Fintech funding: How technology changed the rules for start-ups

Steve Lemon, the guest at our forthcoming Fintech funding webinar, is a “recovering fintech founder” with over 25 years’ experience in foreign exchange (FX) and international payments before joining venture capital funder Volution.

After starting at a retail FX brokerage, Lemon joined Exchange Direct, one of the first non-bank FX and payment companies. From there, he went on to be a founding member of HiFX, which was later bought by Euronet. In 2009, he cofounded Currencycloud, a pioneer in the country’s emerging fintech industry and the first embedded finance proposition, offering international payments infrastructure as a service.

In a way, it started before Currencycloud with HiFX, which we launched in 1998. This was before technology took off; we didn’t even have computers in the very early days. But it was still the first step in an evolution that saw the unbundling of financial services; offering FX execution and risk management services in a more proactive manner than the main banking establishment.

By the time we founded Currencycloud in 2009, the technology arms race was well underway, even though this was still pre Fintech; we were still calling ourselves “new finance”. Technology was key to the business, but it still started by us asking ourselves two questions: Why it took longer and cost more money to make a payment from London to New York than it did to send a package by UPS; and why there was such an inconsistency and opacity in FX pricing that a retail transaction could cost ten times as much as a corporate transaction. 

I think London’s been fortunate in being the epicentre of the trading day, which starts in Tokyo and finishes in San Francisco. That’s why, by the early 90’s, most global banks had a presence in London, which led to a lot of product, financial markets, engineering and sales expertise accumulating in the city, as well as, of course, lots of capital. We were also lucky that English is the international business language.

It meant that, after the financial crisis, there were a lot of smart but disillusioned people coming out of banking in London and a lot of money looking for a home. And it was just as the Internet was emerging as a viable distribution channel for your products and services. Cloud computing, particularly, meant it was cheaper and simpler to build these products and make them easily available.

Added to that, you also had readily available venture capital. Ultra-low interest rates led investors to seek alternative asset classes. Backing bright young people with great ideas in a market that made sense was an appealing prospect.  

All these things came together at just the right time, but the industry also brought something essential. The banks were in the middle of the mobile and web banking revolution, but they were still looking at it in terms of how they could cut costs and make it easier for the business. Fintechs approached it from the perspective of the customer, creating a user-centric experience rather than focusing on cost-cutting. 

In the start-up businesses I worked with previously, we could build with a revenue-first approach, spending only what we made. When having sophisticated tech stacks and online capabilities became table stakes, it brought significant build costs around hiring product and engineering teams, for example. New processes and business models also led to an increasing compliance overhead. 

You had to build scale quickly, and it was cost-intensive, which meant growing organically was no longer practical; you needed external capital. With venture backed businesses, you raise money and build the infrastructure first, so you have a closely managed spend ahead of the revenue line.

Very much. It’s an entirely different way of looking at things. When you’re building a business, you have to believe in what you’re doing almost unquestioningly. You must turn up every day, and it becomes a grind, but you have to keep at it.

As an investor, you get a snapshot – a short window of opportunity, and you’re asking key questions: Do you believe in the problem statement they're addressing? Do you believe in the product that they have? Is the market big enough? Is there a big enough revenue opportunity, and is this the team to seize it?

When you’re evaluating lots of these propositions, it can very quickly become a commodity. If you're not careful, you can become quite dismissive of people's hopes and dreams. As a former founder myself, I try very hard not to let that happen. We need to remain mindful and respectful of just how hard it is to build a business. Without question, it’s one of the hardest things you can do.