Alex Lazarow is an author, speaker, global venture capitalist, and contributor to The FR.

As the founder of a global VC firm, a member of Kauffman Fellows, the global network of venture capitalists, and an investor in a number of startups around the world, here are my top ten counterintuitive — and perhaps controversial — strategies for successful fintech investing.

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1. The moat and the TAM equation for fintech investing

Conventional wisdom is that moats are key, but financial services is one of the largest markets in the US economy, roughly 20% of GDP. Taking a consumer and small business (”SMB”) lens for now: most products are not that differentiated over time. Among the largest fintech success stories, many have won because of: a superior product (e.g. simple API with Stripe), better value proposition (free bank account at Chime, a former portfolio company) or a unique go-to-market strategy (e.g. Guideline partnering with Gusto). This can often be complemented by serving an underserved but massive customer segment (e.g. Nubank).

My view is that while moat matters and can be defensible over time (particularly for enterprise startups), the Total Addressable Markets (“TAMs”) in financial services are so large that product differentiation and sales velocity matter even more. Robinhood is a massive business, but with a service that many others offer today. Ramp was not first to market in the spend management category but moved very quickly in launching products.

Yes, incumbents — and other startups — will inevitably copy you. But only if you’re too slow to grow and iterate. And as we will see in the unit economics section, fintech can generate moats from scale.

2. An Engaged Attitude With Regulators

Fintech is “Fin” first. I personally am wary of any pitch that does not work with a spirit of openness and transparency with the regulators. (Perhaps it is one reason I have not been a crypto investor over the last decade!) I am of course biased as a former regulator myself.

I look for entrepreneurs who do more than comply with the letter of the law, but respect it. They understand why customer protection guardrails are there — even if they don’t agree with them.

The best founders I’ve worked with have engaged with regulators with an attitude of openness and engagement.

3. Younger is not necessarily better

As I discussed in Out-Innovate, the stereotype of the hoodie-wearing, 20-something fintech founder is giving way to seasoned entrepreneurs with years of industry experience. Certainly, there are examples of generational founders starting companies at a young age. Stripe, for instance, is a strong example in fintech, and Meta is in social media. However, many successful fintech founders bring domain expertise built up over decades. This is of course, tied to the attitude point above. In fintech, I often overemphasize understanding why a particular founder is uniquely qualified to tackle the particular issue. As a consequence, this biases towards more experienced founders with deep domain expertise.

4. Geography can be turned into an advantage

New research by Kauffman Fellows demonstrates the rise of “Fund Returners,” who are increasingly coming from outside Silicon Valley and all over the world. Global geographies have a few structural advantages for fintechs. The cost of building a startup is often lower, so the same raise goes meaningfully farther and thus derisks the business.

Global startups often have less competition. Of course, there are certain drawbacks to building outside Silicon Valley: Market size may be smaller, and there is less downstream access to venture capital. Perhaps it is no surprise that the largest neobank in the world is in Brazil (Nubank), the largest input & embedded fintech marketplace is in India (OfBusiness), and arguably the largest BNPL company globally is based in Sweden (Klarna).

5. Unit economics

The shiny allure of rapid growth means little if it’s built on unsustainable unit economics.

Readers of my columns will note my preference for camels. When I meet founders, I try to understand what their unit economics are today. Do they have a handle on them? How strong are they? What is the timing of cash flows (see next point)? Clearly, they won’t always be perfect, particularly in the early days. Therefore, it is important to understand what pieces the company has a handle on and what still needs to be proven out. How much have the founders researched this? How informed is it with real world experience?

Fintech can be a scale game. For example, payment companies and neobanks can consistently get much better deals from partners simply by being bigger. If unit economics is passable in the early stage, there is actually a consistent path to improvement. This is different from many other categories where unit economics necessarily degrades over time. However, unit economics in the beginning is necessarily the foundation.

6. Cash cycles matter

A good fintech will have strong unit economics. A great one will also have a negative cash cycle.

For example, if a lending startup receives an 80% advance rate versus 100% (the percentage of the loan that can be financed), this can be the difference between having to fundraise or not—or between life or death.

Paradoxically, growth can actually hurt the business. If a lending company sees explosive volume and deploys $100 million in the first scenario,it will need to raise $20 million just to be in business on top of whatever it costs them to set up the operation.

In the latter scenario, it is $0 in incremental equity.

In short, in the former scenario, the company will require more cash as it grows. In the latter, it will at least remain neutral.

The same dynamic plays out elsewhere in fintech. An insurtech may need to fund a portion of its book — especially if it operates as a full-stack carrier — while a payment company or neobank may need to maintain reserve balances.

In some cases, a fintech can structure cash cycle deals where they get paid upfront, and only need to pay their counterparties in a few days. With enough growth, this can help fund the business. Nubank, for instance, has benefited from a negative cash cycle, since the company typically gets cash upfront from customers and pays its merchants a little later. This can help accelerate growth. Optimizing the cash cycle of a company can make a good fintech an excellent one.

7. A fintech should have a financial model — even at the seed stage.

An early-stage financial model is, by nature, an exercise in futility. Startups, after all, are not companies — they are projects in search of a business model. At the pre-seed stage, they do not yet know that model with certainty and only begin to define it around Series A (and sometimes well beyond). Unit economics, the depth of sales channels, and other key factors are, at best, educated guesses in the early days.

As a result, many founders and VCs argue that a financial model is not required by companies at this stage.

For fintech, I disagree — most startups live and die by some form of financial intermediation. A lending startup makes money by first giving it away, losing a portion, and paying others for the use of their capital. Insurance companies collect premiums, pay out risks later, and manage policies in between.

While the ultimate inputs will never be perfect, I evaluate a founder’s ability to forecast, the thoughtfulness of their approach, and the scalability of their model. Do they have a point of view on key metrics like cost of goods sold, gross margin, or cash burn? How nuanced is their perspective across different scenarios?

Every VC tries to assess a founder’s grasp of the domain and business model, and the financial model is a key way to showcase this.

8. VCs should not make their own models

Given that early-stage founders lack certainty about their business model and the assumptions underpinning it, any financial model is inherently imperfect.

Compounding this imperfection by creating a new venture capital model only amplifies errors. This dynamic shifts at later stages when assumptions are more certain, making scenario modeling more valuable. After all, a venture capitalist is necessarily less close to the business, its assumptions, and its operations. How could they do better?

As a policy, we do not build our own models for seed-stage companies. Instead, we leverage the founder’s model and build sensitivities on top of it. We focus on understanding the impact of unit economics assumptions, dilution, and exit multiples on investment returns.

9. Business model depth, not buzzwords

The last few years of fintech have been awash by buzzword after buzzword: Crypto. NFT. And now AI.

No tech trend will be a panacea. Early enthusiasm is often overblown.

Financial services are massive markets. Despite the buzz of fintech, they are still dominated by incumbents. The next big trend may be hot, but this doesn’t mean it will conquer fintech. A founder doesn’t need to pitch reinventing everything. Partnering or working with incumbents (with data and distribution) is powerful. To be right in venture requires being contrarian (and being right). As a result, a VC should care less about what’s hot today, and more about what has a chance to make enduring change within the existing context.

10. The customer

A focus on the customer is required for every VC. In some ways, it is even more important in fintech. If you're wondering whether a regulator might block something, a useful heuristic is to ask: Is this genuinely good for the customer? And is the customer being treated like an adult — with full transparency, openness, and dignity? While not foolproof, this approach has generally worked well.

Financial services are quite sticky. If you’re wondering if a customer will make the effort to switch, ask yourself if the product is really that much better. Ask yourself if you, your wife, or your mom would use it. You must be able to give a resounding yes to this answer. The customer’s voice is paramount for us.

Conclusion

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Fintech is not like other industries. A different VC playbook matters. Here were a few in mine. What am I missing?

A version of this piece was published in Forbes.