The Fintech founder’s funding guide
The venture capital funding winter has gripped the Fintech startup ecosystem for a year now. But as temperatures in Europe rise, a new season is around the corner for commercially sound businesses too.
Boosted by a strong start to the year which saw Q4 2022 legacy deals closing after the New Year, the total capital deployed in private fundraising in Q1 2023 increased to $14 billion – compared with just $6.1 billion in Q4 2022.
While economic headwinds continue to create challenging conditions for all technology companies, those that can quickly adapt to meet evolving investor needs are well-positioned to achieve their funding goals this year - though most likely not until deep into Q4.
For Fintechs looking to raise capital over the coming quarters, here are the most important factors to bear in mind.
What investors are looking for
VC’s general investment criteria are relatively homogenous. However, the bull market – which saw record levels of private and venture capital funding for Fintech companies in 2021 – required investors to abandon many of their strict requirements. As the winds of change began to blow in 2022, we now find ourselves returning to a situation where investors are once again applying their criteria stringently.
Today, sustainable revenue growth is a priority, with investors willing to accept lower near-term growth in favour of positive EBITDA and financial stability. This is expected to continue as investors take a longer-term view. “Real”, profitable unit economics meanwhile have become a must. Future monetisation strategies are assumed to carry high execution risk; companies are expected to show a credible path to profitability quickly.
While the overall growth strategy remains central to an evaluation of a company’s potential, it will be thoroughly examined. Efficient use of resources and expected ROI are much more important today than international and product expansion plans, with limited tolerance for excessive spending. While investors may fund new capital expenditures, they expect a company to break even within 9-15 months depending on the latest unit economics.
On the product front, product-market fit remains important as ever. Fintechs are expected to demonstrate that their products target the right market and closely align with clients’ needs and expectations. This necessarily involves proving the defensibility of the business model against disruptive technologies, a recent and prominent example being generative AI. Fintechs must be abreast of market changes and show that their product or service can withstand, or embrace, disruptive technologies.
The standout factor, however, is always the management team. The business model has always been, and will continue to be, crucial – but most often, the founding management team will be the deciding factor. Management’s track record provides an indication of the teams’ capabilities, particularly when it comes to adapting in the face of new challenges and pivoting at short notice. Management teams must be able to demonstrate their aptitude and ability to deal with unexpected challenges to inspire confidence among investors.
Factors influencing fundraising success
With all that in mind, how can Fintechs ensure they put their best foot forward when beginning – or continuing – their fundraising journey?
There are several factors within a team’s control. These include preparation – which is key if a business is to successfully approach the market with an effective equity story and impactful marketing materials. Meanwhile, timing should be carefully considered to leave enough runway. This involves looking at current financial projections and understanding how costs and revenue will evolve as the business grows and how much negative cash flow will need to be covered.
Like a job interview, it is important to remember that the investor selection process goes both ways. Any investor a Fintech is approaching should be carefully selected to ensure they fit the requirements. The high-level characteristics to look out for are well-known – for instance, their experience investing in the sector, whether that be payments or lending; their experience with the business model, whether that is B2B, B2C, or B2B2C; the qualitative value-add they can provide through networks and operations support; their track record of scaling similar companies; and ultimately whether the ticket size matches funding needs for this and follow on rounds.
Given the importance of getting the right fit in today’s market, it’s crucial to dig deeper. If a company plans to expand across verticals, is the investor comfortable supporting this journey? What kind of B2B or B2C have they focused on to date – SME vs enterprise, mass-market vs affluent? Would they be able to lead the next round if it had to be done internally, and how much capital do they have in reserve for follow-on funding? What evidence can they share of their contributions to the growth of similar companies? These are all questions founders looking for funding should be asking before making an informed decision.
Finally, careful consideration of the valuation and terms is a must, and all shareholders need to be aware of the trade-off between valuation, terms and speed. It is worth exploring whether VC is the right route for the business, or whether venture debt – which typically allows for more favourable terms and less dilution of ownership – might be more appropriate.
Fuelling for growth
In most cases, a startup’s fundraising history sets the trajectory for future investment. It pays to spend time getting the right investors on board that can help a business reach new heights, and carefully considering the terms of the engagement.
Fintech companies seeking to raise capital in the coming quarters have good reasons to be optimistic. Investors remain enthusiastic about supporting ambitious businesses that showcase promising technologies, strong market traction, a clear path to profitability and proficient management teams.
Investors being smarter with their investments should not be a cause for concern; rather it presents an opportunity for good businesses to look great and economically unsound businesses (that ‘bought the market’) to fall by the wayside.