Dr Richard Theo, co-founder and CEO of Wealthify, outlines key things to consider when investing in the FinTech sector.
London is now widely regarded as the FinTech capital of the world. Despite mixed messages over the impact of Brexit, the sector boasts an estimated 61,000-strong workforce, accounting for around 5% of the UK’s financial services labour market. Little surprise then that enthusiasm for FinTech is translating into millions being poured into firms by investors eager to back the ‘next big thing’.
An estimated £524m was invested in UK FinTech in 2015, according to EY, with a significant element coming from another tech-based phenomenon, crowdfunding – where smaller investors can secure equity stakes in early-stage startups. But with the hype comes a word of caution. ‘90% of startups fail’, as the saying goes, and it’s all too easy to get caught up in the dream of securing a 5% stake in the next Apple or Amazon, only to never see your money again. So, before you part with your hard-earned cash, here’s a few things you should consider when investing in FinTech:
Invest in things you love
Only invest in products and services you believe in, or would use yourself. As Warren Buffett says: “In the world of business, the people who are most successful are those who are doing what they love.” You’ll find many FinTech firms raising funds through crowdfunding sites recruiting their shareholders to take part in beta testing, research and other activities and although there’s no obligation, you’re likely to get more out of your investment than just monetary gain if you’re engaged with the brand, act as an ambassador, and can advocate for it.
The majority of FinTech companies will take some time to reach profitability, so be prepared for the long-haul. If you’re patient and they are a success, you could see a big pay day. But don’t necessarily expect to get a return within 12 months. If you’re investing through crowdfunding, it’s worth checking with the founders about the potential ‘exit strategies’ – i.e. the scenarios through which you might see a return – before you take the plunge as your stake is only worth something if the company carries out an IPO, or is bought by someone else. Whatever you do, don’t make the same mistake as Apple co-founder Ronald Wayne, who sold his 10% stake in the company for $800 in 1976, shares that are now worth $70bn. Hindsight is a wonderful thing.
Check out the competition
Some FinTech firms find a niche and exploit it well, whilst others compete against each other to offer customers generic services, like money transfers and loans. These services often find it hard to differentiate and ultimately compete on the one thing they can control – price. The effect is that prices are pushed down; great for customers, but not so good for shareholders concerned with profitability. So, look into how the company aims to differentiate – what are its USPs? Do they boast a better user experience than others? Do they reward loyalty? With little to separate providers, customers are likely to flit between them seeking out the latest offers.
Is there a need for the product or service?
It sounds like an obvious one, but according to CBI Insights, more than 2 in 5 (41%) of startups fail because of a lack of a market for the product or service, making it the most popular reason for new ventures to flop. Avoid getting sucked in by the clever marketing slogans and ask yourself objectively: would anyone buy this? Is it a genuinely good idea, or just a fad? Are there other better, cheaper, alternatives already out there, and do people buy them? Consider all of these questions carefully and be honest with yourself. Even road test them with friends and family to see what they think. If there’s no market, there’s no money to be made.
Do you believe in the people behind it?
When investing in FinTech startups, you’re investing as much in the people as the proposition, so it’s vital you do your homework. Not having the right team in place is the third most common reason for failure of startups, according to CBI Insights, but other causes include losing focus, team disharmony and lacking passion, all which come down to the quality of people. Turning a startup into a profitable business takes an enormous amount of determination and work, so it’s worth looking at their track records. People buy from people, as the mantra goes, so if you have confidence to buy into the team, customers are more likely to want to buy from them.
Check what the deal is
It’s always wise to check what you’re actually getting yourself into. Are you buying an equity share of the company, or something else? There are various forms of crowdfunding, including: rewards-based, that offer discounts, special rates or other benefits; donation-based, that are purely philanthropic; and debt-based, which is effectively a loan paid back with some interest. Sometimes companies even use crowdfunding for subscriptions: Roccbox – the portable stone bake pizza oven – recently undertook a crowdfunding round via Indiegogo, in which investors pre-paid for an oven, allowing the firm to raise the necessary capital to manufacture the product.