Investment – How companies can find backing and investment for their Fin Tech start-ups and what investors are looking for in a pitch
Jerry Lees – Published in Financial Technology
External financing for startups usually comes from friends and family, individual (non-institutional) angel investors, early-stage funds or some combination of these sources.
Raising capital generally takes longer than most new entrepreneurs expect. Getting in front of investors is a lengthy process, and investors will often take a long time to give you a final answer. So the sooner you get started, the better.
“ In the realm of ideas, everything depends on enthusiasm; in the real world, all rests on perseverance. ”Johann Wolfgang von Goethe
Now with new developments in web sites that aim to help entrepreneurs access investors and especially start-up angel investors there has been a revolution in the way Fintech companies can access seed capital. There are now numerous crowd funding web sites offering access to business angels who are ready to back good business ideas.
These web sites short circuit the process of accessing capital investment, radically reduce the cost of raising funds and extend the scope and range of investment fund sources.
Beauty parades, computer dating for investors and entrepreneurs and access to investors of all shapes and sizes across continents now make the potential for raising new capital far simpler.
For example, Nicola Horlick, the renowned fund manager/”superwoman” of the Nineties has set up her own fund competing at the top end of the spectrum. Ms Horlick, believes it is a “no-brainer” that crowdfunding has rapidly become mainstream as banks are not lending to small business and savers cannot get reasonable interest rate returns from bank and building society accounts. Quoting Horlick: “Crowdfunding is all about cutting out the middle man and allowing small businesses to get the funding they need without banks taking a slice of their margins in fees from when firms take out business loans,” she said. “For savers, these ventures offer the potential for much greater returns.”
As well as the potential return on capital, many business proposals on crowdfunding sites qualify for special tax reliefs under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) rules. Investors can access generous tax breaks, for example claiming back income tax on the money invested.
Recently the FCA has gave indications that they wish to restrict crowdfunding to sophisticated investors and published the following comments on their web site
“Crowdfunding: is your investment protected?… We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.
We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.
We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.”
We at Linear have addressed this issue directly with their client, Growthfunders and have addressed all the FCA concerns expressed above. Linear Investments appointed Growrthfunders https://www.growthfunders.com/ as an authorized Appointed Representative of Linear Investments, thereby bringing Growthfunders as a crowd funding business under the FCA regulatory umbrella of Linear. Linear has the FCA regulated client money permissions, procedures and regulatory capital in place to ensure that Growthfunders is fully FCA compliant in terms of holding Client money which is held through Linear’s client account structures. In addition to client money permissions, Linear carries out regulated qualification checks on all investors before they join the site to ensure that they are properly identified as sophisticated investors within the FCA defined terms. We feel that other crowdfunding sites will need to follow the lead of Growthfunders in the near future.
Crowd funding is not the only option, and tends to operate at the lower end of the financing spectrum. For larger ventures or acceleration capital, venture capital specialists, private equity funders, stockbrokers and corporate finance houses provide funds for larger scale investments and of course there are the capital markets for bonds and equity.
Investors however still require, as you would expect, business cases to be presented in well-structured business plans. What investors expect is a case, well thought through that addresses the key features of any sound business proposal.
- A clear description of the business idea in a well-structured and precise proposal
- Make sure it describes the problem your company is solving
- The addressable market and your progress to date
- Describe the competition and how you handle competition, what is your Unique selling proposition (USP)
- The background and credentials of the people involved – investors bet on people as much as ideas – Money follows people!
- Track record of the team
- Key objectives, milestones and goals
- It’s much more significant for a startup entrepreneur to work with the right type of investor – experience counts.
- A clear financial case, cash flow and justification for the investment, return on capital, with sensible contingency and credible risk analysis
- And finally – what many budding entrepreneurs fail to consider – the exit strategy for the investor/business. Investors want to know how and when they will get their investment back
Entrepreneurs create businesses for many and varied reasons; passion, intellectual challenge, lifestyle and so on. Investors, on the other hand, generally have one key consideration – return on their capital. It is important to spell out the exit strategy or strategy options for the investors and the timeframe, which must be realistic and above all, credible.
What conclusions can be drawn from this? It is very clear that Crowdfunding is a powerful new tool that will invigorate and stimulate investment in Fintech and other new ventures. It is also clear that the FCA is moving towards regulating this sector and will publish a white paper on the subject soon.