Endeavor

1 In early 2019, Endeavor Insight partnered with Fintech District and Endeavor Italy to assess the entrepreneurship ecosystem for financial technology companies in Milan. The purpose of the study was to provide a snapshot of the sector's current state, evaluate the industry's strengths and weaknesses, and enable decision makers to better understand and support local entrepreneurship in the sector. The recommendations in this report are based on 64 interviews with Milan fintech entrepreneurs that Endeavor Insight was able to conduct with support from Bip, as well as additional analysis of 113 local fintech companies. In addition, the team analyzed 159 linkedin profiles of local fintech founders. Fintech companies were defined as companies with a technological service or product dedicated to enabling financial services. The study concluded in the following key findings. E X E C U T I V E S U M M A R Y 1 1 Decision makers in the private sector and the public sector alike should focus on helping companies reaching scale. A historic financial capital in Europe, Milan has seen a boom in fintech startup activity in recent years. Just as the banking sector entered a recession, a number of banking professionals, faced with constrained growth opportunities and slashed innovation budgets at their banks, teamed up with technology experts to start new companies, and over 80 fintech companies were started in Milan in the past five years. However, only 5 percent of these companies have reached scale and employ more than 50 people today. Milan's difficulty to produce fintech companies at scale presents a significant challenge for the sector's future growth. In fact, according to European Commission's data on small and medium business in Italy, companies with 50 employees or more drive most of the economic growth in the private sector in Italy. Data from previous studies of the technology sectors of New York, Bangalore, and Mexico City, and other tech hubs around the world show the same trend. Furthermore, companies at scale, on average, tend to pay higher wages than other companies, and they tend to be more resilient in times of crisis. If deci- sion makers wish to foster growth in the fintech sector, they need to dedicate resources to addressing the challenges that prevent founders from reaching scale. 2 2 Fintech entrepreneurs identified access to capital, access to talent, and compli- ance with regulation as their top challenges in scaling their companies today. Based on interviews with 64 fintech entrepreneurs in Milan, the following are the three major challenges that make it hard to scale a company in the fintech sector today: Access to capital. While many wealthy individuals are involved in early stage invest- ments, few venture capital investors, both Italian and international, have expressed interest in fintech companies in Milan. Most local fintech companies' services are focused on the domestic market, addressing the inefficiencies of the Italian financial ecosystem, such as the long time that it takes to pay a vendor, or the cash-heavy nature of consumer finance. Exit options are extremely limited as well, which makes investors cautious. Access to non-financial talent. There is an abundance of banking talent in Milan, but there is a shortage of tech skills and managerial skills, and a shortage of people with past scaleup experience, as reported by interviewed founders. Senior executives and business development experts are in especially great demand. These needs differed widely by busi- ness model: consumer-facing companies were over 35 percent more likely to rate access to managers as a challenge compared to business-to-business founders. Compliance requirements. Founders in Milan reported that fintech activity, compared with fellow EU countries, is heavily restricted by regulation, and its lack thereof: the ab- sence of a specific fintech regulatory framework is debilitating as the sector is governed by the general traditional financial services rules; this creates uncertainty and high compliance costs, while constraining the potential to innovate. 46 percent of the interviewed 64 found- ers - and over 60 percent of b2b founders - reported regulation as a major challenge. 3 3 Network Analysis points to challenges and opportunities in the Milan fintech entre- preneurship community with long lasting implications for the sector's future potential. There is an absence of productive mentorship and angel investment connections be- tween fintech entrepreneurs in Milan. Research shows that mentorships and angel invest- ment from a founder at scale makes a measurable difference in a founder's ability to scale and significantly improves their economic performance by number of employees. These types of connections are extremely uncommon among fintech entrepreneurs in Milan: only 3 percent of companies benefited from this type of support, whereas 58 percent of companies in the sample belong to a network organization like Fintech District, Italiafintech, or Endeavor. This could be explained by the fact that the sector is still young. With time, however, this may turn into a major challenge in the sector's ability to foster companies that scale in the future. The fintech community has strong ties with the banking sector because of former employment. Fintech companies and the organizations that help them are strongly con- nected to banks through former employment and investment connections. Over 40 percent of fintech founders worked in banking before, and over 30 percent as senior executives. 65 percent of investors and support organization leaders also come from banking. These con- nections are important resources for scaling companies: some of the most accomplished founders in the sector today benefited from business partnerships and equity investments from private banks. Entrepreneurial networks are the most influential actors in the entrepreneurship community and they can become a vehicle to transmit resources. The fintech sector in Milan is characterized by a tight knit web of peer-to-peer connections. Entrepreneurs know each other well, and they frequently co-operate with each other, often to advocate for legislative change. As a result, networks and advocacy groups are the most influential organizations in Milan. Because of their enormous influence on the entrepreneurship com- munity, networks are important vehicles that transmit experience and resources that may address the challenges entrepreneurs reported. 4 Decision makers in the public sector and the private sector who wish to support fintech entrepreneurship in Milan need to focus on four key areas. Channel resources to companies with a potential to scale. More fintech companies need to reach scale in Milan for the sector to become productive in the long run. To help the sector, decision makers should not only focus on supporting startup activity, but also take serious actions to boost companies' scale up. Foster relationships with international investors. Decision makers need to follow the lead of scaling founders that were able to attract growth capital for their companies. They typically have done so by relying on their personal connections with Italians abroad, or by attending an accelerator abroad. Decision makers should actively cultivate connections with high performing accelerators and investment funds abroad and facilitate their entry into the Italian market. Address the shortage of tech talent and non-financial managerial talent in the sector. Decision makers need to focus their attention on the challenges that hurt growing com- panies the most. Through international recruitment events and programs to host qualified managers, decision makers need to foster non-financial talent in Milan. Leverage entrepreneurship networks to foster angel investment and mentorship among entrepreneurs in the sector. Entrepreneurship networks are the most influential organizations in the Milan fintech community today. Network leaders should use their prominence to build on the high levels of trust in the system, help entrepreneurs share resources better, and take over their role as leaders in the community.

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