The Fintech Founder’s Guide to Venture Capital

Is Venture Capital Right for Your Fintech?

Understanding the basics of venture capital (VC) will set the strong foundations needed to charge ahead and fund your growth in the promising fintech sector.

What Is Venture Capital?

Venture capital investments are a form of private equity, which typically comes from a firm of investors in a venture capital fund, in exchange for a percentage of the company. Additionally, they may provide their expertise and introduce founders to other key industry figures. This type of funding differs from bootstrapping as it doesn’t involve your own capital or that of your family and friends, and stems from multiple sources, not just one angel investor.

The VC Funding Lifecycle

When going for venture capital investments, early-stage tech companies will go through several stages of fundraising that accommodate their current financial needs and strategic support — the gasoline for their engine to start. Some startup companies may opt for pre-seed investment (often those with capital-intensive projects that need money to develop prototypes) but most will start at the Seed stage. This should be enough capital to continue improving your offering and establishing a customer base.

From here on, startups go through Series A, B, and any other later-stage funding they might need to become self-sustaining or exit the market. Each stage marks the evolution of key company aspects, such as team and office expansion, moving into emerging markets, developing new services, strategic partnerships, and more.

Assessing Your Startup’s Readiness

Is your fintech fit for this competitive market? The truth is, it’s up to your product, your financial capacity, and external factors. For example, locating your business in startup havens like Silicon Valley or London will help you gain more support from established companies and give you more networking opportunities to garner financial backing.

Additionally, you must assess if your product or service should be built for fast growth or a slower, more sustainable pace. In many cases, technological innovation demands quick cash flow and burn, making venture capital the perfect choice.

Lastly, is your team ready? Does anyone in your founding team have previous experience in the venture capital market? Not everyone is ready to perform at the competitive level of startups, or venture capitalists, so examining your team is a must.

And when in doubt, resources like Crunchbase or PitchBook can help you assess whether your company is ready to enter the venture capital landscape.

Alternatives to Venture Capital Funding

If venture capital doesn’t seem like the friendliest option, especially in a sector marked by sharp declines in the past year, there are more alternatives out there for your company.

For instance, crowdfunding can help finance your business through the general public pitching in small amounts of money. There are many platforms available to do this, allowing you to connect with the public, offer rewards rather than equity, and expose your product to a wide online audience.

Bootstrapping can also be an effective way to get your company financed. Capital usually comes from your own pocket or that of family and friends — either as a loan or a donation.

Preparing For The Fintech Venture Capital Market

If venture capital is the right path for you, it’s crucial to set your company on the right path to succeed in this environment. For example, a good way to start is crafting a compelling narrative for your startup, which helps you resonate with investors.

This should be a clear, concise, and meaningful story that informs where you’re coming from, your value proposition, and your ultimate goals.

It’s also important to assemble a team that reflects your company values, matches the skills needed to help it thrive, and shares your passion for the project. It’s also relevant to include an experienced voice that guides your first steps in the venture capital industry and fintech world, helping you avoid common pitfalls.

Moreover, you must prove your company’s worth with a robust business plan. This should include an appealing executive summary, extensive market research to position you among the competition and current industry demands, your business model, marketing strategy, financial projections, and funding requirements.

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While building this plan, it’s also paramount to demonstrate your current traction — whether that’s your customer base, pilot programs, focus groups, or any revenue you’ve amassed so far — to validate the demand for your business and attract solid investors.

This is also where you should include terms like lifetime value, customer acquisition costs, churn rate, cash flow, leads, and more. These key metrics are the standards investors will hold you to, which show early signs of a promising startup or indicators that you need more time to develop.

As your business takes flight, you must think of ways to protect it against risks that could hamper its growth. For instance, building a risk management strategy will help outline potential risks and their severity, find ways to reduce their likelihood, and prepare your business in the aftermath of incidents.

Acquiring insurance coverage that fits your startup’s needs also adds a much-needed layer of protection in case of unforeseen events, which also shows your commitment to protecting your assets, executives, and investors.

Challenges Early-Stage Companies Face During Fundraising

The fundraising journey can be full of epic highs and lows — it all depends on how you ebb with the flow. Let’s examine the potential challenges along the road.

Dilution of Ownership

One of the biggest trade-offs of raising venture capital is the dilution of company ownership. Because you’re receiving capital in exchange for a stake in the early-stage company, you might begin seeing your share of the company reduce as funding rounds come and go.

To soften this blow, you can manage your dilution in a smarter way, either by negotiating more favorable terms, implementing employee stock options, or resorting to other financial avenues.

Valuation Challenges

Valuation is everything for a company when it’s time to announce a funding round. How much is your company worth and, therefore, how much money does it need to raise?

This is a complex matter for early-stage companies as they lack a solid track record to define them by the discounted cash flow method or an absolute valuation process.

This ambiguity means founders might fall short or overestimate their company value, each bringing their disadvantages, such as leaving money on the table or making it difficult to justify future rounds. This is why making accurate financial projections and resorting to comparable valuations (evaluating you against competitors) can be the best way to go for young companies.

Loss of Control

Similar to the dilution of ownership, venture capital funding might mean bringing several other board members into the company — synonymous with loss of control. As a result, decision-making in emerging companies stops being a founder and executive team effort with a wider pool of voices pitching in, not always in agreement with others.

This is why it’s crucial to include protective provisions in an investor term sheet, allowing founders to retain certain control over the direction of their company.

Time Commitment and Distraction

On paper, fundraising sounds like a time-consuming task. In practice, it’s no less demanding than it seems. In an effort to lead exceptional funding rounds, company leaders might lose sight of the well-being of their company, putting their future at stake.

While fundraising is vital to keep a startup afloat, so is dedicating time to essential daily tasks, especially for an early-stage company. This is where finding a balance is important, potentially leading you to find a dedicated team member or advisor to manage the fundraising process.

Rejection and Negotiation Fatigue

It’s easy to get lost in the fundraising sauce and overlook a key factor: mental health. Funding rounds aren’t always friendly environments, filled with exhausting negotiations, many rejections, and the acceptance of new and potentially unwanted realities in your company.

Checking in with yourself and your team is also much-needed during this time, ensuring you’re supporting each other while taking the blows of long negotiations, tricky investors, and unfavorable deals.

Strategic Misalignment

Lastly, fundraising isn’t all about the money. Ideally, investors become long-time business partners, boosting your company growth and supporting you every step of the way.

In the due diligence process for potential investments, you must also evaluate the variable of compatibility with the person, not just the capital you’ll get from them. Do they align with your mission? Do they believe in your vision? These are also important questions to ask.

Pitching to Venture Capital Firms

You realize you want to go down the venture capital road — now what?! It’s time to find the right private equity firms to pitch.

Ideally, according to Milad Alucozai, founding partner at Good AI Capital, by the time you need funding, you’ll have begun building connections with other venture capital investors and firms that understand and are interested in your company’s field.

So, even before you know you’d like to start a funding round, it’s important to connect with partners at firms, speak to other founders about their venture capital experiences, and even shortlist those who have shown interest in your company.

Creating the perfect pitch deck is also crucial at this stage. You must ensure your deck is concise but powerful, including key facts like the problem you’re solving, your competitors, and financial projections. Ultimately, it should be a clear reflection of your company.

But this deck isn’t finished without delivering a masterful presentation. In it, you must demonstrate passion, expertise, and a clear vision, while also condensing everything into a short amount of time — investors have many of these to go through.

Utah Valley University says focusing on a maximum of five main points and knowing your audience well are among the elements to make a winning presentation.

Make sure you rehearse not just the presentation but also potential investor questions, both the easy and difficult ones.

Navigating the Due Diligence Process

Once you’ve piqued someone’s interest and they want to take your startup under their wing, a due diligence process must take place before they give their final seal of approval.

• Understanding Due Diligence: Investing in early-stage startups is quite risky, which is why venture capital firms must also take their time to examine you and your company to decide whether they should invest in it or not. They will look at factors like the founding team, burn rate, possible cash runway, Product-Market Fit (PMF), run a unit economics analysis, and more.
• Preparing for Due Diligence: To ensure you make the process as smooth as possible, you must also have some documentation at the ready. For example, financial, legal, tax, and asset-related documents, marketing strategies, and relevant information about the founding team.
• Transparency and Communication: What venture capital firms are attempting to do with due diligence is get to know a startup in-depth to ensure they’re making the right call. And, if you believe you’re in fact the right call, it’s best to move with transparency and open communication. This means disclosing both strengths and weaknesses, especially so they know how to best support you once they decide to fund you.
• Negotiating Term Sheets: These sheets will reflect the rules of your partnership from that moment on. It’s crucial to strike a balance between what the venture capital firm wants and your demands as a startup. For example, you should set a favorable but realistic valuation, negotiate a beneficial equity stake for both parties, and define board representation.

Post-Investment and Beyond

Once you’ve climbed the fundraising mountain and surpassed all hurdles, there’s still some work to do. For starters, building and maintaining a strong relationship with your venture capital firm can solidify their support for the long haul, securing an important partner for the remainder of your startup’s venture capital funding life.

Plus, venture capital firms aren’t just there to give you money and leave with some private equity back, they also want to help you grow in the best direction. This is why leveraging venture firms for their expertise and available network can propel your startup to new heights with help you would’ve otherwise missed out on.

Fostering a collaborative environment will help materialize your long-term vision for the company with partners who are willing to uplift and advise you when strategic guidance is needed — that’s the additional value of a venture capital firm.

The fundraising process can be quite arduous and exhausting, but it’s nothing short of rewarding for an ambitious and promising startup. The fintech sector is growing more competitive, meaning the playground is fierce, and your startup must gather the best team, venture capital firm included, to overcome the bad and enjoy the good!