Get insights from Elizabeth McCluskey discussing the depth of fintech.
Elizabeth, can you tell us about your role as the Head of Discovery Fund and Director at TruStage Ventures? What are your primary responsibilities and objectives in supporting fintech companies?
I joined TruStage Ventures (formerly known as CMFG Ventures) in 2021 to launch its Discovery Fund, a fund dedicated to supporting underrepresented entrepreneurs who are building solutions for financial inclusion. We dedicate $5 million annually to early stage fintech companies led by BIPOC, LGBTQ+, and women leaders, helping to close the equity gap and support scalable solutions designed to address a new generation of challenges. Many of our portfolio companies are financial wellness and lending solutions, including Caribou Wealth, Stackwell and Zirtue.
I’m on a mission to find companies that are promoting the affordability and accessibility of financial services. Part of my role includes sourcing deals and meeting with entrepreneurs and CEOs, followed by due diligence and negotiating terms. I also provide long-term support for these companies, helping them scale, network, and find the resources they need to succeed.
TruStage Ventures has invested in and supported 40 fintech companies to date. What criteria or factors do you consider when selecting companies to invest in?
Many early stages companies don’t have a lot of historic financial metrics to share, which is why I focus on the founder. Understanding the founder’s story and background is a huge part of my decision. I spend time asking about their motivation and experience to solve this problem. Then, if they have been able to attract other people to their mission, such as early employees, investors, or advisors, I learn their perspectives on the company’s culture. I want to know if the founder is open to feedback and guidance, as well as building trusted relationships. These aspects are important because each investment is an opportunity to be a partner for long-term success and growth.
How do you see the current fintech landscape evolving, and what are some notable trends or areas of innovation that you find particularly exciting?
Market conditions have substantially impacted lower-income individuals and younger generations – many of whom have never experienced conditions like rising interest rates before. This makes our support of financial inclusion solutions that much more important.
One of the most important areas of innovation is liquidity management. Consumers need solutions to help manage their cash flow and budget – even more so in tight economic times. Credit access, including opportunities to build credit and receive affordable loans, is especially important in a rising interest rate environment with higher financing and credit costs. While liquidity management and credit access offer immediate solutions, low-to-moderate income individuals are especially in need of investment and retirement solutions to plan for a healthier financial future. There is a huge opportunity to help consumers historically left behind by traditional financial systems achieve financial health.
TruStage Ventures has a dedicated fund to support underrepresented founders building solutions for financial inclusion. Why is it important to invest in diverse founders, and how does this contribute to the overall success and impact of the fintech industry?
It’s important to invest in diverse founders to narrow the gap in venture capital funding, where less than 3% of dollars go to Black, Hispanic, and women founders. This is despite these demographics representing a sizable and growing portion of the population in the US. Representation matters to consumers, and we find that leaders who have historically been underserved by traditional financial systems are working hard to create the financial inclusion they wish they had. The synergies between diverse founders and financially inclusive solutions are evident and represent a strong investment opportunity. By investing in and supporting underrepresented founders, venture capital firms can not only narrow the equity gap but position themselves for strong returns and alignment with an increasingly diverse consumer.
How do fintechs and credit unions benefit from partnering with each other? What opportunities or advantages can arise from such collaborations?
Credit unions have a wide range of members with unique financial needs. It’s nearly impossible for them to build technology to support all of their circumstances. That’s why fintech partnerships are important. Credit unions are partnering with diverse leaders to ensure diverse members receive the products and services they need. These founders often share similar financial experiences and have built solutions to address challenges that hit close to home. As a result, credit unions can provide more inclusive and accessible financial services, especially during tough economic times. Members can be equipped with the tools to rise above today’s challenges and plan for their financial futures.
What advice would you give to fintech companies looking to establish partnerships or collaborations with credit unions? How can they effectively navigate the credit union ecosystem?
Fintechs often launch as direct-to-consumer solutions, then quickly realize the struggle acquire customers and scale. Credit unions offer a valuable channel for distribution because of their established relationships of trust and service, which makes it easier for fintechs to grow and scale. In turn, fintechs provide credit unions with cutting edge technology that enables credit unions to focus on their core mission to help their communities and positively impact members.
Strategic corporate venture capital firms, like ourselves, help fintechs navigate this ecosystem. Through our parent company, TruStage, we provide fintechs with access to a network of more than 6,000 financial institutions. We’ve created a community of fintechs and credit unions, as well as host an annual summit, to encourage innovation and collaboration. We also regularly make strategic introductions and offer guidance based on the needs of credit unions.
In your experience, what are some common challenges or obstacles that fintechs face when trying to bring their solutions to market, and how can they overcome them?
When starting out, fintechs often face a chicken/egg problem. They need to raise an initial round of capital in order to go to market, but investors want to see traction before considering an investment. This is especially true in the credit union space, where it’s typically a long, hard sales cycle to acquire a fintech’s first customer. In an era of increasing competition among fintechs to get the attention of financial institutions, it’s also important but difficult to form relationships with key industry players and channel partners who can help navigate a fragmented market. A mix of strategic investors can help overcome some of these challenges. It’s important to align yourself with investors and advisors that can propel your business forward through connections, partnerships, and general experience.
As an investor, what are the key factors you consider when evaluating the potential success of a fintech startup? Are there any specific metrics or indicators that stand out to you?
In order for our overall portfolio to be successful, we’re looking for at least a 10x return potential from any investment we make, knowing that in reality a good portion of these companies will fail or return 1-3x. This means that we need to get into a deal on the right terms, but it also means that the company has to serve a large enough market. Typically, we’re looking for companies that are addressing a market size of $1 billion+. If available, we also look at business specific metrics, like customer acquisition cost (CAC), lifetime value (LTV), and the relationship between the two; length of the sales cycle, average revenue per user (ARPU), operating margins, and burn rates. We expect founders to know these numbers and speak to what their targets are over the long run and how they will achieve them. We recognize that these metrics should improve over time; we don’t expect that an early-stage company will be immediately profitable. But again, as important as the metrics are, for early stage companies I want to hear the why and the how behind what they’ve already achieved and what they expect to achieve in the future.
How do you see the role of technology and innovation in promoting financial security and access for consumers? How can fintech companies contribute to this goal?
I believe that financial security means not just having today’s needs met but setting consumers up for financial stability in the medium and long term. Technology has multiplied the number of solutions available to address a variety of financial needs, and it has simultaneously brought down the cost for most of those solutions. For example, fintechs in the areas of banking, lending, and investing have reduced the barriers to entry for consumers who are looking for solutions. An individual no longer needs to have $1 million to get personalized wealth management solutions or pay a fee every month to get access to checking and savings. The pressure that fintech companies have exerted on the industry at large has forced traditional institutions to become nimbler and consumer friendly as well, with innovation ultimately benefitting consumers.
Are there any specific sectors within fintech that you believe are particularly ripe for innovation and investment? If so, why?
The industry’s attention to true financial inclusion is finally starting to bear fruit, specifically the effort to make financial services more affordable and accessible to everyday Americans. It’s timely because consumers are struggling to make ends meet and pay their bills on time. And, Millennials and Gen Zs have never experienced a sustained rising rate environment. This presents a major opportunity to invest in fintechs that provide consumers with more accessibility to affordable capital, as well as financial wellness tools such as education, budgeting, and credit repair, creating a more financially inclusive experience.
How do you approach building a diverse portfolio of fintech investments? What steps does TruStage Ventures take to ensure inclusivity in its investment strategy?
We’re proud of all the work we’ve done to support diverse leaders. Last year, we published a report on the Discovery Fund’s impact to-date investing 36% of our fund in women founders and 57% in BIPOC founders. We continue to invest in companies that are improving the financial health of everyday Americans, ultimately creating a more inclusive financial system. Through the Discovery Fund, we’re breaking down the barriers of entry for venture capital, giving underrepresented leaders and founders resources to continue making a difference.
Can you share any insights or best practices for fintech companies seeking funding? What should they prioritize or demonstrate to attract investors?
Current market conditions make it difficult for fintech companies seeking funding. Many investors have tightened their investments and relationships, opting to re-invest in existing portfolio companies with a successful track record. Because of this, fintechs must manage their expectations around a lower valuation and will need to show traction to get attention.
It’s important for fintechs to make the most of every minute with an investor and take time to prepare. This includes but isn’t limited to pitch decks, demos, research, and questions. Time spent with investors can lead to current or future partnerships, or introductions to others within the industry.
Early stage fintechs without traction to show shouldn’t be afraid to fail fast and quickly get to a minimal viable product that can prove return and ROI. Investment cycles are taking longer today, which means fintechs should focus on cash management and finding ways to grow organically and efficiently in the meantime.
In your opinion, what are the key factors that differentiate successful fintech companies from those that struggle to gain traction? Are there any common characteristics or strategies that you have observed?
Many companies struggle to gain traction initially, but it’s what companies do when faced with that early struggle that distinguishes them. Founders need to be committed to the problem they are solving but not married to the solution. They have to listen to the customer and iterate based upon their needs and use cases. For example, we have invested in a number of companies that initially started as direct-to-consumer solutions. The market response told them that they hadn’t gotten the product right, or at least the distribution channel. They successfully pivoted, rebuilding the product to sell to financial institutions, where they found greater success. Adaptability and humility in making those kinds of decisions is key.
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