The Dos & Don'ts Of Fintech VCgettyAs the founder of a global VC firm, a member of Kauffman Fellows, the global network of venture capitalists, and an investor in a number of startups around the world, Im always astounded that in every deal, different VCs focus on different things. Ive been fortunate to invest in several fintech unicorns from the early stage. Here are ten counterintuitive (and hopefully occasionally controversial) strategies for successful fintech investing.1. The Moat and the TAM Equation For Fintech InvestingConventional wisdom is that moats are key.But financial services is one of the largest markets in the US economy, roughly 20% of GDP. Taking a consumer and small business (SMB) lens for now: most products are not that differentiated over time. Among the largest fintech success stories, many have won because of: a superior product (e.g. simple API with Stripe), better value proposition (free bank account at Chime, a former portfolio company) or unique go to market (e.g. Guideline partnering with Gusto). This can often be complemented by serving an underserved but massive customer segment (e.g. Nubank).My view is that while moat matters and can be defensible over time (particularly for enterprise startups), the Total Addressable Markets (TAMs) in financial services are so large that product differentiation and sales velocity matter even more. Robinhood is a massive business, but with a service that many others offer today. Ramp was not first to market in the spend management category but moved very quickly in launching products.Yes, incumbents (and other startups) will inevitably copy you. But only if youre too slow to grow and iterate. And as we will see in the unit economics section, fintech can generate moats from scale.MORE FOR YOU2. An Engaged Attitude With RegulatorsFintech is Fin first. I personally am wary of any pitch that does not work with a spirit of openness and transparency with the regulators (perhaps it is one reason I have not been a crypto investor over the last decade!) I am of course biased as a former regulator myself.I look for entrepreneurs that do more than comply with the letter of the law, but respect it, and the reason customer protection exists - even if they dont agree with it.The best founders Ive worked with have engaged with regulators with an attitude of openness and engagement.3. Younger Is Not Necessarily Better For Fintech InvestingAs I discussed in Out-Innovate, the stereotype of the hoodie-wearing, 20-something fintech founder is giving way to seasoned entrepreneurs with years of industry experience. Certainly, there are examples of generational founders solving companies young. Stripe for instance is a strong example in fintech (and Meta in social media).However, many successful fintech founders bring domain expertise honed over decades. This is of course, tied to the attitude point above.In fintech, I often overemphasize understanding why a particular founder is uniquely qualified to tackle the particular issue. As a consequence, this biases towards more experienced founders with deep domain expertise.4. Geography Can Be Turned Into An AdvantageNew research by Kauffman Fellows demonstrates the rise of Fund Returners, increasingly coming from outside Silicon Valley and all over the world.Global geographies have a few structural advantages for fintechs. The cost of building a startup is often lower, so the same raise goes meaningfully farther (thus derisking the business).Global startups often have less competition, making success larger. Of course, there are certain drawbacks to building outside Silicon Valley: market size may be smaller, and there is less downstream access to venture capital.Perhaps it is no surprise that the largest neobank in the world is in Brazil (Nubank), the largest input & embedded fintech marketplace is in India (Ofbusiness), and arguably the largest BNPL company globally is in Sweden (Klarna).5. Unit Economics RuleThe shiny allure of rapid growth means little if its built on unsustainable unit economics. Readers of this column will note my preference for camels.When I meet founders, I try to understand what their unit economics are today. Do they have a handle on them? How strong are they? What is the timing of cash flows (see next point)?Clearly, things wont always be perfect, particularly in the early days. Therefore, it is important to understand what pieces the company has a handle on and what still needs to be proven out. How much have the founders researched this? How informed is it with real world experience?Fintech can be a scale game. For example, payment companies and neobanks can consistently get much better deals from partners simply by being bigger. If unit economics are passable in the early stage, there is actually a consistent path to improve. This is different than many other categories where unit economics necessarily degrade over time. However, unit economincs at the beginning are necessarily the foundation.6. Cash Cycles MatterA good fintech will have strong unit economics. A great one will also have a negative cash cycle.To make a simple example, if a lending startup receives an 80% advance rate vs 100% (the percentage of the loan that can be financed), this can be the difference between having to fundraise or notor between life or death. Pardoxically, growth can actually hurt the business. If a lending company sees explosive volume and deploys $100m, in the first scenario, they will need to raise $20m just to be in business (on top of whatever it costs them to set up the operation). In the latter, it is $0 in incremental equity. In short, in the former scenario, as the company grows it will require more cash. In the latter, it will at least be neutral.The same dynamic plays out elsewhere in fintech. An insuretech, may need to fund a portion of their book (especially if a full stack carrier) and a payment company or neobank could need reserve balances.In some cases, a fintech can structure cash cycle deals where they get paid upfront, and only need to pay their counterparties in a few days. With enough growth, this can help fund the business. Nubank for instance has benefited from a negative cash cycle the company typically gets cash upfront from customers and pays its merchants a little later. This can help accelerate growth.Optimizing the cash cycle of a company can make a good fintech an excellent one.7. A Fintech Should Have A Financial Model. Yes, Even At Seed StageAn early-stage financial model is by nature an exercise in futility. Startups, afterall are not companies. They are projects in search of a business model. They do not yet know that business model with certainty at preseed and only start to define it around Series A (and sometimes well beyond). Unit economics, depth of sales channels, etc are at best educated guesses in the early days.As a result, many founders and VCs argue that a financial model is not required by companies at this stage.For fintech I disagree: most startups live and die some form of financial intermediation. A lending startup makes money by first giving it away, losing a portion, and paying others for the use of their capital. Insurance companies get paid premiums, pay out risks later, and manage policies in between.While the ultimate inputs will certainly not be perfect, I evaluate a founders ability to forecast, the thoughtfulness of their approach, and the scalability of the model. Do they have a point of view on key metrics like cost of good sold, gross margin, or cash burn? How nuanced is their perspective based on different scenarios.Every VC tries to understand how strong a founders grasp is on the domain and model. The financial model is a key way to showcase this.8. VCs should not make their own modelsGiven that early-stage founders dont have certainty on the business model or the assumptions that underpin them, the model exercise by nature is imperfect.Compounding imperfection by recreating a new venture capital model is simply compounding errors (this changes at the later stage, of course, when there is more certainty on the model assumptions, and thus more value in creating scenarios). After all, a venture capitalist is necessarily less close to the business, the assumptions, and the operations. How could they do better?As a policy, we do not build our own models for seed stage companies. We leverage the founders model, and then build sensitivities on top of it. We do spend a lot of time understanding the impact of unit economics assumptions, dilution, and exit multiples on the investment return.9. Business Model Depth Not BuzzwordsThe last few years of fintech have been awash by buzzword after buzzword: Crypto. NFT. And now AI.No tech trend will be a panacea. Early enthusiasm is often overblown.Financial services are massive markets. Despite the buzz of fintech, they remain dominated by incumbents. The next big trend may be hot, but this doesnt mean it will conquer fintech.A founder doesnt need to pitch reinventing everything. Partnering or working with incumbents (with data and distribution) is powerful.To be right in venture requires being contrarian (and being right). As a result, a VC should care less about whats hot today, and more about what has a chance to make enduring change within the existing context.10. The customerA focus on a customer is required for every VC. In some ways it is even more important in fintech.If youre wondering whether the regulator will block something, a heuristic I find valuable is asking oneself: is this actually good for the customer? And is the customer being treated like an adult, with full transparency, openness, and dignity?While this isnt surefire, this has generally worked well. Companies that do something fundamentally good for customersprovide a service at a lower cost, or with greater transparencyshould exist.Financial services are quite sticky. If youre wondering if a customer will make the effort to switch, ask yourself if the product is really that much better. Ask yourself if you, your wife, or your mom would use it. You must be able to give a resounding yes to this answer.The customers voice is paramount for us.ConclusionFintech is not like other industries. A different VC playbook matters. Here were a few in mine. What am I missing?