Why fintech start-ups and angel investors are a match made in heaven

Tim Mills, Angel CoFund: an early-stage fintech needs more than just capital investment

Fintech is one of the UK’s fastest growing sectors both in terms of the number of successful start-ups emerging within it, and the amount of funding it has attracted to drive development.

According to Innovate Finance, the UK fintech landscape experienced a record year for funding in 2017, attracting $1.8 billion of venture capital (VC) investment. That’s a 153% increase on 2016. But an interesting aspect of this sector, which often gets overlooked, is how much of that innovation is supported by angel funding.

Insights from FinTech Global show that angel investors have consistently made up about a third of the total number of active fintech investors since the beginning of 2014, with angels backing over 1,000 ventures globally. This trend is by no means a coincidence. It reflects the growing, positive relationship between angel investors and the thriving fintech sector that has blossomed over the past decade or so.

So what drives this pairing of fintech start-ups and angel investors? There are a number of reasons, and the most important are rooted in the structure of the fintech ecosystem itself.

The banking and financial services community is actually smaller and closer knit than most might think, and entrepreneurs in this space are looking to establish businesses in a highly regulated, fast-moving and often esoteric field. Additionally, the fintech industry has regulatory challenges and complexities that simply do not exist in most other markets and such hurdles cannot be overcome without the help of individuals who have a deep understanding of the industry inside out.

For these reasons, advisors who understand the business dynamics, know the regulatory landscape, and can connect to the right people in partner businesses, are an extremely valuable resource for companies in the early stages of setting up. They need investors who and can dedicate time and advice, as well as funds. This is where the deep networks and operational knowledge of angel investors often has a clear advantage over venture funds.

According to research from the British Business Bank, the average active angel devotes a substantial amount of time – on average 1.6 days a week – to their investment activities and supporting their portfolios. This means high-potential fintechs are able to draw on the mentoring and specialised insights they need to grow their businesses.

Fintech companies also have to deal with the challenges of launching into mature markets where they are seeking to displace offerings from well-funded incumbents. Early-stage fintechs aren’t just competing against other start-ups, but they are often disrupting the models of well-established giants like the banks, large insurance companies and others in the financial services industry. With these challenges it can be difficult for even the most innovative of fintech start-ups to stand out and make a strong case as to why they will succeed, especially when seeking funding pre-product launch.

Of course, all investors are on the lookout for companies with the potential to break through and make good returns. However, what makes angel investors so advantageous here is that they are more willing to take more nuanced or harder to quantify risks and can be more patient when it comes to returns. Furthermore, many angels are by nature more interested in funding teams in the crucial early stages where their capital has most impact and is key to setting the course of operations and delivering core R&D. This combination of more speculative investment combined with deep involvement is something few institutional funds are able to commit to.

Ultimately, an early-stage fintech company needs more than just capital investment to get its products off the ground. They’re going to need the considered advice, expertise and contacts necessary to nurture growth beyond that initial concept. That’s why angel investment is such a good match – the best angels tend to be successful individuals from a given sector who have done it before and also have the time and resources to help you and your business out.

So if you’re an early-stage fintech on the hunt for investment, find yourself an angel that has gone through the journey themselves. They are the most likely to understand your vision, the challenges in the market, and have the knowledge to help with both – while offering the crucial initial capital you need to take those first few steps.

By Tim Mills, investment director, Angel CoFund