Lead with risk to sell into financial services
Want to acquire a financial services company as a customer? Look for the places where they are struggling to manage institutional risk. As an enterprise fintech investor with experience working inside large finserv companies, I encourage founders I meet to consider go-to-market strategies emphasizing a startup’s ability to de-risk situations these organizations face.
The industry is a fruitful playground when it comes to risk: every flavor is present, from reputational and regulatory to operational and financial, such as credit, market, liquidity and model risk. There is a clear understanding that managing those risks effectively is not optional, even if it is highly burdensome to the business. This means new solutions that lighten this burden or help get ahead of any developing risks are very likely to resonate.
In other words, financial institutions move slowly when startups try to sell them better ways of doing things. However, they respond with greater urgency when there’s a consequence to not adopting technology.
The proliferation of data is top of mind
Business losses, penalty fees, increased regulatory oversight and other risks are heightened by ever-growing volumes of data; and tools that offer granular, actionable insight derived from it allow financial firms to more precisely assess and isolate unwanted exposures. Technology, especially artificial intelligence, is the only way to uncover these new frontiers of risk as well as respond to them in real time.
The financial services world is notorious for risk imbalances that lead to burst market bubbles and new waves of regulation. This is often a result of mispricing of financial risk in assets sold or held by the firm. Calamity tends to strike when their value rapidly depreciates after the market environment changes or artificially propped- up demand fades. Since the scope of the problem becomes apparent only when it is too late, regulation is always reactive and backward-looking. Armed with better data and tech solutions to monitor emerging risks, financial institutions can get ahead of future bubbles before they burst.
It is important to note that actionable risk management insights aren’t just beneficial for financial firms internally. They can also be a powerful differentiator with their own clients. In my experience, sharing risk intelligence and offering tailored solutions informed by it can help financial services companies earn market share to a greater degree than other, more typical, ways of acquiring B2B customers.
Great products generate exclusive risk data
From the startup’s perspective, risk isn’t just a successful selling strategy into incumbents, but also a product consideration. It is commonly understood that the most successful startups create “moats” that make it difficult for other companies to succeed in the same category.
A solution that identifies threats is one thing; a product that leverages unique data into a tailored risk mitigation product is another. Some of the most successful startups I’m seeing do the latter, which allows them or their partner financial firms to, in turn, roll out next-generation, data-driven financial offerings that are exclusively available to their clients.
Pioneering finserv and fintech companies lean into proprietary data and analytics to more accurately price products such as credit and insurance. Enabled by relevant data, precise risk protection better addresses clients’ needs and narrows the scope of uncertainty, and can thus be made available to clients at better prices.
We’re seeing this in the parametric insurance category, for instance, where specific exposures and events can be isolated instead of bundled into larger indemnity policies. These contracts also come with a lower administrative burden as technology is central to their implementation and administration. A good example of this in my portfolio is Otonomi which offers parametric cargo delay insurance for time-critical freight.
Better quality data and best-in-class software together allow for specificity in risk assessment which means a multitude of new non-traditional financial products that serve precise client needs can be offered. If better quality data is also proprietary data, then the financial institution or fintech company that builds a product offering on top of their software is looking at an incredible competitive advantage. To bring this to life with another portfolio example, Steady’s platform offers property managers in the single-family rental market a unique Owner Benefit Package that combines software, Rent Default Insurance benefits and Rent Advance product access.
In my dealflow, I’m seeing more early stage companies that understand the value of products built on proprietary data captured by their software, and I hope to see them in even greater numbers in 2024. Leading with risk management when selling to financial institutions captures their attention because of the immediacy of the need. While this is an impactful component of a go-to-market strategy, it can be even more powerful if incorporated into a product strategy. And if you can build a company that generates exclusive data to identify and reduce institutional risk, you have a real long-term advantage landing financial services companies as clients.
