Dear Luc: When is the best time to go fundraising?

In Dear Luc, we answer the questions the industry’s fintech founders are too afraid to ask, and solve the problems they don’t want their VCs to know about.

From regulation readiness to technology teething troubles, our start-up agony uncle, Luc Gueriane, is here to help.

Luc has over seven years’ experience working with flagship fintechs like Revolut, Wise, Monzo and Curve.

His expertise and extensive work in the fintech ecosystem mean that Luc is able to offer unique insight into the building of a successful fintech company.

Dear Luc,

I’m feeling the pressure, seeing all the funding rounds lately for fintechs so early on in development. When is the best time to search for backing?

I get it, it’s hard to concentrate on your own business growth when there’s articles being published almost weekly with headlines such as “UK fintech investment reaches record levels”, or “record-breaking VC investment in fintech in 2021”. It might feel as if everyone is getting some form of funding but I’m here to tell you that this is not the case.

What is early stage?

First, let’s get some context. Generally speaking, ‘early stage’ concerns the phase of a start-up development preceding the rapid growth phase. Meaning that the business isn’t fully operational but is in the deep depths of research and development. There’s no denying that exceptionally interesting business models might still capture the attention of investors at this stage however this is now less common.

Historically, seed funding or angel investment was more common for these early stage fintechs. Many investors had caught on to the excitement of financial technology and were fascinated by how it was shaking up the traditional finance space. Some fintechs would be fortunate enough to raise enough of this investment to never need to engage in a Series A round of funding. But for many, this initial financial boost was just the start of their investment journey.

One of the better known fintech disruptors, Revolut, raised a whopping £1.5 million in seed funding in 2015, and then another £1.7 million in seed funding again in 2016. Despite being only six years ago, this was game-changing money for such an unknown industry. They had a strong MVP to win the confidence of investors and it was then over to them to deliver on their strategy.

Would investors be so keen to part with their cash for such an unestablished business in 2021? Not likely.

The last few years has seen the market get more and more saturated, causing investors to become savvier. In the latest Finch Capital Report, it was uncovered that investors look at mature fintechs, with years of experience and established business plans more so than their early stage counterparts.

Although it might seem like many businesses are getting funding from day one, I feel the use of ‘early stage’ has distorted things amongst the masses of growth happening across the space. With heavy regulation and new product opportunities developing all the time, businesses are being worked on for several years behind the scenes before becoming known players. As a result, firms must make sure they’re not comparing their business to one that has already jumped ahead to Series A.

The best time depends on what kind of investment you want

It’s important to remember that there is no one size fits all for investment. The “best time” to search for backing is entirely reliant on what kind of relationship you are looking for. Think about the type of investor you want, rather than the type of investment. Are you looking for an advisor to complement your skills and work with you to grow your business? Or are you looking for someone to provide the funds to help you continue your current operation?

Each investor, no matter what stage of funding, will each want a different level of involvement in your business. So, you will need to weigh up how much control you are willing to potentially lose by giving up some equity – even if it means that cash injection would bring you a return.

You also need to consider how this investment ties in with your long-term business plans or potential exit strategy. Is your firm a lifestyle business? Or is this a business that you want to individually grow and turn into the next big unicorn? Understanding why you set the business up in the first place will be key to discovering what kind of investment you want.

Be aware of the investment bubble

Fintech is a very competitive space with many products offering similar functionality and benefits – each all fighting to be top of wallet. Sharing the news that a business has received funding is always going to sound impressive to potential customers and the wider market but don’t read too much into it as a rival early stage company.

Valuations are only worth their money if someone would be willing to buy the business for the same amount that it is being valued.

With the knowledge that fintechs can become huge money-making machines, I believe that firms with a proven concept are more likely to attract investor attention.

My view is that if you’re looking to get backing, make sure you’re doing it for the right reasons. The PR value might be great but if you’re seducing investors based on their agenda rather than your own, then you may experience a clash of expectations later down the line. Doing this at the “right time” is also key and this all depends on your business plans. As with hiring any new team member, investment options need to fit in with the direction of your long term goals rather than short term wins.

Do you have an embarrassing question you want answered, or a seemingly unsolvable problem you’d want help with? Post an anonymous comment below, or email FinTech Futures’ Tanya Andreasyan in confidence.

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