Bootstrap to IPO – exploring the different ways of financing FinTech
Written by Claire Cockerton, CEO, Innovate Finance
The potential of financial technology is extraordinary. FinTech innovations such as mobile services, crowd funding platforms, peer to peer lending and behaviour finance software are transforming the future of banking and the way we engage with money and financial institutions. But how do we grow this sector? Beyond the praise and investment poured into superstar firms such as Transferwise, Stripe and Powa, there are many other companies grappling with fundamental challenges to growth.
Innovate Finance recently hosted a Bootstrap to IPO panel discussion at the London Stock Exchange to help address this issue and to come up with solutions. Sponsored by the British Business Bank and London Stock Exchange, this event tapped into the expertise and knowledge of FinTech’s leading investors and entrepreneurs to come up with recommendations to boost investment across our entire ecosystem-from bootstrap to SME to IPO.
What our experts revealed was the founder’s journey from startup to global enterprise is not a straightforward experience. The alternative finance sector, which is now worth £1 billion, has created different sources of funding opportunities to help SMEs. They include some of the companies at our panel discussion, such as Fintech Circle, Granttree, Syndicate Room and CrowdBnk.
Yet despite this diversity too few entrepreneurs tap into these finance options. This can stagnate growth for many firms since most investments are either going into small, early-stage start-ups or large, well-established companies, with little of the money making it to small and medium-sized companies. Some of our panellists suggested this gap was partly due to the low risk appetite of venture capitalist firms in the UK in comparison to their American counterparts. Louise Beaumont from GLI Finance brought to light a widespread concern that ‘the venture capital business model in the UK is broken.’ Other speakers echoed Beaumont’s view, highlighting the need to build an ecosystem that would allow SMEs to thrive in the UK.
Keith Morgan, CEO at British Business Bank, shared this sentiment. In his opening remarks he stressed the need to support SMEs and give them more choices for the sake of the economy. "60 per cent of public sector employment was accounted for in small business and if the sector grows we succeed." He said that, "too many businesses rely on one relationship for finance," and that 80 per cent go to the High Street bank and give up if they don’t get a loan.
Morgan believes that FinTech firms should be equally supported in their funding journeys to fuel investment in our industry and to secure London’s leading position in this space. "Despite the incredible surge of investment into the FinTech industry over the past year, there are still significant problems for FinTech companies in accessing finance at various stages," he said.
Erin Lockwood, MD at Silicon Valley Bank, told the audience about "a huge knowledge gap with regards to alternative finance" and that the ‘funding gap’ could be closed if entrepreneurs were better informed about other kinds of financing. Until that happens, traditional financing will remain the dominant strategy for FinTech entrepreneurs. But what do banks and venture capitalists look for when they back a company?
Kevin Dillon, General Partner at Atlantic Bridge Ventures and James Stickland from HSBC suggested that anyone seeking out investment should demonstrate a robust business model and an understanding of the market. Having a CEO with experience also helps. Nicolas Debock, an investor at Balderton Capital, added that revenue is not the key factor investors are looking for but a product that can attract and retain users. Zach Tan from Infocomm said the minimum cost of investment was £1 million. Anything lower was difficult to justify due to the resources needed to ensure due diligence.
Our event concluded with the voices of our members and their journeys to raise capital. Essentia Analytics, Remitia, Bankable, and Derivitec talked about the importance of knowing investors and making sure entrepreneurs formed partnerships with people that truly understand their businesses. For them, attracting funding was a two-way process and entrepreneurs had to find investors that were a strategic fit for their business. Eric Mouilleron from Bankable believed synergy was also important. "I want to enjoy having lunch and dinner with investors before they become part of my company," he said. Derivitec’s CEO, George Kaye added, "I never compromise when hiring employees and I adopt the same approach with VCs."
With so many alternative finance options available for firms today (especially in the UK) we should see more companies expanding their businesses, with or without the support of VCs and banks. However, there’s a need for our ecosystem to enable the growth of FinTech firms and to inform SMEs about the new ways of financing to drive the economy. With greater knowledge about alternative finance, more businesses can grow and secure the future of our sector. We have to do more to spread the word and make this happen.