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It was a record year for European investment in FinTech in 2018. The sector saw $34.2 billion invested which was more than double the amount raised in the prior year. With an average $8.5bn per annum of venture capital being invested in UK-FinTech, capital raising has never been more important for many early stage businesses.
For FinTech businesses contemplating any third party investment into the business, ensuring that consistent, structured information and analysis to support the due diligence process is a fundamental success factor. The key value drivers for investors will differ depending on the nature of the business and what stage of the lifecycle it is in. The due diligence approach will need to be refined to address those value drivers as well as manage the requirements of the investor with the information available.
With this in mind, I recently spoke to CFOs of high growth businesses about due diligence considerations and risks for pre-profit businesses at our quarterly FinTech CFO event. Below is a brief summary of the key takeaways:
Due diligence considerations
For seed-stage FinTech businesses, investors will be focussed on the market opportunity. It is therefore important for FinTech businesses to clearly identify their addressable market, what differentiates them from the competition as well as be able to substantiate these assertions with external evidence, where possible. Investors will also want to vet the management team and their experience - the founders being the lynchpin of the organisation and instrumental to the delivery of the business plan.
As the business begins to grow and develop traction, investors will continue to place focus on the commercial opportunity but may shift their attention to other areas such as quality of the technology, revenues to date as well as longevity of customers. Investors will also likely focus more on margins, track record of product development and cash burn so businesses should be well prepared to present and clearly articulate the evolution of these metrics.
Risks for pre-profit businesses
There are a number of additional key due diligence risks commonly faced by start-up and pre-profit businesses, including ‘key man’ risk, inadequate governance and embryonic relationships with regulators.
Businesses should not underestimate the importance to investors of having appropriate governance, a robust control environment and should look to ensure they have positive interactions early with the regulator, when a regulated activity is being undertaken.
In conclusion, the rapid growth of the FinTech industry, coupled with the increasingly complex regulatory requirements creates a complicated environment that even the most experienced businesses may struggle in. It’s imperative that FinTech businesses are prepared and understand the risks involved in order to attract investment.
If you would like to find out more about key due diligence considerations for your early stage FinTech businesses, please do not hesitate to reach out to me.
The UK Deloitte Private High Growth team is running regular webinars, for Founders and CxOs of fast growing businesses, on a variety of topics to offer insights and practical considerations for the community. You can register for the webinar series here.
Colin is a partner in Deloitte's London Transaction Services practice and focuses on financial services in both the UK and Europe. He has over 10 years of experience providing transaction assist and due diligence services covering acquisitions, divestments and carve outs for both share and asset transactions. His client base includes private equity sponsors and corporate clients.