5 tips for fintechs raising Series A & B funding
Despite a funding slow down fintech founders need to keep long-term upside potential in mind, writes Gareth Jefferies, Partner, RTP Global.
Though Innovate Finance recently announced a slump in fintech funding at the beginning half of the year, overall, the investment landscape for technology startups is still bright.
Even if the financing environment is tighter now than in recent years, there is still plenty of dry powder at both the early and growth stages, and tough times tend to help forge the strongest and most resilient companies.
Fintech founders building in markets that can sustain VC-scale outcomes, with business fundamentals conducive to those outcomes, will still find a receptive investor audience.
With a clear understanding of what investors are optimising for, as well as what they should expect and demand from those investors themselves, they can find the right investment partner that will be there for the journey.
If you’re looking ahead to a Series A and B funding round, here are five things to consider as you bring on your next investment partner.
1. Position your product as mission-critical in B2B, or show real customer love in B2C:
There are a lot of companies that were getting funding in 2019-2021 that were solving nice-to-have issues, but the one thing that happens in a recession is that everyone focuses on what really matters.
For B2B companies, the nice-to-haves get crossed out by the CFO, and what is mission-critical comes to the fore. Similarly, consumer applications need to solve a real problem for their users and show signs of true customer love.
2. Highlight those select few standout metrics or datapoints: At Series A and B, there’s no shortage of information to show. However, there’s often one real ‘green light’ moment — a signal that there’s something truly special here.
Different investors may care about different things but for me personally, I’m trying to find that ‘green light’ signal with every investment I make.
3. Be aware of the importance of capital efficiency, but remember that terminal upside potential is still the #1 priority:
Some founders are being told that all VCs care about in the current climate is profitability. Capital is no longer free, and business models built on the premise that it was are no longer viable. So, capital efficiency matters more than it has in recent years and ‘growth at all costs’ is rightly out of fashion.
However, don’t lose sight of the fact that VC is a decade-long hold period asset class for a reason. We invest based on our belief that this company can scale to a $5-10bn outcome or even more if everything goes right.
4. Partner with VCs that truly understand your business for a fruitful long-term partnership:
All companies need their investors to understand their business thoroughly to ensure real alignment.
However, fintech is more complex than other sectors in this regard — there are multiple layers of regulatory considerations, a lot of esoteric knowledge, and many of the nuances of the different business models are not obvious to every investor, especially in parts of fintech like lending and payments.
If you are speaking to investors that haven’t done as much fintech investing as others, make sure to ask qualifying questions to ensure that they actually understand your business, and the potential opportunities and risks. A poor understanding of the mechanics and nuances of the business is the first step to long-term misalignment and conflict.
At Series A and B, you are likely to be embarking on a five or 10-year relationship with your investors. So make sure that these are people that you want to work with and have involved with your business in the long term, not just at the point that you raise capital.
It’s always a good idea to gather references from founders that particular investor has worked with in the past, and not just from the success stories but especially from the ones that didn’t always go according to plan — you learn far more from those.
5. Be deliberate about what you’re going to want from an investor:
VC brands aren’t as valuable in attracting fair-weather capital as they used to be. Founders should focus more on what value the investor will bring to their business.
What is valuable will depend on the company. Some will want support with talent or business development, others might want access to the VC’s network.
We often find our portfolio companies are drawn by the flexibility with which we can deploy capital, as well as our global network, and the learnings we’ve gathered from investing early in 10+ companies that went on to become $1bn+ companies and 5+ that became $10bn+ companies.
Shop around for the right individual and the right partnership that will provide the support you’ll most value.
Though the market is tough right now, VCs are always looking for the next $10bn business and are looking for fintech founders they believe have the ambition and potential to achieve this growth.
Don’t lose sight of the fact that you’re finding a partner for a long journey: ask the right questions to ensure that you’re bringing on board a partner who will most improve your odds of success and that you’ll want along for the ride.
The views and opinions expressed are not necessarily those of AltFi.