A look at the state of UK fintech investment – Why should fintech investors continually analyse the team spending their investment?
Through the fintech industry, Gluon builds relationships with founders, CTO’s, angel investors, mentors, and venture capitalists (VC’s) in our work with early stage fintech companies. How is the UK market structured for fintech investment? How do VC’s look assess fintechs?
The UK fintech industry generated £6.6bn revenue in 2015 for the UK economy whilst attracting £524m in investment. London, despite Brexit, is seen as a sophisticated market whose residents have a technological mindset. The availability of capital in London has always been cited as a reason for fintech startups to base themselves in the nation’s capital. Add to this, the regulatory support to fintechs and London’s position as a financial hub and you have a mixture of conditions that creates a supportive ecosystem for fintechs and fintech investment.
However, this is not to say that London does not face its challenges. The aforementioned Brexit is one of the concerns along with access to tech talent. In a report compiled by EY for the UKTI, it is concluded that a fintech startup relies on talent in three key areas: technical talent, financial services (FS) expertise, and entrepreneurial and leadership know-how. The UK has a good supply of entrepreneurial know-how and FS expertise, often combined into individuals that drive companies with a solid mix of both qualities. It remains to be seen how Brexit affects the FS expertise and entrepreneurial / leadership talent currently based in the UK as emerging fintech players look to attract talent.
The current availability of tech talent in the UK is somewhat concerning and has seen many companies look to eastern Europe and further afield to develop products and create IT infrastructure. Gluon’s business model was predicated on this analysis by combining a senior team split between London and the Philippines. This allows Gluon to underpin the emerging lack, and inflated cost, of resources in the UK with talent from abroad without losing quality of delivery.
Fintech investment via growth capital in the US (New York and California) currently dwarfs London (£3.2b versus £431m), in part due to a more mature tech environment but also the maturity of venture capital (VC) in the US. IPO’s in the tech sector also show that the US has had more success with the larger incumbents in the tech scene. However, VC money in tech is directed towards fintech at a higher rate in the UK than in California (30% vs 12%).
These statistics underpin the feeling that there are fintech investment opportunities with early stage fintech startups in the UK. FS knowledge and expertise are good, the VC scene is less developed and the ecosystem in London is well developed to support fintech startups. However, some VC’s feel that we’ve slipped pass the bell curve for early stage success within fintech investment and that fintech investment is plateauing in 2016.
The purpose of this article is not to say that you should or should not invest in fintech. It’s important to consider the overall economic influences as much as it is to consider the concept and team that you’re investing into. London continues to be a financial and fintech hub but this is only as important as the idea and execution that you are considering funding.
And so, the fintech team. In speaking with VC’s in London it’s clear that many will put the team at the top of the agenda when assessing a proposition. And rightfully so, every team needs the right mix of individuals to successfully execute and this is something that can change during the lifecycle of a fintech. I spoke with the charismatic Michael Boevnik, a fintech advisor, investor, and founder of his own company that works to launch businesses in new media telecoms and fintech. He eloquently summarises the changing needs of a fintech team during its evolution:
We will tell founders to improve their team in advance if we see “gaps”. You have to realise that in the lifecycle of a company you need different people/skills. One example, in the growth phase you need a “hunter” who goes all the way, but if you grow to a certain level you need a “manager” (farmer) who takes care of the house (HR, People, internal meetings, keeping the ship headed in the right direction). Trust me that you will want the hunter out of the way when the business gets past a certain point (you may have to reposition his/her role etc) to keep the house calm and growing at the right pace and in the right way.
We had a great example of this with a co-founder whose business grew very quickly. She quickly realised her skill was not in becoming the manager but driving new business and early stage growth. She exited the company once it got too big and went after her next early stage project. I admired that she knew her qualities and played to these.
Gluon has worked with fintech startups in a variety of scenarios and this has included structures in which we become the trusted IT partner for the business. This ultimately depends on the founder’s experience; if they have a good tech understanding then Gluon will underpin them to provide the IT infrastructure and scaling when the time arises. Alternatively, the fintech may have the CTO / Tech Lead in place, but wish to scale with an outsourced solution. Like the services provided by the many incubators this solution alleviates the founder from some of their duties, enabling them to turn their attention to other key areas of the company.
The investor’s responsibility is to maximise the odds in which their investment grows and we spoke with some VC’s that have had to take a day to day hand in fintechs to ensure this happened. The incubator model has also proven successful, allowing investors to get into companies where they have likely been vetted and take a more hands-off approach as the incubator provides the support function to the fintech startup (incubators was covered in depth during my Q&A with tech innovator Andrew Vorster). Here at Gluon, we are always open to supporting VC’s as a trusted partner to come in and assist with project completion or provide IT road mapping to help fintechs move forward with their technology.
In talking with VC’s around fintech investment, it was interesting to note that many felt the strength of the team and ability to execute and deliver were the biggest keys to success. Many of them were not talking about monetisation or exit with the early stage fintechs they had seen pitches from. It is believed that if the fintech achieves critical mass through acquisition and growth then there will be a variety of ways in which to monetise. Of course, Google did not monetise in the early days but investors could see the potential of how this could be achieved.
Now that’s not to say investors will continue to invest money in every fintech whilst enjoying the comfort of the bigger picture. As Michael rightly pointed out, the lifecycle of the company requires different people and skills. Gluon understands this and is well positioned to work with fintechs at all stages of their lifecycle – something that is of great benefit to the fintech investor.
Steve Findley is a relationship manager with Gluon Consulting. Steve has over ten years experience working within finance across London and Sydney in commercial banking and marketing. Steve welcomes discussion with anyone involved in fintech to build partnerships, identify opportunities and further the network for Gluon Consulting – to get in touch with Steve please click here.