For many, the idea of investing in FinTech is exciting. After all, who doesn’t want…
Keys an investor or corporation should consider to invest in Startups in FinTech
The digitization of the financial industry has accelerated in recent years, and to invest in Startups in FinTech has emerged as an attractive opportunity for investors. For these reasons, FinTechs would be considered either profitable or have yet to reach profitability. Profitable companies can be compared to other tech stocks, but the industry has specific approaches that should be used for appraising investments in FinTech Startups.
Here are 6 keys to consider when you decide to invest in Startups in FinTech:
Founders and management team
Are the founders passionate?
Will they be dedicated to growing the business and able to face the inevitable challenges? Do they have the drive to get through the highs and lows? They should be willing to listen to their investors. Believing in the team is a prerequisite for investing in Startups.
Do they know the key metrics and financials of the business?
Look for founders who truly understand their business’s financials and key performance indicators (KPIs). A founder should be able to articulate them and have a clear sense of where those metrics may be in a year or two.
Is there a qualified management team?
Many investors consider the team to be more important than the idea or the product itself. Not only should management have good experience, but they must also have the right set of skills and the proper temperament to grow the business.
What are the potential risks to the business?
To invest in Startups, you should be aware that there will inevitably be risks in any business plan, so the founders should be prepared to answer questions about the principal dangers to the business. As well as any legal or regulatory risks, they should also be aware of any technology and product liabilities. Look for Startups that can show they have reduced or eliminated product, technology, sales, or market risks to your investment.
How will my investment be used?
You need to know how your capital will be invested and when the company may be looking for the next round of financing. Their fundraising plans should be aligned with their capital requirements. Pay attention to how they estimate the cost of engineering talent, marketing, or office space, and make sure that it is reasonable for the company. You want to make sure that they have enough capital to meet their next milestone before raising more financing.
Are their expected valuation and financial projections realistic?
Ultimately, it is the potential cash flow that determines the value of a Startup, and some key factors that go into a determination of valuation would be the founders’ experience and past success and their business model’s capital efficiency.
Looking at the technology that has already been developed by the company also helps, as does an assessment of the size of the market opportunity available. Ask probing questions about any assumptions the founders have and expect them to provide cogent, thoughtful responses.
Is the product good and how differentiated is the technology?
The entrepreneur must clearly articulate what the product or service consists of and why it is unique. What problems does it solve and what are the key differentiating features? What competitive advantages are there over existing technology and how easy will it be to replicate? How costly will it be to build the technology into each product?
Company intellectual property
Pay particular attention to what key intellectual property the company has and how it was developed. Do any prior employers of a team member or any third party have a potential claim to the company’s intellectual property? Was it developed with government grants or open-source technology and does the company have a right to use it?
Positive early traction and size of market opportunity
Signs of any early traction or customers are also important to invest in Startups. Is there a beta or minimally viable product? Does the company have pilot customers with testimonials or strategic partnerships? Has the Startup gained admission into technology accelerators or incubators?
How will the company scale this early traction and become meaningful? They should know what their actual addressable market is and what percentage of it they plan to capture over time.
The discovery tool in the Finnovating platform makes it much easier to find FinTech Startups from all over the world. The «open-to-capital» button lets you quickly identify which Startups are open to investment.
For more information about early investment in companies, have a look at our other posts like “Seed money: how to find Startups to invest in” or “How to find climate tech Startups to invest in”.