How to Evaluate a Fintech Start-Up Company

The demand for innovative financial solutions is rapidly evolving. Credit unions looking to stay competitive in the market will need to adopt a culture of innovation. However, building or buying capabilities is an expensive proposition. Partnering with fintech startups can open the door to best-in-class products and services that meet the growing expectations of members. Fintechs can bring needed capabilities that fall outside of a credit union’s core expertise. A partnership allows credit unions to bring solutions to market significantly faster than building internally while managing limited internal resources for core capabilities. The following are high-level considerations to be used when evaluating fintech start-up companies as potential partners: 

1. Determine your credit union’s risk appetite

The word “start-up” covers a wide range of companies. Early-stage startups, for instance, are likely testing rapidly in search of product-market fit for their solutions. For these companies, there is a high likelihood that the business will pivot its product significantly, switch its go-to-market approach away from a partnership model, or potentially run out of capital. As start-up companies mature, these risks decrease. 

Credit unions must have a well-defined concept of the level of risk they are willing to assume with a partner that’s balanced against the benefits the partnership will bring to members and any opportunity cost of waiting. As a preliminary guide, the stage of the start-up can roughly indicate its riskiness (seed stage being the highest). In the diligence process, it is important for a credit union to drill deeper into the company. 

2. Complete due diligence 

Credit union due diligence for a fintech startup should not look the same as traditional vendor due diligence. There are unique characteristics and considerations in evaluating start-up companies. The following is a non-comprehensive list of key items to focus on in diligence:

• Understand the motivations of the management team. The motivations of startup founders can vary. Ensuring the management team you are partnering with is aligned with your credit union’s goals and the desired outcome for your members is paramount to developing a long-term partnership.
• Identify the company’s growth prospects and underlying assumptions. Regardless of the scope of your partnership, it is important that the company has plans outside of your credit union. This will ensure the financial health of the organization, which will better enable it to support the partnership. Understanding the validity of the company’s growth plan will help ensure the management team members have thought intelligently about the various growth scenarios they will be pursuing.
• Understand current relationships with partners and investors. Very few diligence items more clearly indicate what a partnership will look like than the start-up’s current partnerships, even if different in scope. Ask for introductions to the company’s partners and investors and gather feedback on the company’s ability to work with partners, meet milestones and drive toward shared objectives.
• Evaluate the company’s cash burn (its monthly overhead expenses less actual revenues). A high cash burn is not inherently bad; however, it is important to understand because this metric can indicate when the start-up will need to raise capital and how often. Especially early on in a company’s life cycle, raising capital can often be consuming and distract it from current operations.
• Determine the company’s exit strategy. If your credit union is viewing a partnership as a long-term strategy, you will also need to understand the implications of the partner exiting the arrangement. Establish open lines of communication early in the partnership to talk about the company’s goals and ideal timeline.

3. Partnership structures, integration and ongoing governance

Several forms of partnership might fit, depending on the solution that will be brought to market (e.g. white label, application programming interface or referral). The partnership structure will dictate what level of integration will be required for both parties. Collaborating through a detailed timeline and resource allocation will be critical to the development of the integration plan. More involved integrations will require deeper diligence of the start-up’s ability to commit resources and meet milestone deadlines. 

Once integrated and live, the success of the partnership will be dependent on open lines of communication regarding expectations, milestones and key performance indicators. These should be drafted, agreed upon well in advance and maintained by both parties. However, as the partnership evolves, it will be important to re-assess progress periodically to maintain alignment for all constituents. 

Partnering with fintech startups can provide a differentiated channel to introduce innovative solutions to credit union members. Understanding the framework to assess the health and strategic alignment of a fintech partner early on will become a critical step in navigating the long-term relationship and meeting the growing expectations of members.cues icon 

Sam Das is a principal at CMFG Ventures, the venture capital entity within CUES Supplier member CUNA Mutual Group, Madison, Wisconsin, that invests in strategic fintech and insurtech companies that support CUNA Mutual Group and the credit union industry. The company’s investment strategy focuses on financial technology, data analytics, financial education and protection, and digital channels to address gaps and opportunities within the insurance, credit union and financial services industries. CUNA Mutual Group is a financially strong insurance and financial services company enabling people to make financial decisions that work for them. The company was built on the principle of “people helping people” and the belief that a brighter financial future should be accessible to everyone.