How fintech startups can succeed in an increasingly competitive space

This is Ask a VC, where we quiz venture capitalists on the latest trends in finance. It's been said that nine out of 10 startups fail, and given the growth of financial technology companies that have sprung up since the financial crisis, a path to long-term profitability is key. RRE Ventures, a venture capital firm based in New York City, has invested in a number of high-profile players including Ripple, OnDeck and Avant. Its investments also include technology companies such as Palantir, Giphy and SocialFlow and media outlets including BuzzFeed, NerdWallet and theSkimm. Founder and general partner Stuart Ellman spoke to Tearsheet about what he looks for in entrepreneur pitches, the challenges of building a sustainable business model and the evolution of products for consumers and businesses. How can investors tell the difference between the next big fad versus the next big thing? Experience and judgment. It's extremely difficult to figure out what's a fad and a thing; theoretically a thing is a fad that lasts a very long time. The question is how long is something going to last, and are you going to be able to take what you have and create a lasting competitive advantage and then be able to build a business out of it. What trend is most exciting to you right now? Robotics. The ability to get robots to perform tasks that are helpful to people and [also] get a return on investment is really just coming online. Is there one that’s particularly overhyped to you or has lost your attention? There are many. Amazon's announcement about the closure of Quidsi [parent of diapers.com and soap.com] certainly helps delineate how hard it is to be a retailer that doesn't create its own products. Not sure if this is overhyped, but as compared to the last 10 years when we funded a variety of media startups like BuzzFeed and Business Insider, it's much harder to break into the new media market because so many of those then-startups have become very large companies in and of themselves and have partnered with much larger companies with big distribution. And obviously, there's been a lot of hype in insurtech as well, because you have a number of new insurance companies that are managing general agents, which means that they're using the insurance plans from insurers and marketing them differently. There's a lot more risk in being a managing general agent as a startup against seeing what some of the incumbents will do to combat them and compete against them. Personal finance is getting increasingly competitive. What will the winners need to have? Over the past 10 years, you've had an unbundling of products and services. You had Mint which helped you understand and learn what your financial picture looked like, and you've had people doing savings, like Digit, and people doing bill negotiation, like Truebill and Billshark.   Each of these point solutions created value, but it was hard to achieve significant scale on any of them. What Clarity Money is trying to do is create the next generation by being an API that uses all of these different services. I would rather not have one thing that does the saving and one that does bill negotiation and another that does subscription management -- I would rather one that integrates all of them. For those that are underserved by the financial system, what can startups offer that's different than the banks? I have a personal belief that it's not my job to make money off of people by putting them into debt that they cannot afford to have. On the other hand, getting people credit that were previously underserved is something that's important and obviously technology is well suited to do. What’s the biggest mistake that entrepreneurs make when pitching you? The belief that prior success will lead to future success. It's clear to me that every good entrepreneur fails, and failure allows you to see things more clearly. What's the biggest lesson you've learned from a failed venture? Be careful about how much money you put into companies that may have once been a good idea but cease to have been after a certain period of time.