Jon Dawson, Senior Manager haysmacintyre advises fintech start-ups on the right time in their business growth to woo investors.
In their earlier stages, fintech start-ups may have pulled together some money from seed round funding or investment from family and friends. There may, however, come a point when these businesses need to consider more significant external investment.
Throughout the whole process, it’s worth keeping in mind that securing an investment is similar in many ways to a job interview – it is a two-way relationship. Business owners need to impress investors, but they also need to ensure the investment suits their company’s needs.
With fintech being a particularly popular sector, there are thousands of investors to choose from – so how do businesses choose the right investor, and how should they prepare?
When is the right time to look for investment?
Businesses should consider what makes them attractive to investors.
Within the sector, many non-revenue generating businesses are attractive because of their prospects, usually because they have developed a product that has huge market potential.
Revenue generating businesses should consider further investment when they have a strong history of stable or growing revenues.
Start-ups may also need to consider any recent events that are likely to enhance the price of their offering, such as whether they have been working with any notable companies, or if there have been any changes in legislation that could alter the value of their offering.
Choosing the right investor
When a business is ready for investment, they have to consider what type of investor they want: aside from funding, what else do they want to receive from their investor?
For many start-ups, an ‘angel’ investor will be the preferred choice. These investors can offer extensive experience and expertise, helping the business leaders through unfamiliar territory, whilst standing back from the day-to-day management of the business. Often referred to as “patient capital”, angel investors are generally less concerned with rapid returns, supporting the business throughout its growth.
Alternatively, fintech companies may turn to venture capital (VC) investment. It is, however, worth considering that the VC investor will want to exit at some point down the line, many frequently departing within five years of Series A investment. It should also be kept in mind that they may want some control over the day-to-day operation of the business, and would possibly want a position on the board.
Start-up businesses often receive investment that is particularly hands-off, where the investors pay little attention to day-to-day matters. As the scale of investment increases, businesses should prepare for this dynamic to change. Investors in more mature businesses, often expect to know everything the company is doing and have an influence on decision-making.
Some investors may also not completely understand exactly how fintech works: the standard VC model expects to make a return within two to five years, but the standard fintech model will often be non-revenue generating for three to five years. As a result, VCs may wish to accelerate any sales prematurely, which may not be in the best interest of the company going forward.
Seek external advice
As business owners embark upon the journey towards investment, it’s worthwhile consulting external advisers. Having worked on both sides of the deal and having seen the level of detail that we would investigate on behalf of investors, I would recommend external advisers are appointed by business leaders before going to the market for funds.
Businesses should look to take on board both legal advisers and accountants, ideally with names investors will recognise, to guide them through the next steps.
Regardless of the discipline, advisers should have the director’s interest at heart, and should be considering the outcome for director as an individual, including the tax structure going forwards and ensuring that not too much of the business is sold off at this early stage.
Consider the internal structure
The structure of the business is another key consideration for those seeking investment. Many investors appreciate when a founder can admit where their strengths and weaknesses lie; if the founder is best placed as an innovator (sometimes the case for fintech companies), it is important they acknowledge this. Appointing an external CEO, who has more appropriate leadership skills and business acumen, to take on the day-to-day issues of managing the business is certainly worth considering. Once the business has reached a certain size (some would say 12 to 15 employees), it may also be worth employing a COO to take the strain of the daily business management off the founder and CEO so they can focus on their own responsibilities.
As the business moves forwards, an employee incentive plan may be required. With expansion and structural changes on the horizon, incentivising employees to remain with the business in the long term is vital, especially if they are future candidates for senior management positions. It’s useful to consider how a share option scheme might work and how this might impact investment.
What is an investor looking for?
Once organised internally, businesses will need to consider how to appeal to the right investor by preparing their investor deck and forecasts. An investor deck is effectively a sales pitch, but the best investor decks also explore weaknesses. These can include how the business compares to competitors or any difficulties they may face and how they would counter these issues, rather than waiting for the investor to address them. It’s also worth moulding the pitch around how the investor could eventually exit the investment, in view of the business’s long-term future.
Of equal importance are the forecasts of the business. Fintech companies will have developed some form of technology and will be raising investment on the basis that their product has superior potential compared to competitor products, and will be of significant value. The danger with this is that many forecasts are over optimistic, and aren’t appropriately justified, which may be seen as unrealistic by prospective investors.
The amount required from the investment should also be carefully thought out: businesses shouldn’t request the absolute minimum which, in theory, is required to keep the company’s cash flow positive. It’s important to factor in a buffer when considering the investment value, which could be used to mitigate future hurdles.
Ultimately, an investor wants to work with a company that is open and honest with them.
Consider the implications on tax reliefs
From the director’s point of view, a business will need to consider how the director may wish to exit in the future, and the ripple effects this could have on various tax benefits which they might be entitled to.
In several cases, founders will be eligible to entrepreneur’s relief, so will pay tax at ten percent on their proceeds. Often, founders will set up EIS or SEIS schemes in the early stages which can allow a tax free sale for founders who have invested through the scheme. It’s important that eligibility is considered throughout any major events to ensure the founder remains eligible for the relief.
I would always recommend taking professional advice prior to any investment round, corporate event or restructure.
Ultimately, there are several factors to consider when embarking upon the next stage of growth for a fintech business. External funding can offer leverage for growth, but business owners should be careful to time their approach right: striking while the iron is still hot, but only when they are fully prepared. The right investor can offer not just financial support, but also invaluable expertise, so businesses will do well to be sufficiently prepared to secure the investor who is the best match for their company.