At the LHoFT we help founders turn their innovative ideas into startups with a transformative effect on the financial industry. We also help established startups expand into Europe and beyond, growing their reach and market penetration.
(Photo by Samuel Zeller on Unsplash)
In talking with founders who fall into the latter group (established and expanding) we have identified three priorities when attempting to scale after finding initial traction:
• Focus on the numbers
• Maintain strategic agility
• Hire the right people
We consulted some local startup executives to share their insight and experiences in order to better explain these issues:
• Raoul Mulheims, Cofounder & Chief Executive Officer, Finologee
• Nicolas Buck, Chief Executive Officer, SEQVOIA
• Timothy Nuy, Executive Director, MyBucks, & Dave van Niekerk, Chief Executive Officer, MyBucks
“Our sales cycle can be up to 24 months so there is little room to get it wrong in terms of margins. Also, the innovation of tomorrow needs to be funded by the revenue of today.”
1. Focus on the Numbers: KPIs & Unit Economics
One of the more cynical comments about the dot-com bubble was the joke “we lose a little money on every customer, but we make it up on volume.”
This refers to the trend in which 2000-era companies focused on rapid scale and user acquisition over a sensible monetization strategy. Grow now, worry about profit later. This approach is justified with three assumptions:
- Economies of scale or new technology will increase margins further down the line
- Optimism about user’s lifetime value
- Reliance on user acquisition gaining momentum in the future & reducing cost
One or more of these assumptions may be true, but it is a mistake to rely on them without a razor-sharp focus on KPIs for acquisition and margins. There needs to be warning signs as early as possible if progress is slow relative to burn rate and runway.
“The fact that you have to have full control of relevant metrics at all times goes without saying…In my opinion, the CEO has to be the ‘chief numbers guy,’ so he’s able to both challenge every team member and immediately have the right answers for investors, clients and partners,” Mulheims said.
Sacrificing margins for growth can also hamper your ability to innovate and adapt. Having the financial robustness to fund anything, from a new feature to a complete product pivot, can be the difference between life and death for a startup.
“Our sales cycle can be up to 24 months so there is little room to get it wrong in terms of margins. Also, the innovation of tomorrow needs to be funded by the revenue of today,” Buck added.
Nuy explained MyBucks pragmatic approach to profitability from the outset and how that enabled them to continue developing and adapting.
“Our focus when we started the business was to ensure that we were generating profit from the onset. We had a basic business model, which we implemented, and then built a profitable foundation. This foundation enabled us to raise capital, develop our technology further and grow the business organically, in addition to calculated geographic expansion and selected acquisitions,” he said.
“Challenge your strategy with a few people that you trust, either for their knowledge of the industry you’re in or their solid background in product building.”
2. Strategic Agility: Continuous Learning & Adaptation
Military strategist and United States Air Force Colonel John Boyd devised a system to define agility in combat operations referred to as the OODA loop: Observe, Orient, Decide and Act.
This system has been applied to the startup world for about as long as there have been startups and is the precursor to much of the logic behind The Lean Startup ideology. The loop prescribes that after each action the user returns to observation to evaluate consequences, and then the process begins again.
This approach prevents startups from investing too much time and money into development strategies that ultimately aren’t achieving the desired effect. It is tempting to believe that poor results can be remedied by doubling down on investment, but often this is an example of the sunk cost fallacy. It’s important to stay humble, and avoid being protective of your concept.
Mulheims offers two key considerations: “First, focus on the product and indeed make sure to challenge your strategy, your features, your pricing…basically all product ingredients at all times. Secondly, don’t always go by the ‘How to Build my Startup’ book. You have to take some shortcuts, make educated guesses, trust your gut feeling, otherwise you’ll be too slow. Challenge your strategy with a few people that you trust, either for their knowledge of the industry you’re in or their solid background in product building.”
This is particularly relevant to the world of financial technology where the speed of innovation is not only driven by the multi-directional evolution of technologies, but also by rapidly changing customer expectations and impending regulatory requirements. As mentioned in relation to tracking unit economics, this can make early profitability vital in covering unforeseen costs related to development changes.
“Being a fintech, the environment in which MyBucks operates is extremely fast-paced and dynamic. With new innovative financial technology being released on an almost daily basis and ever-changing regulation in its market, MyBucks cannot afford to be slow in responding to these conditions. Hence, to remain relevant and competitive, flexibility at MyBucks is core across the board,” Van Niekerk added.
On the flip side of the coin, Buck warns about the risk of over-enthusiastic agility distracting from long-term goals and product roadmaps: “Applying great technology to a business model takes time. Flexibility is a word that cuts both ways. It is both necessary and important to keep customers in the loop in terms of product development, but the big picture and the road ahead is very much about conviction. So no definitive answer on that one.”
“The first thing [we look for] is that they really want to work with us. Not just the industry or in any random startup company, but they should have a good idea of what they will get into, and show some true interest for what we’re doing.”
3. Hire the Right People, Treat Them Well & Offer Smart Incentives
Industry magazine Business Insider curated insights from 28 top CEOs about their hiring practices. Broad themes included the recruitment of natural optimists who will be able stay positive during challenging times; the importance of proactive attitudes; and valuing raw materials rather than expertise. Hiring for fintechs brings its own set of challenges. What kind of balance do you want to strike between traditional financial expertise and entrepreneurial innovators? Do you want creative risk takers or critical thinkers who know regulation inside and out?
Passion, not just for the industry, but for the specific project itself is also very high on the list of desirable traits, in fact it’s at the top of the list for Mulheims: “The first thing [we look for] is that they really want to work with us. Not just the industry or in any random startup company, but they should have a good idea of what they will get into, and show some true interest for what we’re doing. The second check we apply is actually a pretty classic one: people we hire have to have a truly solid skillset.”
Van Niekerk describes how their hiring practices ensure that the right people are put into the right roles, making the best use of their backgrounds: “We employ ‘industry mavericks’ in our technology, creative and leadership roles, and we place the ‘conservative thinkers’ in our governance, risk and compliance roles. This balance enables us to meet regulatory standards and at the same time be innovative, agile and a catalyst for digital financial inclusion.”
Of course, human resources isn’t just about hiring. It’s about ensuring your employees are in the most comfortable and productive environment. We already mentioned the two ends of the spectrum found in fintech: entrepreneurs applying technical innovation to reinvent old solutions and financial veterans with an intimate knowledge of the sector and its opportunities. Buck highlights the need to make sure those groups share knowledge and understand the other’s problems: “For us as a regtech in the funds space, we need to get the mix right – industry professionals and great techies – and we need them to share and work together. I think that is probably the biggest challenge – to get the flow of expertise in the different areas of the business moving. What we don’t want is product development to say that the techies don’t understand the funds industry.”
“Luxembourg is a great place to develop a business. Incredible things can be done here, simply because the local players, instead of just wanting to grow their own business, want to and are able to collaborate and do something great for the whole country.”
Final Thoughts
We have outlined and explained the three most significant considerations for growth by leveraging the expertise of local startups. That brings up a point that could supersede those three: community and mentorship. If you are part of a collaborative ecosystem – including government stakeholders, investors, corporate partners and other startups – you benefit from a wealth of knowledge and wisdom sharing that would take you decades to accrue yourself. Others have made mistakes you can avoid and they will happily share their successes and advice, much like they have in this article.
Above all the strengths we benefit from in Luxembourg, the spirit of collaboration comes first. We can rely on local support for the fintech ecosystem and a government that recognizes that financial technology is central to the country’s future.
Nasir Zubairi, CEO, LHoFT, said it best: “Luxembourg is a great place to develop a business. Incredible things can be done here, simply because the local players, instead of just wanting to grow their own business, want to and are able to collaborate and do something great for the whole country.”
