Ask the expert: how can I create a winning investment strategy?
Greg Watts is our resident expert. He is the founder of Demand Creation Partners, a London-based growth consultancy that helps fintechs and paytechs to scale. A visiting lecturer at the American University in Paris and regular industry speaker, he was previously head of market acceleration at Visa Europe.
QUESTION: How can I create a winning investment strategy?
Despite the challenging economic backdrop, now could actually be a good time to for fintechs to accelerate their investment efforts. Let me explain why.
According to a 2018 study by U.S. Bank, some 80% of businesses fail because they’re unable to secure sufficient capital.
There are a number of reasons for this, but the most common is that they simply don’t know how.
With more time on our hands, and with potential investors arguably more receptive to taking calls, this could be a good time to refresh your investment strategy and look for new sources of funding.
In this column, we’ll look at why some companies struggle to identify and secure investment, provide suggestions on how to get the funding you require, and look at new funding sources that have emerged following the outbreak of COVID-19.
- Understand who’s who.
When you’re starting your fintech business – or even when you’re established – the world of investment can feel like a Pandora’s Box.
Who should you approach first? What’s the difference between a high-net-worth individual, a venture capital firm or other sources of funding?
Here are the most common sources of investment:
- Friends and family – Many fintech founders begin investment with friends and family. It’s often the quickest and easiest way to get going. However, expectations must be managed to minimise any impact if the business doesn’t work. You have to weigh up, “Is it worth it?” if things don’t go to plan.
- High net-worth individuals (HNWIs) – As the term suggests, these are wealthy individuals who invest in specific types of businesses and typically hold assets of over £1 million.
- Venture capitalists (VCs) – These are individual investors or firms that provide funding in return for an equity stake. VCs don’t usually invest in early stage businesses and often only take part in an investment round once a business has achieved clear commercial criteria. Depending on the size of the deal, many will ask for a seat on the Board in return for an equity stake.
- Accelerators and incubators – In recent years, more accelerators and incubators have emerged. These are either be standalone organisations or attached to an existing business such as a bank or retailer. Incubators offer seed funding, help develop business models, offer product development expertise, and often provide a place to work. Accelerators look for companies further along in the process. Their services focus on connecting startups with investors and influencers. The payback is usually an equity stake in the companies they nurture. Depending on the investment opportunity, this may range from 0.5% to 50%. In some cases, you won’t need to part with equity, just second-round funding. Examples of accelerators include Fintech Innovation Labs, Level 39, Plug & Play, Seedcamp, Techstars and Y Combinator.
- Crowdfunding – The practice of funding a project or venture by raising small amounts of money from a large number of people. Typically (but not always) suitable for businesses already trading, notable examples include Funding Circle, Kickstarter, Ratesetter and Seedrs.
- National and local government funds and grants – Another source of funding is central and local government. The British Business Bank, for example, recently launched the Coronavirus Business Interruption Loan Scheme to help struggling businesses.
There are still further resources providing a view on the current status of investors – indicating, for example, if they’re “open for business” amidst the outbreak and providing insights on how best to engage with them. A good example is the COVID-19 European Investor Status List, which is open source and can be found here.
- Identify the criteria for investment.
What do you need the investment for? How much do you require?
Is it to launch a use case in a particular market to prove your technology or commercial model to investors? To develop a product or launch into a new territory? Or to strengthen your sales pipeline?
It’s important to be clear what you want funding for before approaching investors. It’s the first question they’ll ask, so you need to be prepared with an answer.
Once you’ve determined how you’ll use their funding, it’s a good idea to create a one page summary or more comprehensive (albeit no more than 15 slides) pack to share with them. These should include:
- A summary of your business
- The problem you’re fixing
- A competitive landscape summary – and how you compare
- How much investment you’d like to raise
- What you’ll use it for
- What returns and benefits investors will see
- Establish a strong structure from the outset.
Before contacting potential investors, it’s important to have back-end structures and processes set up to ensure a solid footing from the start.
Here are some items you’ll need to have in place:
- Articles of association – This document specifies the regulations for a company’s operations and defines the company’s purpose. It lays out how tasks will be accomplished within the organisation, including the process for appointing directors and handling financial records. Effectively, it’s your governance structure.
- Share subscription form – Sometimes known as a shareholder subscription agreement, this is an agreement between a company and investors to sell shares to investors at a fixed price. This is done by offering new shares to investors, who after the closing of the transaction become shareholders of the company. In short, it’s the agreement between the company and the business which sets up the “rules” for how shares or equity can be transferred between parties under certain circumstances.
- Non-disclosure agreement (NDA) – Many investors won’t sign NDAs simply because they see so many pitch decks and regard them as an inconvenience. However, it’s important to have one prepared just in case.
- Create a plan to connect with target sources.
Now that you’re clear on how much you want to raise and how you’ll use the money, the next step is to get in front of the right investors to pitch.
In a previous column, I outlined ways to get in front of prospects to generate more leads. The process is similar for identifying investors and funding sources. Different investors have different criteria so it’s critical you research targets thoroughly.
For example, some investors only invest in post-revenue businesses or in those at more mature stages of growth, whereas others target seed rounds and smaller investments to maximise the Seed Enterprise Investment Scheme (SEIS) tax benefits.
Do your homework. There’s nothing more frustrating for a potential investor than receiving untargeted or irrelevant approaches.
Once you’ve identified profiles of ideal investors, the next step is to create a target list and develop an outreach campaign to get in front of them. Tools to use include email, LinkedIn, networking events and introductions from mutual connections. The latter is by far the most effective.
Under “normal” circumstances, many investors like to meet in person before making a final decision. However, that’s obviously not possible at the moment, so the next best thing is to connect via phone or a Zoom or Skype call. With many investors working from home and arguably desiring more human contact and engagement at the moment, it’s potentially a good time to have a conversation.
Bringing it all together
Raising investment is never easy – global pandemic or not – but the process can be simplified if you have a clear plan before you make your approaches.
As with lead generation, it all comes down to having a clear message that resonates with your target audience.
Despite it being virtually impossible to meet in person right now, by simply changing your tactics you could potentially achieve a better outcome.