Capital Raising for Fintechs
At a basic level, raising capital involves getting the money to grow your business from investors i.e financing your business. Start-ups often rely on their founder’s ambition and investment. Although, there comes a time where out of doors capital is needed to facilitate greater growth. Hence, capital raising for fintechs is critical for their future growth. The concept is straightforward, essentially, it is companies in need of capital seeking for investors in the market.
There are four primary stages that Fintechs typically go through when attempting to raise capital.
The Four Stages
Initially, a startup often requires seed capital in order to become an established business.
Essentially, seed capital is the financing in the formation stage of a startup to begin developing an idea for a business or a new product. Funds are generally provided by private investors in exchange for an equity stake in the company or for a share in the profits of a product.
At this stage, investors are searching for two basic things: a great convincing concept and an innovative founder. You need to focus on developing the business concept to successfully raise seed capital. During this stage, it is critical to capitalize on your intangible assets. Developing your intellectual property to increase your valuation will achieve such goals.
Moreover, you must be cautious of ownership dilution when providing investments in exchange for a stake in your business. In these early stages of a start-up, there is high risk with investing. Larger capital investments will often come in exchange for a larger piece of the pie.
At this point your fintech is up and running and your business idea is developed but you’re still in the early stages. Most start-ups at this stage have offices, staff, and consultants, even though they may have no actual product.
Venture capitalists provide the major share of the money needed to start a new business. It is a high risk investment that is paying for product development, market research and prototype production. A venture capital is a substantial up-front capital investment and the investors are typically looking to actively participate in the growth of the business. Thus, it can be a long term commitment which means you should seek a savvy VC investor that aligns with your business goals and offers more than capital, such as great business expertise and a work of customers.
Once your business proves a successful track record and shows great potential to continue significant growth; private equity (PE) is the next source of investment capital. These investments come from high-net-worth individuals and firms who purchase stakes in your company.
A PE investors primary goal is to invest in a private business. A business that has a strong growth trajectory, where its value can rapidly increase within a 3 to 5 year time frame. As it they will be able to sell the business at a higher price. Thereby, fulfilling their objective to maximise their return on investment.
The PE market in Australia is developing at a fast speed; particularly in recent years. However, PE firms are typically looking for the top 3 in any segment and rarely invest below $30 million which has imposed major challenges for tech companies especially small businesses. Although, the very recent boom in fintech investments has seen more high-net-worth individuals (locally and globally) interested in investing in tech creating more opportunities for smaller fintech companies.
Developing an experienced and driven management team who can promptly make profit from invested capital will attract PE investors. Implementing structures and procedures that mitigate and address potential risks facing your business as well as ensuring an optimal cash flow will be key factors attracting PE investors.
Equity Capital Markets
An ECM is a market where financial institutions, such as the ASX, help companies raise equity capital and trade stocks. Equity Capital Markets (ECM) is commonly associated with companies working to get an initial public offering but encompasses much more.
The ECM is broader than the stock market as it consists of the primary market and the secondary market. The primary market is for private placements, initial public offerings and warrants. The secondary market is where existing shares are sold, and futures, options and swaps are traded. Hence, the ECM plays a key role in the greater allocation of resources in a market economy.
Initial Public Offerings (IPO) is usually the final stage and the end goal for many founders to exit, opening up a whole new world of capital. If a company is looking to get an IPO, then they will likely need to raise equity capital from financial institutions which can be accomplished through ECMs.
Indeed, the IPO process is a complex and lengthy presenting difficulties throughout all levels of the process – from the stringent guidelines of the ASX; to needing buy-in throughout the company; and handling perceptions of suppliers, customers, and the broader public.