The leading FinTechs of today are vertically integrated software companies who are disrupting incumbents with new technologies, business models, and distribution networks. We list the qualities venture capital firms look for in FinTechs today, and how they are changing the dynamics of the financial services space, based on a fireside chat between Alex Rampell of Andreessen Horowitz and a distinguished technology investor

Expanding the opportunity set: new technologies, business models and distribution channels

According to research by VC Andreessen Horowitz – often represented by their numeronym a16z – approximately 4,000 start-ups are founded in the technology space in the US every year. While the major VCs may connect with more than half of these start-ups, they will ultimately only invest in a handful of these firms. Thereafter, only fewer than two percent of start-ups receive funding.

What then, are the qualities that VCs look for?

The panel highlighted three criteria VCs look for when they pipeline and narrow in on investment opportunities:

1. Access to a broad distribution network: Including access to innovative distribution channels and partnerships in order to cost-effectively acquire new customers. Establishing this before the incumbents innovate is crucial to the success of early-stage companies.
2. Talented teams who are willing to run through walls: Especially ones with deep understanding of the sector and regulatory environment. While this can often be hard to assess, it helps to spotlight those who can navigate repeated failures and adapt to constant change.
3. A large market opportunity: The right solution must be coupled with a sizeable market opportunity

The battle between incumbents and disruptors

One panelist pointed out that a lot of what Silicon Valley is about and does well is the spirit to challenge the orthodoxy. Entrepreneurs often have to take an existing business, identify how it has worked in a way endorsed by experts, and yet, still go ahead to say, “I’m going to start from first principles and see if I can do a better job.”

In some cases, the experts are right. In many instances, these entrepreneurs fail. But it is a fantastic spirit that is unique to the Valley – a certain style of innovation and fearlessness to go and change something that has been around for a long time, and in some cases for millennia.

A natural follow-up: “What is the key battle between these traditional heavyweights and rising upstarts?”

Given the focus on large market opportunities and distribution networks, companies today are expanding their opportunity sets and building vertically integrated software companies to increase customer value. For example, within the financial services, FinTechs no longer aspire to sell software to insurance companies, but instead seek to access the large market by deploying their own risk capital to become software-enabled insurance firms.

As one of the panelists succinctly stated, the battle between every start-up and incumbent is whether the start-ups get the distribution before the incumbent gets the innovation.