Driving Innovation in Fintech: How VCs identify the next big thing in financial technology
By Sagar Agarvwal, Co-founder and Managing Partner, Beams Fintech Fund
The fintech industry has become a magnet for innovation, blending technology with finance to revolutionise how we interact with money. From digital payment platforms to blockchain-powered solutions, fintech is not only transforming traditional banking but also enabling financial inclusion on a global scale. Venture capitalists (VCs) are the ones to watch in this evolution, as they identify and fund startups that promise to change the future. But how do VCs spot the next big thing in a space that evolves as rapidly as fintech?
The most impactful fintech solutions are born out of necessity. VCs actively seek out startups that address specific pain points or inefficiencies in the financial ecosystem. The emergence of digital wallets like Paytm or PhonePe answered the cumbersome process of cash transactions. Similarly, cross-border payment platforms like InstaReM gained popularity by simplifying international transfers with reduced fees.
Understanding the pain points of the consumer, whether it is the unbanked population in the emerging markets or businesses demanding fast payment processing, VCs can invest in solutions having a high market relevance and scalability.
Evaluation of the Founding Team
In fintech, the skills of the founding team can be as important as the product. VCs tend to favor those who have deep domain knowledge and a history of success. A great team that understands the complexities of finance and the promise of technology is a winner.
Staying ahead of trends is the only way to find breakthroughs. In fintech, several trends are molding the landscape:
- Embedded Finance: This is the integration of financial services into non-financial platforms, such as ride-hailing apps that offer payment wallets. Startups using this trend are highly in demand by VCs for their ability to expand financial access seamlessly.
- Green Finance: As awareness about climate change grows, VCs are investing in fintechs that focus on sustainability, such as carbon-offset investment platforms or renewable energy financing.
- DeFi (Decentralised Finance): DeFi startups, which use blockchain to eliminate intermediaries in financial transactions, are redefining the very nature of financial systems. VCs are interested in platforms like WazirX.
- AI-Based Personalisation: Artificial intelligence powers personal financial services-from wealth management robo-advisors to advanced credit-scoring models for lending.
Knowledge of these trends can then help VCs pick emerging domains where startups will more likely grow.
Technological Competitive Advantage
Fintech innovation often relies on technology. VCs are attracted to startups that have a strong technological base, be it through blockchain, AI, machine learning, or big data analytics. Those startups using these tools to deliver unique and scalable solutions stand out. For instance, Zerodha and Groww have leveraged AI to democratise wealth management, making sophisticated investment tools accessible to retail investors. Similarly, blockchain platforms like Instadapp have transformed cross-border payments by reducing transaction times and fees.
Fintech operates in one of the most regulated environments. VCs assess just how good startups are in dealing with compliance. These involve observing KYC regulations, AML policies, and other data protection measures.
Startups like RazorPay, M2P, etc. which connect financial accounts to apps, have succeeded because they prioritise compliance while creating value for both consumers and institutions. VCs tend to favor startups that proactively integrate compliance into their product design, minimising risks with regulatory scrutiny.
For VCs, the ability to scale and monetise a solution is important. Fintech startups must be able to show how they can take their solutions across geographies, industries, or customer segments. Take PayPal for instance. Originally focused on e-commerce payments, later it diversified into P2P transactions, merchant services, and even cryptocurrency. That’s precisely why VCs invest in such companies – scalability and adaptability.
Monetisation strategies are also important. VCs want to see a clear revenue model. It can be in the form of subscription-based pricing, transaction fees, or value-added services.
Building Trust Through Security
In an industry that depends on sensitive financial data, security is paramount. Fintech startups need to focus more on cybersecurity, data encryption, and fraud prevention. VCs assess how such challenges are addressed by these startups because any security failure can cause reputational as well as financial damage.
Driving innovation in fintech requires a mix of foresight, expertise, and strategic investment. For VCs, it means identifying startups that solve real problems, leverage cutting-edge technologies, and have the ability to scale sustainably.
As fintech continues to evolve, VCs will play a pivotal role in determining the future of the industry, powering innovations that reshape how the world interacts with money. Always keeping their eyes on the horizon and committed to fueling innovation, venture capitalists keep fintech at the center of the global economy.
