Revisionary exercise in startup strategy — Part 3/5
By: Evelina Vrabie
Tags: Strategy, Entrepreneurship, Fintech, Founders, Startup

As founders, we need to make choices about how to create and capture value from our idea. The framework helps us decide by analysing four factors:

Competition Customers Technology Identity

I like to think about these factors like sliders. When dragged, it pushes the startup down a system of axes between competition and collaboration, execution and control.

Four choices that shape a startup’s strategy. Courtesy of prof. K. Ching.

1) Choose your customers

For any startup, the first task is to figure out who the customers are and how much value we can create for them.

I believe that when the competition is fierce, in a saturated market, a new startup must really “wow” their customers. A marginally better product won’t be enough. Touco wanted to create a much better new way for people in vulnerable circumstances to deal with their financial admin and delegate control.

At Touco, we identified two types of customers:

end-users : direct Beneficiaries — those in need of support through vulnerable circumstances and their Carers — family members or professionals

: direct Beneficiaries — those in need of support through vulnerable circumstances and their Carers — family members or professionals organisations: high-street banks, utility providers, charities, care homes and agencies

For our end-users, the value is the wellbeing, independence and peace of mind we provide to them and their families with transparent and safe financial control options.

We wanted to offer our digital tools free of charge. We considered a B2B2C model, especially after receiving a lot of interest from organisations willing to better support their members. I believe that’s one reason why we got invited to join several fintech accelerators, including Nationwide’s OB4G, Accenture’s Fintech Innovation Lab and Barclays Techstars.

We’d heard that the Financial Conduct Authority (FCA) was preparing to launch new guidelines for firms to better support vulnerable customers and potentially enforce them with non-compliance fines. We also did a quick bottom-up estimation of the cost savings we could bring to our corporate clients by reducing the number of complaints filed with the FCA, for failures to properly support certain users.

For organisations, we believed that our digital tools would solve those issues with a significantly smaller build and ongoing cost. The value capture would result from distributing our software on an enterprise license with multiple cost tiers for small and big partners.

Choosing the right beachhead segment is a tough challenge for any startup. There are usually two factors that help with the strategic ranking of beachheads:

Sequencing: How does each beachhead facilitate the transition into the follow-ons? Who can provide a credible reference for the others?

We anticipated that the larger clients would have more urgency and bandwidth to trial first. Then the rest would follow. Strategic fit: Do we have the expertise required to handle the candidate beachhead in our team or in our entrepreneurial ecosystem?

Our founding team had some previous biz-dev experience with large financial institutions. We also counted on the support of our partners and mentors.

My revisionary view here is that we were faced with too many beachhead segments. We could’ve foreseen better the ones that dissipate the most efforts to test the hypothesis and instead, execute a more time and cost-effective validation.

2) Choose your competition

A company’s reason for existing is to give value to its customers. That can’t happen without analysing the competition. We can discover the basis of the competition in a certain market if we ask ourselves:

Why are the other players in the market in the first place?

What capabilities, knowledge and expertise do they have?

Are they competing on price or quality?

Are they offering similar or completely different solutions?

What tactics are they likely to deploy to win that market?

Where are they going to move next?

I vividly remember one of our stimulating strategy classes. Our professor used The Princess Bride analogy to make us pay attention to the actual game competitors are playing in a market. The Iocaine powder game between Vizzini and The Dread Pirate Roberts appears to be straightforward but the real game involves a hidden, multi-year quest to build immunity to the powder.

Similarly, at Touco, we considered the risk that our clients would potentially test the value proposition to their end-users in a cheap and fast way with our tools and, should the test be proven successful, build it themselves.

That’s why we ended up with a Value Chain strategy — I’ll explain in the next post. We examined multiple options to make it easy for them to integrate our tools into their existing digital products, via white-labelling, APIs and SDKs for their frontends, mobile banking apps or websites.

3) Choose your technology

A new S-curve is both a window of opportunity and a risk

“The future is already here — it’s just not evenly distributed” — William Gibson

For most early-stage startups, except perhaps those started from academic research, the innovation is in finding a unique combination of technologies which allows them to launch quickly in an unfamiliar market.

We realised it’s not viable to build the technical and financial infrastructure for our Care Card proposition from scratch. Instead, we opted to use existing technologies and partner with other startups to create a Minimum Viable Product (MVP) quickly.

However, developing financial products to help end-users in vulnerable circumstances is not as quick and cheap as developing a food recipes app. Fintech is lively but saturated. There’s a very high bar of entry for new products both in terms of product quality and cybersecurity.

To launch a card, we found ourselves jumping through several hoops. First, we had to clear due diligence from all the partners to use their APIs. One of our partners told us we passed with the highest score among their existing clients at the time. Secondly, we applied for CyberSecurity Plus and started the PCI-DSS process. Thirdly, we would’ve wanted to pass external auditing and pen-testing before going live. All of these are significant costs.

Our team’s desire was to build products that are useful and lovable. We started with a simple prototype which I built, as a hands-on technical founder, in a very short time. We considered the pilot with our end-users successful. Next, we started discussing more elaborate MVPs and enterprise rollouts in a matter of months with potential corporate clients. In retrospect, that was a bitter-sweet experience.

We got excited about their interest but at the same time, I found myself talking with technical architects explaining why a startup our size can’t offer single tenancy and why we shouldn’t worry about stress-testing our MVP with 200,000 users before we acquire hundreds and thousands first. One of their other requirements was to cap the initial rollout at 250 users.

We also learnt that Open Banking has many challenges. Some surprising, like the anxiety the word “open” caused to some users. Some are technically challenging. The data is updated infrequently and lacks a lot of useful information. Because the source data is inconsistent, it’s difficult for AISPs to track and label it properly. You can read more about it in Nesta’s OpenUp 2020 Challenge. For us, consuming it via AISP meant we couldn’t rely on it for real-time, accurate alerts and we couldn’t prevent bad payments from happening. This is another reason why we wanted to control the transaction data coming from our own card.

During our pilot, we worked with a team of experts from behavioural science, data science and psychology to help us understand how certain mental health conditions can trigger a negative cycle of impulse spending and stress. We used the read-only transaction data to look for signs of vulnerability. We wanted to detect it and alert the users’ support network (the concentrical circles I mentioned in the first post) before it impacted their lives.

We heard of a case where someone had previously spent thousands buying cardboard boxes during a Bipolar episode and was now in debt.

4) Choose your identity

The fourth factor is about people — the founders and the team. Defining a startup identity (part of its culture) involves asking hard questions like:

What do the founders want to accomplish?

What does success looks like for them?

What are the influencing factors, like location, ecosystem and resources (mentors, advisors, money etc) at their disposal?

What capabilities and responsibilities does each team member have?

What are the norms and incentives we need to start a great company culture?