Last week, Builder.ai collapsed into insolvency, following revelations of drastically overstated revenues and investor misjudgement. The incident has echoes of other fintech companies that were courted by major investors before unravelling.
Earlier this year, Charlie Javice was convicted of defrauding JP Morgan after exaggerating the user base of her financial aid startup, Frank, when she sold it in 2021 for $175m (£129m). Another recent failure is Stenn, a UK fintech valued at almost £1bn and backed by Goldman Sachs, Barclays and HSBC, among others. It later collapsed after lenders uncovered how payments that were supposed to be coming from some of its customers were, in fact, from entities set up to impersonate them.
These failures raise important questions over the number of acquisitions investors are making without conducting the right amount of due diligence. The trend suggests the emergence of a broader pattern, where enthusiasm for fintech outweighs cautious analysis. In Stenn’s case, multiple investors had accepted revenue evidence without tying it back to underlying customer payments. The Frank deal shows the same blind spots. Internal auditors flagged missing customer authentication proofs only after the purchase.
This is a growing cause for concern, according to Carrie Osman, founder and CEO of Cruxy, a UK-based consultancy. “Investors are running into high-stakes deals with minimal scrutiny and outdated due-diligence processes,” she says. “These practices do not bode well for the fintech industry. We need to see through the hype and never cut corners on areas supposedly of our expertise.”
Fintech FOMO: why investors are missing red flags
A fear of missing out is preventing investors from scrutinising companies, experts say. Pressure to move quickly in a competitive market can lead to insufficient verification of critical data or transaction legitimacy. “There may be a reluctance to miss out on the next fintech unicorn and the potential for huge profits,” says Nicola McKinney, a partner at Quillon Law, specialising in financial crime and commercial disputes.
The rapid growth and complex business models common in fintech make it harder to spot risks early on, she adds: “Companies failing as a result of large-scale and systemic fraud will inevitably go hand-in-hand with investors trying to keep abreast of rapidly developing technology and wishing to exploit exciting opportunities quickly.”
For each big fintech collapse there will also be reduced confidence in the sector
A “herd mentality” may develop, she continues. “If one top-tier investor invests in a new fintech company it can lend it a gloss of legitimacy, with other investors following suit.” There may well be an assumption that the first investor has carried out thorough due diligence and so it is safe for followers to rush or abbreviate their own independent checks.
There could also be internal pressures from teams to move forward on deals, to take bold investment positions and not to prolong due diligence. This is especially the case in private equity, where there is considerable pressure to deploy capital in the current market. “Given the speed of advancements in blockchain, AI and quantum computing, that fear of missing out could continue to drive riskier investments,” McKinney says.
For startups, patchy governance is often accepted as normal. “There is a common narrative that the ingenuity and creativity of founders sits well with traditional governance,” McKinney notes, adding that it usually takes time for a company to mature and develop more traditional internal governance. As a result, riskier behaviour and rule-breaking might be tolerated early on, even by more traditional, risk-averse investors.
Outdated due diligence
Almost half (40%) of fintech companies acquired by traditional banks between 2014 and 2020 either closed down or were sold, according to a study by BNP Paribas Commercial, a sign of the historically high failure rate in the industry.
According to Osman, this all underscores the burning need for investors to re-examine any outdated due-diligence processes. Too often, these processes fixate on financials, while missing the operational and strategic signals that actually determine long-term value. Due diligence tends to be very fragmented and risk is managed in silos. “You’ve got finance, tech and commercial due diligence, all led by different teams conducting their investigations in isolation,” she says, adding that this creating communication gaps and critical blind spots.
A fear of missing out could continue to drive riskier investments
A lack of specialised fintech knowledge is also to blame, according to Osman. “In many of these failures, the due diligence process wasn’t just flawed, it was built around the wrong questions. Investors must go beyond surface metrics, validate user engagement and benchmark against market realities,” she stresses. “Without this narrow focus, mistakes will continue to happen.”
Following that initial investment, companies often continue unchallenged, with missed opportunities for independent verification of their claims. In McKinney’s view, it’s useful for investors to think of due diligence as an ongoing process. They should continue to ask questions of their investments, particularly if further funding might be considered. Such practices, she stresses, would have identified issues in the Stenn deal much earlier.
The future of fintech
Global fintech funding has dampened, dropping to $28bn (£23bn) in 2024, a 20% decrease from the previous year, according to data published by S&P Global.
In light of high-profile frauds like Stenn and Frank, many investors are taking a more cautious approach. Temasek, which manages Singapore’s sovereign investments, recently announced that it would move away from startups, partly as a result of failed investments in companies such as FTX and eFishery – both of which collapsed following the discovery of fraud.
This could serve to further hinder investor appetite in the sector. As McKinney notes: “For each big fintech collapse that occurs, there will be reduced confidence in a sector that needs investment, often in very large sums, to develop proprietary technology and to scale-up.”
To succeed in the space, fintech players must become scrupulous. For investors, this includes deeper financial scrutiny, enhanced background checks and closer regulatory engagement. If backers fail to more deeply interrogate their investments, the risk of costly missteps is only likely to grow further.
Last week, Builder.ai collapsed into insolvency, following revelations of drastically overstated revenues and investor misjudgement. The incident has echoes of other fintech companies that were courted by major investors before unravelling.
Earlier this year, Charlie Javice was convicted of defrauding JP Morgan after exaggerating the user base of her financial aid startup, Frank, when she sold it in 2021 for $175m (£129m). Another recent failure is Stenn, a UK fintech valued at almost £1bn and backed by Goldman Sachs, Barclays and HSBC, among others. It later collapsed after lenders uncovered how payments that were supposed to be coming from some of its customers were, in fact, from entities set up to impersonate them.
These failures raise important questions over the number of acquisitions investors are making without conducting the right amount of due diligence. The trend suggests the emergence of a broader pattern, where enthusiasm for fintech outweighs cautious analysis. In Stenn’s case, multiple investors had accepted revenue evidence without tying it back to underlying customer payments. The Frank deal shows the same blind spots. Internal auditors flagged missing customer authentication proofs only after the purchase.
