According to a recent Accenture study, investment in fintech across the globe, continues to rise. In the first quarter of 2016, investments in fintech reached $5.3 billion, a 67% increase over the same period the year before.
However, the landscape of investment in fintech is changing. Fintech startups are no longer the only option available to investors, as bigger players, such as tech giants and some incumbent players, are starting to explore an entry into this lucrative sector.
In our last article, we put forward the case that organic growth is almost impossible for a fintech firm. In this new environment, fintech entrepreneurs of smaller businesses will find it increasingly challenging to attract investor attention.
Done in the right way, however, you can still succeed in getting investors queuing up to pour money into your venture. In this article, I explore some of the strategies you can use to successfully get investor attention and confidence.
Into the mind of Investor
Looking at things from their perspective, investors are most concerned about the risk of losing their money. Living in the risk/reward world, they understand that large returns are not possible without taking huge risks. So their risk appetite then determines whether they will invest in the venture at all, or if they do, how much return they must get to compensate them for the risk.
Now this may sound obvious, but you would be surprised at how many fintech entrepreneurs fail to look at things from the investor’s viewpoint and are surprised when investors are not enthusiastic about their venture.
By nature, entrepreneurs are passionate about their venture, and can’t understand why investors don’t share the same passion. Entrepreneurs see the up side first, whilst investors start with assessing the down side. It’s therefore no wonder that investors will start to gravitate to “bigger and safer” opportunities being created by more established players who give investors greater confidence and present less of a risk.
To keep things simple, the more you can do to allay investor fears, the more interested they will become. Once you have their attention, this is the time to start showing them the future potential of your venture and sharing your passion. However, please bear in mind that investors will be assessing this future potential opportunity within the context of their risk assessment. If your grand vision doesn’t match their assessment of how good you are at managing their risk, there is unlikely to be a deal, or investors will demand a great premium, regardless of how grand a vision you portray.
4 Strategies to Allay Investor Perception of Risk
By allaying investors’ fears, they will be more open to exploring the vision and future potential of your business. When done in the right way, and in a market attracting huge investor attention, fintech entrepreneurs can successfully create an environment where investors actively line up to back your venture as opposed to the plethora of other opportunities out there. We set out 4 key strategies to build your fintech business in a way that provides investors with the certainty they expect from a fintech venture – i.e. excess profits in a short space of time, because you are able to execute on your strategy and manage the down side.
Testing your Strategy
Reaching a gold mine that has already been mined 80% isn’t going to yield riches. A “me too” strategy won’t scale, and at worst is an unsustainable strategy. Whilst a disruptive strategy is ‘cool’, investors may prefer a strategy that is more collaborative with incumbent players or indeed creates a proposition that helps to improve the operational efficiency or customer experience of incumbent players. Alternatively, becoming an innovative distribution channel for incumbent players is another successful strategy.
Take a step back and reflect on your current strategy, whilst projecting your organisation 3 years into the future. Get an external perspective and realign your strategy if the future doesn’t look that bright. If you are not in the right business, no amount of “working on the business” will help.
Getting your House in Order
A firm that is not well run, doesn’t inspire investor confidence. It’s amazing to see lack of key performance and risk metrics deeply embedded in fintech firms. Without this, they find it hard to keep a pulse on the business and can’t react quickly when the business faces challenges. Things go out of control when problems occur.
Professionally developed management accounts provide investors with confidence. If annual accounts are audited (even if not a legal requirement) – it brings about certainty and the sense of a professionally run business.
Risk Management Framework
When investing in financial services firms, investors are always nervous about the risks that such companies bring. They themselves are vulnerable to risks or risk their clients’ money through transactions they facilitate. Regulation is a constant threat and non-compliance can result in the rapid closure of the firm.
A framework supported by effective policies, processes and systems, will help to ensure that the firm is proactively able to identify potential future threats and respond before the risk is given the chance to materialise.
Easier said than done – after all, this is what got banks into major trouble during the financial crisis. If you get it right, its then a panacea for investors who will get certainty they require. Getting professional help may sometimes be the only option.
Systematise to Scale
Without systems, a fintech firm can’t deliver a consistent and remarkable service to their clients. More importantly, they can’t also scale to reach growth rates expected by investors from their fintech investments.
Well documented processes and systems, and a workforce trained to efficiently operate the system, is what allows the fintech firm to expand into other products and explore new markets. A combination of different products cross selling through different channels is what brings massive scale to the business. A well-oiled system also makes the fintech firm attractive for acquisition by a bigger player. Investors gain confidence because they gain clarity about their possible exit route and the high returns they can make at that stage.
Once the above building blocks are in place, you as the fintech entrepreneur will gain huge amount of confidence about your business. This will show when you face investors and you will inspire confidence in them, confirming that the investment they make in your firm will be a lucrative endeavor. This confidence will enable you to line up investors, at least for an initial meeting. Instead of asking them to make an investment in your firm (and creating a big decision hoop they have to jump through), get them to simply sign an “expression of interest” (a much smaller commitment to make).
If you are genuinely able to pitch how you can take away risk from your investors’ decision making, and if your vision is grand enough, then I can’t see why you would not have more investors lining up to invest compared to the amount of funding you wish to raise (or equity you are willing to give up) – an OVERSUBSCRIBED business.
With an oversubscribed business, you can now dictate the terms of the investment.
By Jay Tikam, Managing Director at Vedanvi