Fintech: Pitfalls in early-stage fundraising

By: Atul Monga 

It’s all going so right on sales but so wrong on raising capital. We outline the early finance challenges that fintech startups need to navigate.

Fundraising is never easy, even for serial entrepreneurs let alone budding first-timers who may be putting their life’s savings or sustained sources of income at stake. Given the stage we are at in the fintech revolution (or evolution), not many have the luxury of claiming to have done it before. But there comes a time in most evolutionary cycles when there is a now-or-never moment and the plunge is worth taking. The focus often tends to be on preparing swanky business plans and presentations with little attention given to fundraising itself – the amount, investors, staging, and so on.

Here are some pitfalls that are worth considering when embarking on a fundraising roadshow.

Early fundraising

Too much, too soon

Many budding entrepreneurs set out to raise too much cash upfront for their startups in the attempt to get to market with a fully saleable product with the monies being raised. Sometimes it is necessary given the importance of speed-to-market, nature of product or service, and the relative cost involved. For most, however, there is merit in establishing milestones – proof of concept, beta-testing, initial launch and expansion, and linking the fundraising to this progression. Equity is expensive and it helps to limit dilution during earlier rounds.

Positioning the opportunity

For a small number of businesses that are truly disruptive in nature, there is no dearth of cash. Potential investors may soon discover that the concept is not what it says on the can, however, or that there are others who are trying to do the same thing albeit in a different location. For those that are going to be a ‘me too, but better at it’, articulating the story well is crucial. Credibility comes best when the founders are from the industry and so have a good understanding of the challenges incumbents face, or are bringing on board someone who is an industry heavy-hitter as a member of their team.

To be, or not to be, regulated

Unlike most other verticals, fintech businesses often undertake regulated activity. In some cases, they may decide to become regulated at a later date driven by the lure of capturing a broader spread across the value chain. It is helpful to have clarity on this front early in the fundraising process as investors are often wary of sinking too much money in, only to find that the regulatory burden can be costly in both time and money.

Subsequent rounds of fundraising

Relying on too small, too often

Many startups simply leave it too late to raise their subsequent rounds. While smaller rounds are good to keep the business going and prepare for a more meaningful round later, first-timers can often put the business in danger by risking the possibility of running out of cash before the next big round. Besides, every round is time-consuming and there is always the threat of existing investors running out of patience.

Accelerating too early

The biggest single folly for early-stage businesses that fail to raise money is that they accelerate their burn-rate in the hope of demonstrating that they are on track to achieve their plans and that hiring more people is in the best interest of the business. Yes, the business may be on track as far as sales is concerned but that may not be sufficient to get investors excited. And often this is done without paying attention to the cash reserves left, resulting in generally sound businesses having to force a shareholder restructure when totally unnecessary.

Select investors carefully

Choosing financial backers carefully is important at each stage of fundraising but choice of early-stage investors can be critical. The business needs advocates, those with deep pockets, and potentially those who can be its first customer or can open customers’ doors. Strategic investors, while important, can often create independence issues, especially in oligopolistic markets, making it crucial to balance the immediate sales opportunity with longer-term potential. Unless such investors are coming in at arm’s length as part of a larger pool of investors, there is the potential risk of being seen as an affiliate. 

While getting the opportunity right and articulating the pitch are important so too is the need to think through how much to raise, at what stage, and for what. You only get one opportunity to pitch, and just as equity is precious to entrepreneurs so too is the opportunity cost to investors.

The author is the technology media and telecoms M&A Director of Grant Thornton UK. Grant Thornton International Ltd. is a leading global business adviser that helps dynamic organizations unlock their potential for growth. Punongbayan & Araullo (P&A) is the Philippine member firm of Grant Thornton International Ltd. For inquiries, you may direct them to 988-2288 ext. 760 or visit our website at grantthornton.com.ph

As published in Philippine Daily Inquirer, dated 25 July 2016