By Jessica Hardy (Assistant Director at Dunedin Private Equity)
Fintech businesses are raising record amounts of investment; private equity backers bring more than just financial firepower to the table, expertise and experience can make a significant impact
Fintech businesses raised a record $112bn of investment last year, more than twice as much as in 2017. This included Dunedin’s own recent investment in paytech pioneer Global Processing Services (GPS).
Investors continue to be attracted to the fintech sector; complexity across the value chain, regulation changes, cross border differences and technology innovation all make for an environment that is rich in opportunity.
Despite the healthy flow of investment and continued investor appetite in the sector, certain businesses will be more attractive than others. Dunedin looked at a range of payment businesses before it eventually made the GPS investment last year. So, what is it that attracts investors to certain fintech businesses over others? And, equally, what can investors bring to these firms to help them succeed?
In the case of GPS, it was (and still is) in an ideal space. Whilst the payments sector as a whole has attracted huge amounts of funding, issuer processing, where GPS is a clear market leader, has received less attention. That is despite the mushrooming demand for such services from a new generation of fintechs that want to challenge the traditional institutions.
Dunedin looked at a range of payment businesses before it eventually made the GPS investment last year.
GPS is the tech powerhouse that sits behind many of the exciting digital banks, challenger banks and fintechs; it is not placing one big bet on a targeted programme, but rather is managing its risk through a portfolio of customers who are all looking to strike gold. It is the equivalent of the Gold Rush era when suppliers of picks and shovels profited from their customers seeking precious metal.
What does it take to be a successful fintech?
Fintechs with the greatest potential to succeed are those able to exploit opportunities created by complexity and regulatory change – in areas such as paytech, insurtech and regtech, for example. These are areas where technology provides a means to serve customers better – whether the customers are financial services businesses in their own right or the end consumers.
Making progress can be challenging. For example, fintech businesses will have to operate within complex regulatory frameworks; that may be a steep learning curve for founders or leaders with a technology background rather than a long history in the financial services market.
It is also crucial to be able to see a path to profitability. Fintech entrepreneurs not only have to be certain they are solving a problem where there is genuine demand for a solution; but also, they must be able to scale sustainably and profitably. This is particularly challenging given the fast pace of the fintech market – technology investment is a continuous requirement rather than a one-off need.
Fintech entrepreneurs not only have to be certain they are solving a problem where there is genuine demand for a solution; but also, they must be able to scale sustainably and profitably.
Platform businesses such as GPS, where customers are able to plug into a range of services via a single exchange, are highly-prized by investors. Once established, a successful platform effectively represents a barrier to entry to potential rivals, which would need to build their own platform to compete. This provides a solid base from which to scale and grow, with recurring revenues providing greater visibility and predictability of earnings.
Successful fintechs can’t afford to stand still with one formula; part of their value lies in their ability to respond to change quickly. Those businesses that are unable to continue innovating risk joining the ranks of the incumbent players they once threatened to disrupt.
The right investor
Even with all the right ingredients for success in place, many businesses may find it difficult to fulfill their potential. Start-up businesses fired by entrepreneurial zeal and creative thinking have to work out how to transition to become established organisations equipped to deliver ongoing sustainable growth. Foundational areas such as governance and process can be overlooked in fast growth businesses with ambitions of market dominance.
This is where the support and capital of an experienced investor can make a significant impact. But the fintech learning curve is steep so selecting the right investor, with a true understanding of the sector, is key.
Start-up businesses fired by entrepreneurial zeal and creative thinking have to work out how to transition to become established organisations equipped to deliver ongoing sustainable growth.
Support from an experienced fintech investor may take different forms. It might involve helping the business to secure the talent and support it needs to develop – in the form of non-executive directors or a chairman, for example, or frontline executives who bring new skills into the business. It might mean technical support, with help establishing systems that enable better financial reporting or customer relationship management. Or it could mean assistance with building governance structures that establish accountability and lines of control as the business expands, ensuring responsible and informed management.
Expansion overseas is another way a fintech can supercharge its growth, and the right investor can bring broad and varied experience of working in international markets with other businesses, as well as potentially leveraging the power of its networks to help the organisation access new territories. For fintechs that are seeking to exploit the opportunities of an increasingly global market place, this support can be transformative.
There is no question that investors and fintechs are well placed to build mutually-beneficial relationships. But while fintech investment is booming, both sides need to be discerning, picking the right partners to help them succeed.
Private equity investors are keen to identify high growth, innovative fintech businesses that are well-placed to exploit the complexity and regulatory change prevalent in the market. The most sort after fintechs are those that are responding to genuine customer needs, are clear about their path to profitability and have clear barriers to entry.
In return, private equity can offer ambitious fintechs experience and support to supercharge their growth, including:
⮚ Capital investment
⮚ Support with talent and skills development
⮚ Technical support and expertise
⮚ Advice on business structure and governance
⮚ Support with expansion into new markets, including international territories.