Who are fintech’s “walking dead”?

BankTech Ventures is a Sandy, UT-based network and investment ecosystem dedicated to banking technology providers and their community bank-focused solutions. Launched in 2021, more than 100 banks have joined the BankTech Ventures Fund, delivering 18 investments by the end of 2023.

In an interview with The Financial Revolutionist at Fintech Meetup, Carey Ransom, Managing Director of BankTech Ventures and a contributor to The FR, describes the phenomenon of “walking dead” fintech companies who face a fintech venture bubble overhang, outlines the future of AI hype, and encourages conferencegoers to say what they really mean. 

This interview has been edited for length and clarity.

The Financial Revolutionist: I’m interested in what you see coming out of Fintech Meetup and 2024 writ large. A pretty broad-strokes question, but you have your finger on the pulse.

Carey Ransom: Some pulses. There are a few bigger things I feel are happening. So number one is you still have what I’ll call the “fintech venture bubble overhang.” I think you have, in some cases, companies that are just going to be walking dead, where they're overcapitalized, and are probably never going to be able to grow into the valuations or the trajectory they were on. At some point, there's a reckoning, which either means everybody gets tired, and maybe that means asking, What's the right value? Maybe the company gets sold or gets combined with some other things or gets recapped. 

I've been involved in a couple that have gotten recapped in just the last year, and they were legitimate businesses, but the capital structure in there was wrong because of all the changes that have happened—and it was probably wrong all along, but that is what it is. So there's still a lot of that out there. In some cases there are super capable people on those teams, and they're looking at it going, I might be better off going and starting fresh. 

So I also see some really strong, capable people that are now starting to start things again. And they're going to be easier to fund, probably, because of their cleaner history. I tell a lot of our banks from where I sit that some of the best banking tech companies focused on enabling banks to be better, not trying to disrupt banks, are going to get started and invented over the next five years. Working with financial institutions to meet consumers where they’re at is gaining traction, as the go-to-market may be more capital efficient, and maybe more predictable, partially driven by the big regulatory reaction and relative backlash on fintech in general. 

And what fintech has really done in this first wave is partnered up the complementary capabilities that a fast moving startup in financial services has with a steady, stable, compliant financial institution. It can sometimes feel like those parties are at odds with each other, but when those work well together, it's magical, and that's where you've seen some of these explosively growing and useful fintechs in the marketplace.

That was a lot of fingers on many pulses. To start from the beginning of your response, what sort of characteristics do these “walking dead” fintechs have in common? Is it their dilution, their business model, a dependence on interchange fees, or something else?

The core issue in most cases is the capital stack in the business does not reflect the real or even potential value of the business. if they've raised $150 million in various rounds of venture—and very likely were at or above a unicorn status—and they're doing $20 million in revenue and not growing 100% or more year over year, they're kind of stuck. It's just capitalized wrong. And if the investors don't feel like they're really going to ever see their money back, they lose interest in their portfolio and then the people in the management team are probably feeling that it’s a mountain they’re never going to climb.

Then the other thing which doesn't get talked about a lot is that big funds in general don't want to have to take marks on a company any more than they have to. So they may well know, This company is probably only worth 20, 30, 40 cents on the dollar of what the last round was, but do we want to proactively tell our LPs that that's the reality? And so there are conflicts.

I'm curious why there's that capitalizing reckoning now, versus previously. You mentioned that they were overcapitalized—

Yeah but this also happened in the dot com era—

Sure, but I'm interested in why it happens in waves rather than it sort of being this more ongoing process. 

I mean, venture is, in many respects, a boom-bust cycle.

Exactly, and my question is, why is that the case?

You have a lot of people who look for easy opportunities. Think about all the companies that have started in this last—let's say—decade. Many looked a heck of a lot like other companies and if these investors backed this one, but the others that were interested in that space didn't get in that one, then the others were going to be excited about one that looks a lot like the first one. So you find these patterns of six companies that look very similar, and have different sets of investors behind them, and maybe two of them will win and you just hope you're an investor behind one of the two that win. 

And then you get a group of founders that are observant of that and say, Hey, we could go start a company like this one, because it's possible. And they look at the formula as opposed to maybe the problem specifically. You just see when something works, I think, with information flow as freely as it is now out there. When something works, you see a lot of people enter into that very quickly. And I think that creates the hype a little bit and then I think it also creates the crash. Inevitably like they're not all going to work; they're not all going to need to exist. And I think those cycle times are probably shortening, because of the pace of change that we see. 

That also is why I think at times, like with this AI hype cycle, you saw some companies raising incredible amounts of money in some cases, like two founders and an idea and they came up with the right pedigree who receive $100M where, in a prior era, it was probably $10M, and then prior to that it was probably $2M. There's definitely some belief out there that some of these platforms that end up being the winners are going to be massively bigger. Right now, we're seeing trillion-dollar market cap companies that we've never really seen before.

Do you expect the music to stop at some point for the AI hype cycle?

For sure. I think a lot of the dollars that went into AI apps that were being built on top of AI infrastructure are tenuous at best. Maybe the realization will happen faster, where the founders go, Oh, yeah, this isn't gonna work; let's just fold up and move onto the next idea.

You mentioned a regulatory backlash against fintechs. Are you talking about upcoming NBFI regulations?

I think you've seen a couple of things. One is the regulators have been very clear with a lot of the banks that these fintech companies are a service provider to you, as the bank, and you are on the hook. A set of banks have been doing this for a long time and take that responsibility seriously. And there are some that saw this fast-growth opportunity for customers and fees and deposits, and they allowed, in some cases, these middleware companies to obfuscate an understanding of what was happening out there. The regulators, I think, are going and really looking deeply at every single bank doing this. 

I'm trying to decide whether the regulators think this should go away—which it won't, it’ll find other forms—or whether they realize that this is the inevitable future of fintech and they're trying to set some ground rules before it becomes ubiquitous. I'm hopeful it's the latter, because I think that's healthy, because banks are a key part of this infrastructure, and they need to understand what's happening with whom outside their historical branch network, especially if these branches all end up looking more like digital embedded branches in different forms. They still have ultimate responsibility as a financial institution. Laying out some of those rules are more important now than ever. 

How are small banks and community banks grappling with this? 

If you think about the last year, there’s this picture in banking and fintech of a doomsday. But most community banks in this country are fine, they have good businesses, they've been conservative, they haven't overstretched or overreached, they've adjusted to the interest rate change and cost of funds change. They weren't super long on a bunch of low-cost loans or treasuries or things that got banks like Silicon Valley Bank in trouble. 

The relative simplicity in their historical business has kept them somewhat protected. And so 2023 was a challenging year, but in many cases, not a bad year for them. And so what I'm really excited about is how to then get them excited to keep going and build upon that and almost be on the offensive about how they want to go out and capture more customers and opportunities in the market and layer in new revenue streams. 

Lastly, when you attend something like Fintech Meetup, do you learn anything new from panels that challenges your worldview? Or are you here more for meeting new and existing people within the ecosystem? 

I tend to not go to panels. I think panels are a good way for people to present what's going on with their company. It's a good way for sponsors to get a little bit more visibility, but I don't think most people are bold enough to say what they really think, share provocative ideas, or even challenge others. I mean, the best panels I've ever seen or been a part of are ones where we don't agree and we're having a civilized discussion and debate. There just aren't enough of those. I love events like this because they catalyze bringing a whole bunch of people together, but it's all the conversations outside of the formal programming where I find value.