How to grow a fintech company without taking outside capital

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During 2015, there was so much venture capital money sloshing around the finance industry. Some of the top startups in the space raised +$100 million rounds (debt and equity). Sometimes, surrounded by the splashy big fundraising news, companies trying to bootstrap their paths to profits get lost in the noise.

Justin Carbonneau, Validea
Justin Carbonneau, Validea

But there are companies out there in the finance world that are doing a good job building businesses for the long term. Validea is one of those firms founded by three professionals that chose to go the self-funded route. Founded in 2003, the company provides investment data and portfolios built and managed using algorithms that mimic the investment strategies of some of the greatest investors in history, like Graham, Buffett, Lynch, and Neff. The company was founded during the dot com era when money was loose and profits didn’t seem to matter.

Instead, when Justin Carbonneau and Jack Forehand teamed up with founder John Reese, the team decided that they would grow Validea with a goal to profitably run their fledgling fintech business. The idea would be to expand the business by using cash flow to build the business, not outside capital.

Control was also an important issue — the firm decided early on that it had a clear goal in mind and it wanted to own its own destiny. “We also didn’t want to give up control of our concept to outside investors who may not have understood the vision we have for the company and may have tried to force us to go in a direction that isn’t consistent with our goals for the business,” Justin Carbonneau, who heads up sales and distribution, remarked. “We think that level of control has been important to both its success and the personal enjoyment we get out of running it.”

Indeed, the firm credits going the self-funded route with helping it navigate the 2008 downturn, a period of time that proved very challenging for companies exposed to the stock market. Bootstrapping a company ensured the team kept costs in check. It also meant there was a high level of resourcefulness on the marketing and sales side. Carbonneau described his early marketing successes, “Early on, we benefited from highlights in major media outlets, such as articles in The Washington Post and on very popular investing sites like MSN Money.” Popular writers and columnists would highlight Validea’s investing system and this type of earned media generated a lot of interest in the firm’s products early on.

Peter Lynch and Validea stock picks

Those big, unexpected wins have changed as the company has grown. The company is much more focused on optimizing its own sales funnel now and that means working to get Validea’s premium products in front of traffic that comes to the site from search engines. Content partnerships can help bring a steady stream of prospects to the site, as well. Carbonneau has inked a partnership with NASDAQ which involves out-licensing part of Validea’s research product to the stock market’s flagship website, which drives more traffic to the firm’s premium products. The firm’s founder, John Reese, is also a contributor to Forbes and Canada’s Globe and Mail, which brings in more readers. “I think this content marketing approach is much more sustainable for the long run versus the former PR-centric growth strategy,” he posited.

While the Validea team recommends their self-funded approach to growing a financial business, it has had its drawbacks, too. Sometimes the focus on short-term profits has steered the team away from focusing on longer-term projects.

Validea Capital Management_-_Invest_Using_the_Proven_Strategies_of_Wall_Street_Legends

For example the founding team runs a separate firm, Validea Capital Management. It took 18 months to launch that asset management business after releasing “We probably could have expanded that much faster if we launched it out of the gate, but we wanted to be cautious both from the perspective of profitability and the perspective of making sure our models were ready to run actual money,” said Carbonneau. It wasn’t until 2014 that the firm launched its first exchange traded fund (ETF), the Validea Market Legends ETF, which was certainly later than some other firms in the space. “So in hindsight, we could have employed a more fast moving, aggressive expansion strategy, but in the end, we are risk averse people and we are willing to give up the upside of a potentially much larger company to ensure that we have a company that is sustainable over the long-term.”

Advice to others contemplating taking VC vs. self funding?

Carbonneau offers the following words of advice for other entrepreneurs considering taking outside capital to fund their fintech firms:

  • It really comes down to each person’s own vision and risk tolerance. Business owners need to ask themselves if control and profitability is more important or if that are willing to give that up in pursuit of a bigger long-term vision.
  • Having a focus on profitability early on gives you flexibility and more leverage if you do decide to raise outside capital.
  • Many times, founders know more about their businesses than outsiders do, so you need to strike a balance between staying focused on what you believe in and future expansion.
  • Sometimes a product can be too early, so it can pay to try to wait for the marketplace to accept your product and self-funding can give you that flexibility.
  • Changing the business model can be key to long term survival – Validea started as a free research product, we pivoted to a subscription based product, then launched the asset management business. The core of what we do was all centered around the fundamental guru-based strategies we run but the various business model evolved over time.
  • Sometimes companies feel compelled to hire, invest, develop, market and more. All of these things cost money, and while they can help grow a business and add-value, they can also hurt a business if the execution is off or if the revenue does not keep up with the cost structure. They increase reward, but also increase risk.