing in financial tech

The hype might be soaring around fintech right now, but investing in the financial services of tomorrow is nothing new for legendary Silicon Valley startup accelerator Y Combinator (YC). From PayTextMe in its first batch over a decade ago, to the likes of Stripe, LendUp and WePay, Y Combinator has invested in some of the world’s most promising financial tech companies. Speaking during an interview at Money 20/20 Europe as part of The Bancorp’s Finetics™ Studio, partner Aaron Harris talks about opportunities to improve financial services, picking winners and why he’s excited about insurance.  

YC has been investing in fintech for some time. Are there particular streams you are more interested in than others?

There isn’t one particular stream or set of streams that we’re looking for, we’re just looking to find a match between a set of founders and an idea that we believe can create a truly large, word-changing company. Also, perhaps non-intuitively, it’s about finding a small place to start. I usually don’t want to fund people who immediately go after the biggest markets because it seems like a cop-out. If you’re going for everything, that tends to mean you’re not solving a particular pain point.

When we look out at the fintech landscape, there is nearly infinite opportunity for very, very, very large companies to be built.

‘Fintech’ has only been mass media speak for two years. Has hype been a help or hindrance to startups?

It’s too early to tell if it was beneficial. On the good side, I think it caused more companies to get started and get funded. There were probably a number of situations where too much money went into some specific companies, and that will hurt them in the long run if their valuation was too high and they can’t meet expectations.

But I’d like to think that overall it was probably a positive, and if it does cool off a little bit, maybe some of the people who didn’t really want to be in it will leave. But you will still have a net increase in people trying things, and every time you have more experiments running, you have a greater chance of success.

What do you look for?

If someone is talking about something that is operationally very complicated or requires a very deep knowledge of a particular space, I want to see that knowledge on the team. It’s hard to re-invent insurance underwriting if you have no idea how insurance works because you’ll probably fail for reasons you don’t even understand.

Of course the counter argument to that is that great businesses are often started by people who are naïve about the industry they are entering – they don’t know what they can’t do. The other thing I really do want to see from founders is insight to the problem and market.

Are you looking to bring more European fintech startups to Silicon Valley?

We are definitely looking for fintech startups to bring to YC. There are a lot of incredible founders and companies in Europe getting started. Because of the ways financial services companies are regulated, it’s going to be a long, long time before US companies can enter European markets, and vice versa. If you can find really good companies here, there is a big market in the European Union to build great companies and we want to work with as many of them as we can.

What do you make of banks working with startups?

I think it is very tricky for startups to work with banks. It can be incredibly lucrative but banks fundamentally are not set up to take the risks required to work with startups. For a startup to get that contract in the first place, they need to be offering something that makes a material impact on the bottom line of that bank. This is something where The Bancorp is actually doing an awesome job. They take intelligent risks about startups and are willing to work with them. Probably that’s because they are more nimble than some of their larger competitors. That is the kind of thing that is required.

Why is ‘insurtech’ taking off suddenly?

There is a huge amount of money and from the outside, what seems like good margins to exploit, and a very old system that has not really innovated in any way other than around user acquisition tactics. But from a user perspective, in terms of claims and so on, nothing has really changed – there is still a lot of pain and complexity.

We had two insurance companies in our latest batch, one doing crop insurance in the developing world, which sounds totally insane but also totally brilliant. Talk about impact – 500 million subsistence farmers in the developing world need protection.

You’re a founder yourself – what is some of the most useful advice you’ve been given?

I think it is really important to figure out what your users actually want and whether that is defensible once you start to build it.

Read more insights from some of the sharpest minds in payments and financial technologies on The Bancorp’s Finetics™ blog.

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