Research from Innovate Finance shows that investment in UK fintech dropped by 39% in the first half of 2020, compared to the same period in 2019. In H1 2020, $1.8 billion of venture capital was invested in 167 startups compared to H1 2019, when $3 billion was invested in 263 startups.
It’s worth mentioning that this $1.8 billion UK fintech investment was still a 22% increase over the second half of 2019, when funding totaled $1.5 billion. All signs suggest that investors will make significant increases in capital investments during the rest of the year.
But are investors getting pickier when it comes to fintech? It certainly looks like the current investor appetite is for more mature, later-stage fintechs: more than half of H1 2020’s fintech investment went to just five companies: Revolut, Checkout.com, Starling Bank, Onfido and Thought Machine. Early-stage fintechs raised just 8% of the total investments.
However, the coronavirus crisis has rapidly accelerated the digitisation of financial services, with lockdown restrictions encouraging those previously resistant to engage with digital financial services. The stage is set for fintechs to thrive and deliver offerings that meet shifting consumer demands. To be in with a shot of wooing investors, fintechs will need to demonstrate certain qualities that set them apart from other companies.
So, what exactly are investors looking for in the next big fintech?
A strong, differentiated proposition
The fintech marketplace is crowded and filled with mature innovators setting a high standard for everyone else. To catch the attention of investors, you must be addressing a clear, pressing market need that no one else is tackling. Not just that, your proposition must be easily articulated and backed to the hilt with market research that proves the opportunity is worth pursuing.
Investors are going to ask the question: Why you? What are you doing that’s unique? How will you protect your position? Getting this right means a foot in the door with investors.
A path to profitability or exit
An attractive fintech must be able to demonstrate a concrete, long-term plan for the financial viability of the business. There are different paths for investors to make their returns, be it a trade sale or IPO, but the fundamentals of securing a successful outcome are usually the same. Plotting a course to attract and serve your customers for less than you can monetise them for will be at the core of any subsequent valuation, no matter how its outcome is achieved.
Whatever the goal, you need to demonstrate an understanding that building a scalable and sustainable fintech is likely to require significant capital. To develop competitive services, attract customers and monetise your offering, you must invest in the right people, partners and technology.
Strong leadership and core team
A great team means many things: strong leadership with the vision to build something revolutionary; the skills and expertise to turn that vision into reality; the experience to navigate the pitfalls and opportunities that you will face; and the ambition and determination to make the business successful no matter what.
Ultimately, securing investment is about building relationships. The right team with the right qualities is often what convinces investors that they’re putting their money in the right place.
The right partnerships
Partnering with the right organisations can give you strategic access to the solutions that will help build and scale your offering. Their expertise and experience are often invaluable; many partners have been in the game for years and may have already solved problems you might be encountering for the first time.
From an investor’s perspective, seeing that you’re working with credible partners and proven tech helps build confidence. It shows that you’re a less risky investment, and that you respect their investment and are going to be using their money to build real value.
Fintech investment is not dead
After this recent blip, we expect the amount of investment into fintech to continue to be significant, at least in relation to other industries. But there’s no avoiding the fact that investors will be looking to stress test potential investments much more than before.
By creating a differentiated proposition, planning a clear route to profitability, building a strong team, and finding the right partners, fintechs will be in with a shot of securing the funding they need to make their grand vision a reality.
By Shaun Puckrin - CPO, Global Processing Services