By Roei Samuel, founder and CEO, Connectd
Despite the pandemic, the UK remains one of the leading investment destinations in Europe and only sits behind Sweden for investment into startups against population size, and behind the US on a global stage. So where is this money going?
Fintech’s remain the primary source of investment early-stage investment, and I’d attribute a lot of this to the fact that we have rapidly adopted digital technology over the course of the pandemic, specifically in this sector. Traditionally and historically speaking, banks would rely on their physical branches, which became defunct at the height of the pandemic, and they have felt that impact ever since.
Challengers by comparison were digital first in their approach, giving them the edge from the outset. However, as we start to see the pandemic’s impact begin to ease (touch wood!), it is evident to see how quickly the big banks and FS companies have caught up by turning to fintech startups to provide technological solutions. Where does this leave investors and what do they need to look out for before investing in the future?
The Importance of Data
It goes without saying the investors rely heavily on data in their decision-making process, which provides opportunities for fintech’s that speak their language. This is reflected in the deal making process, as meetings turned virtual, naturally investment rounds decreased but the value remained the same, and analytical data played a part in retaining those levels because they demonstrated the opportunity of a business far easier than any pitch process or networking meeting might have done.
It all depends on the model, of course, but the majority of fintech’s are underpinned by subscriptions, but driven by transactions. Analysing the number of transactions that occur, within a specific geographic region in the space of a year will be crucially importing in terms of understanding the potential upside. Ensuring that this data is a focal point in investor decks will immediately garner attention.
More broadly, an understanding of how the company proposition is based readily available data is hugely important. For example, does it work with open banking, or would all of the data need to be generated in the app itself? The latter certainly wouldn’t be a con, as it means the data may in the end up hugely more valuable, but it will take more time and money to build.
Choosing a Segment
The ‘fintech sector’ is something of a broad catch-all term, but there are many segments within it. Many are hugely over-saturated, while others are emerging and ripe for investment. Investors are interested in:
- Competitive edge – are your features and functions superior?
- Moat – is this suitable enough to protect the business’ long term profits?
- Defensibility – do you have the ability to maintain true defensibilities to help the business stay at the top?
Having an answer to all three will help put ease the minds of potential investors.
Be Mindful of Incumbents
Particularly in B2B propositions, incumbents are now increasingly looking to build their own solutions to compete with emerging fintechs. Rewind just a few years ago and this was seen as too expensive. But the tide appears to be turning. If successful, this saves a huge amount on cost and resource but if they fail, it kickstarts an acquisition strategy. This is reflected in the growth of M&A activity in the fintech space.
The Investor Landscape Has Shifted
Investment in any startup has traditionally been seen as something of a closed shop, based more around what you know than who you know. The pandemic changed all of that. With face-to-face meetings all but off the table for the better part of a year, the very nature of how deals are done has changed, which will have a profound impact on the startup scene.
According to research, the average startup investor receives as many as 20 pitches per month, while spending the equivalent of an extra day a week searching for deals on LinkedIn, as an example.
Accelerated by coronavirus, investors are increasingly happy and confident making decisions virtually. This is breaking down those traditional barriers that blocked startups who didn’t have an ‘in’ with the establishment. As a result, fintech startups are connecting with investors – and business mentors such as non-executive directors – online, matching based on data and shared interests.