Funding your Fintech venture
The financing of the global fintech industry increased by 18% in 2017 equivalent to $27.4 billion. The value of deals in the US itself increased by 31% to $11.3 billion. In the UK, deals almost quadrupled and in India, financing increased by 500%.1 Funding your fintech venture or idea can be a daunting prospect, but with all the available fintech funding and lending options out there, it need not be.
Raising capital for any business idea is a fundamental part of laying the foundation for your start-up, but getting it wrong will often lead to failure within the first year. James Christopher Flowers, Private Equity Investor and Investment Manager in the financial services industry recently said in an interview with the Wall Street Journal, while some new fintech companies will be extremely successful, most will not – ending in tears for many fintech entrepreneurs.2 It’s important then to understand why so many fintech startups are ending in failure.
Three reasons why fintech startups fail
Chris Meyers, Co-Founder and CEO of BodeTree, a financial management solution for organizations serving small businesses, recently wrote an article for Forbes on why he believes so many fintech startups are failing. Below are his three reasons for why too many entrepreneurs struggle in this popular sector.3
- The methodological contradiction present in the partnership of finance and technology
Flowers, mentioned earlier, says the contradiction existing in fintech is that finance is slow-moving, while technology is fast-paced and domineering. This contradiction is a direct result of how fintech startups are funded by investors. Fintech partnerships and funders are often used to the fast-paced tech environment and seeing a quick return on their investment. Investors will then expect the same for fintech startups when they inject their money into an, albeit technology-driven idea, however forgetting it exists within the financial industry. Finance is a slow-moving investment sector meaning it takes a lot longer to break into the market. Fintech entrepreneurs will often receive this kind of pressure from long- and short-term investors, and as a consequence, this will affect their short-term thinking and expectations.
The danger of the “growth-at-all-costs” mentality
Rohit Arora, Co-Founder of Biz2Credit describes how fintech companies are under constant pressure to keep their earnings up and in turn, decide to take out high-risk loans. The growth-at-all costs mentality is not only valid for the fintech industry, but is especially prevalent due to the initial excitement that comes with this new financial services sector. Meyers describes how when investors provide fintech funding and fintech lending just for the sake of seeing quick growth, instead of innovation, big problems arise, often ending in failure. The value of global investment in fintech funding is said to grow to $8 billion this year. Competition is fierce to get a piece of the pie in this sector, and often this will lead to fintech start-ups making risky decisions instead of prioritising sustainable growth.
- Working professionals in the financial sector are resistant to change
Most institutions have developed their own values and general ideas over the years, however the financial sector sticks out in this regard, and the working professionals from this industry are especially resistant to change. Most of these same working professionals do not see fintech startups as a threat to their jobs, and because this sector is highly regulated, it is both conservative and not necessarily dedicated to innovative thinking. Therefore, fintech startups not willing to travel the long road with these incumbents will find failure to be imminent. Meyers describes how, for example, at BodeTree, an average deal takes approximately a year to a year and a half before it can be realised. This can make it difficult to raise fintech funding in the meantime, and gather interest.
With all that said, fintech does translate to the partnership of finance and technology, after all. Many fintech startups are finding great success. The cautious financial sector is receiving a revamp, and so many of these fintech startups are thriving because they represent the future of both of these industries. So, what can be done, and what does it take to successfully find fintech funding or to develop a fintech partnership for your startup?
Below are five ways to fund fintech startups:
- Fintech funding
- Fintech partnerships
- Angel investments
- Fintech venture funds
- Bank loans
- Self-funding: one of the most obvious ways to fund your fintech startup is by self-funding. This could include using your own savings or getting a family member or willing friend to fund the initial stages of your business idea. If you choose to receive fintech funding from friends and family, it’s likely the funding will be categorised as shareholding investments falling under the law of equity. This means the investor will:
- Receive ownership of a part of the business and a share in the growth of the value of the fintech startup
- The shareholder will have rights in the company set out under common law, but this can be varied in certain instances
- Shareholders will not recover their funds if the company goes into liquidation until the costs of the company are paid off
- Crowdfunding: the act of raising money from a large number of people each contributing a relatively small amount, often via the internet – has grown in popularity over the years. According to Fundly, more than $34 billion has been raised on a global scale through crowdfunding.4 There’s nothing to lose as an entrepreneur by posting your fintech startup idea on a crowdfunding site to see if funders take a bite. Make sure to state your business goals, business plans of making profit, and most importantly – tell your story. Three examples of some popular crowdfunding platforms are: Kickstarter, RocketHub and Dreamfunded.
82% of incumbents expect to increase fintech partnerships in the next three to five years, according to the Global Fintech report completed by PwC at the end of 2017. These fintech partnerships often are not made to raise capital from the get-go, but bring with them other benefits like reaching customers you couldn’t get to on your own, or to overcome licensing issues. Some fintech startups will create an innovative new platform for financial services and then seek a partnership with an established provider. Others might partner with farmers or large social organisations to reach customers in difficult-to-access regions or spaces were there is little access to technology. An example of the benefit of a fintech partnership is the People’s Pension Trust in Ghana which recently signed with Vodafone Ghana to offer pension plans based on mobile phones to more than 8 million Vodafone customers in this country.5
An angel investor or private investor is someone who provides capital – in this case fintech startup funding – in exchange for usually a convertible bond or ownership equity. Angel investors will often invest due to having a passion or genuine interest in your startup idea which means they are often invested in your sustainable success and keen to provide advice and mentorship.
Fintech venture funds
Fintech venture funds or venture capitals will provide funding to companies that look to have a lot of potential. In the fintech industry, fintech venture funds often will invest in a business against equity. These investments are generally known as being high-risk, but with the hope of bringing high-return opportunities. According to Fintech News Singapore, it was recorded late last year, Paytm, a fintech startup in India received $1.4 billion in venture capital which overall increased the fintech fundraising activity in the country to almost five times more than what it was in 2016.6
If all else fails, a bank loan is often an entrepreneurs next best option when trying to come up with some business capital. According to Techbullion, banks offer two types of fintech lending for fintech startups and ventures:
- Bank Funding – this involves sharing the business plan, valuation details, and project report with the bank.
- Working capital – a loan needed to run a full cycle of profit-generating operations.
Before taking the time to find out what your options are for funding your fintech startup, find out what it truly takes to start one up in the first place. Antony Thomson, Co-Founder of Metro Bank says “So, what do you need to launch a fintech startup? Start with top talent. Deep industry experience helps. Whilst some experience outside finance is helpful”.7
It’s important to continually examine the emerging fintech industry and stay up-to-date with the technologies that will disrupt existing marketplaces and financial services before developing your own fintech innovation.