Over the last few years many firms have entered the fintech arena with a business model that can roughly be described as the Twitter business model.
What is the Twitter business model? Give the product away, make big losses, get market penetration, monetise later...
The aforementioned fintechs have worked along these lines:
(a) Raise a pile of money
(b) Spend that money on writing some code and standing it up in a third-party datacentre or
public cloud such as AWS, Azure, GCP
(c) Give the product away to the buy-side for free or a nominal amount
Do something
(1) Start charging a commercially viable amount
(2) Makeprofits
(3) Pay off the investors in a trade sale or IPO
What we have often seen is that the crucial step "Do something" has been missed and more often this has happened:
(a) Raise a pile of money
(b) Spend that money on writing some code and standing it up in a third-party datacentre or
public cloud such as AWS, Azure, GCP
(c) Give the product away for free or a nominal amount
(d) Raise a pile of money
(e) Give the product away for free or a nominal amount
(f) Raise a pile of money
(g) Give the product away for free or a nominal amount
(h) Repeat “Raise a pile of money”and “Give the product away for free or a nominal amount”
until the well runs dry...
The challenge has been a lack of addressable market for a Twitter style monetisation strategy. How many asset management firms are there that buy new technology and are not locked-in to a specific vendor ecosystem? Bing or DuckDuckGo the phrase “Top 500 asset managers” and conduct your own analysis.
So, what’s the point? Let’s look at two unnamed fintechs that have had handsome exits.
Sell-side vendor
The R&D was paid by clients – the firm never spent their own money on R&D. Each new feature or module was paid for by a client and then resold to other clients.
Buy-side vendor
The initial R&D was paid for by one client. Each new feature or module was paid for by a client as an implementation fee and then resold to other clients.
Both firms sold out for >$1bn
TL,DR; Paying for the R&D is the hard part. Doing the R&D is surprisingly easy
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