This Idea is Bananas

What I wish 1st time founders would know, after my 3x founding journey

Last week, I spilled some beans about building fintech startups, during a fun podcast episode with Shawn Budde.

Between Shawn and I, we’ve founded four (4) startups that raised $500mm+ so far. The full episode (link) is packed with firsthand founder stories, and you should listen end-to-end. Below I’m highlighting a few top insights.

What Building the Future of Financing Means

Shawn Budde

We've been doing credit card and lending for a long time. However, Gestalt, the SaaS business, that isn't a lending business, right? It supports, lending businesses. So can you talk a little bit about how it is that we chose to go down that path and to start a business that wasn't really in our sweet spot, so to speak?

Chloe Zhu

I would say it's still in our sweet spot. So at Ensemblex’s venture studio, I like to say that we focus on the future of financing. And at first blush, it sounds like, yes, another credit card company or another personal loan company. But no, if you think about it, together across our team, we have over 150 years of experience working in this $3 trillion industry.

And throughout our collective careers, we've worked at so many different places: big banks, small fintechs, non-bank lenders, credit funds, etc.. So we can identify a lot of patterns, a lot of unsolved problems that everyone faces, no matter how big or how small you are. So that's why I'm really excited to be building in the future of financing, because it's not just about having another credit card company, although I still think there are a lot of opportunities there.

But also it's about creating common tools that really solve a common pain point for all of our pals in the lending industry. So Gestalt falls into that category.

How I Approach Building the Future of Financing

There are three ways I think about the future of financing. And under those three areas, I'm constantly testing and trying different ideas. That is how financing is distributed, decisioned, and delivered.

Again financing is everywhere. It's not just credit cards, right? Even if you're a SaaS company, you may need to borrow money to invest in your Google Ads for the next month. Or if you run a daycare and then you tell parents, you don't have to pay all the tuition upfront, you can pay it over a year. You're essentially financing your customers, your parents. So financing is everywhere. That's why it's a big industry and there are so many opportunities.

So how financing is distributed. That's already a very interesting area. So take the daycare example. That's usually not something people would say, that's a FinTech opportunity. But if you think about it, why would the daycare center operator let parents pay over time? Do they apply certain criteria so that certain parents can have that privilege, certain others wouldn't, et cetera? So distribution is already very interesting with open banking, with all the pipes built in the back end. Now we have more opportunities to distribute financial services in more convenient and somewhat unexpected ways. So that's one.

And then two, how financing is decisioned. I mean, that's really how you [Shawn] made your name, from Zest.AI about 15 years ago, really the first to use AI in financial services. And even today, that's only 30 % penetrated in the industry. So still a lot of room for growth and new innovation.

Thirdly, how financing is delivered. So that's more kind of looking within the lender. How can you improve your process? How can you have a step change in efficiency gains? So that would be something like Gestalt: instead of having an army of analysts or engineers organizing data, now you can just use the software.

Normalizing the CFSO (chief financial service officer) Role at Fintech Startups

Chloe Zhu

… as a more macro comment, we are innovating in a very hard industry. I would say health care and financial services, these are the two hardest industries.

And in health care, it's already a very accepted practice to have a chief medical officer when you start any health care company, because you have the FDA regulation hanging over every single company. You need to make sure at a chemical level the drug you are developing actually works.

But if you look at a financial service industry, it's not yet a common practice to have a chief financial service officer in the room. And frankly, I think because of that, the innovation cycle has slowed down/a lot of venture dollars have burned unnecessarily because there was not that financial service officer in the room on day one.

So that's really where I see the role of Ensemblex. We already have over 150 years in financial services. And for any founder that collaborate with us, it's a leg up of a century, if not more.

Shawn Budde

You said financial services is a hard industry. What makes it a hard industry?

Chloe Zhu

First is regulation and then in the financing world, it's the delayed signals.

So I recently gave a talk about using the financial services. So if you just ask, are you using financial services? About 70 percent of the banks out there actually are. But if you drill down, most of the 70 percent is used in. lower stakes situations such as summarizing a call script, right? There's no decision you need to make off of that AI output. But if you look at high stakes decisions such as decisioning, should I give out a mortgage to this future homeowner? That 70 % drops to 32%. And I believe a large part of it is because of regulation. A lot of people just don't have that trade craft to use really the latest technology and the latest technique and modeling to really help financial service industries go forward.

Two is the delayed signaling… In lending, really you can manufacture hypergrowth because in that initial phase, you're just giving up money, right? Who doesn't like free money? And then the signaling really comes back six months later, a year later, depending on the product you designed, and maybe 30 years later if it's a mortgage product. And a lot of dollars could have been raised during that interim period. And then afterwards you realize what a crappy business you've built.

Shawn Budde

Yeah. We're obviously, quantitatively oriented, at Ensemblex, but I was having breakfast with someone today who was saying… their business got burned because they built all their models and all their credit policies. And they did that during COVID when there was, you know, all the government money flowing in and then they, they grew the business rapidly and they just got slammed. And so I think that is the combination maybe of the data and the artistry, and that context of having been in this industry helps a lot to just move a business forward in this space. So I think that's great thought.

In the full podcast we covered many other topics such as:

What I/ Ensemblex Look for in a Potential Founder

How Ensemblex Vets Ideas

… and more

Btw, the Ensemblex Exchange podcast is a gem. I’ve enjoyed listening to the CEO of Happy Money, the CEO & co-founder of Gestalt, and the CEO & founder of Ness Card. Highly recommend to other fintech founders & leaders.