Technology that services the financial services industry (fintech) has boomed over the last decade but with Brexit looming and foreign investment in early stage fintech businesses down, what can you do to get ahead?
Really understand your business
Think long and hard about what your business really does well, barriers to entry, the competitive landscape and what makes it disruptive. Test yourself to understand how this is built into everything the business does.
This is a commodity that invariably will be in high demand and short supply. Get into the habit of creating balance, leveraging others whilst retaining responsibility. Be honest about capabilities and where each person adds value in each growth stage.
Protect your value
Understand what is truly valuable, be commercial and prepared to pay to protect the right thing, particularly Intellectual Property (IP), including know how. Scrutinise your employment and contractor agreements to ensure IP is appropriately assigned to the business from inception before things get complicated, people move on or there is greater value in dispute. Investors want water-tight written evidence, up to date IP registrations, a clear picture of IP licensing and protection.
Keep it lean
Have a very clear idea of why you need money and where it would be best deployed. Bootstrap (self-fund) as much as possible to evidence commitment and avoid dilution (founder control is a metric for investors). Make best use of grants and tax breaks, particularly full use of R&D tax credits.
Think beyond the money
Cultivate relationships with people you want to work with, particularly those that can follow their money or provide valuable introductions. Talk to other portfolio companies and the market. Choose your advisers as carefully as you do your investors; you will be investing in their ability to help you navigate your path.
Go early, go often
Fundraising can be an arms race with the winner taking all, allowing possibly even inferior innovation to catch up later. Better to have enough for a rainy day than face a funding cliff.
Understanding your investors
Unicorns might garner more press but investors are also looking for “cockroaches”: businesses that can survive a nuclear winter. Investors typically seek Technology, Team and Traction, the latter being particularly challenging in some fintech businesses with long sales cycles.
Investors do due diligence to ensure you live up to the hype and there are no skeletons in your closet. This takes time so prepare ahead, collect and index everything in a secure and digitally accessible way and plug gaps such as unsigned or incorrectly signed documents, Companies House filings, up to date statutory books and a clear cap table, including the fully diluted position.
Keep it simple
The fly paper of failed start-ups is littered with overcomplicated tax, options and capital structures. Tax breaks, such as EIS and EMI schemes, can help boost your business but focus on building your business not a legal or tax structure.
Keep stakeholders onside and appropriately informed at the right point (not jumping the gun or breaching confidentiality but so as to avoid unavailability or objections) as you will likely need them for required approvals, waivers or consents or signing written resolutions, for example, to dis-apply pre-emption rights over the allotment of new shares or adopt new articles of association.
Focus on incentivisation
Be clear about reward and dilution (and who suffers this and when) as these can be misunderstood and contentious, particularly in relation to good or bad leaver provisions (dealing with ownership and valuation if employees leave the business) and board or observer rights (often tied to percentage ownership). Investors will want to agree the size, allocations and vesting conditions of your EMI scheme or other incentivisation plan.
Summarise the deal
Agree in depth term sheets before wasting time, money and effort on long form documentation. These are typically non-binding (save for confidentiality, costs, exclusivity and governing law and jurisdiction) but set the tone. If you don’t understand something, ask an expert. Terms such as “full ratchet anti-dilution mechanism”, “participating liquidation preference”, “cumulative dividend” and “reverse vesting” can significantly impact your business.
Thomas Colmer is a partner and legal deals leader for fintech at PwC, an area he has focussed on for over a decade, including in-house as head of M&A at a leading global fintech software vendor. He is part of PwC’s multi-disciplinary ‘Fast Growth’ team advising entrepreneurial private businesses start up, scale up and exit.