Funding a fintech: how can startups and scaleups attract private equity investment

As the rollout of the COVID-19 vaccine helps to encourage economic recovery, Australian Fintech companies, from start-ups to scale-ups, are in the sights of Private Equity (PE) investors.

PE firms have become increasingly more active in the Fintech sector, with $137.5 billion invested globally in 2019.

Receiving investment or being acquired outright by PE investors can be great news for a Fintech company. However, there can also be risks as PE firms often have goals and focus points that differ from other investors.

There are three areas where PE can assist in stimulating business growth:

  1. Extra capital and collaboration / resources to reach targets and goals
  2. Strong experience in streamlining business processes
  3. Understanding how to expand business operations.

There are of course other ways to raise capital, including: debt, loans, and public markets. Each option comes with specific advantages and drawbacks, making close consultation with your advisors pivotal to making the optimal choice to match your situation and goals.

Knowing what PE firms are looking for and how to prepare for a potential acquisition, negotiating the optimal deal and collaborating with the PE firm post investment are all crucial aspects for any investment deal.

Other key considerations are:

1. What are the benefits of PE investment?

  • Market expertise: PE firms have a track record of collaborating with portfolio companies on expanding market share and building out new markets. If your company is looking to expand the likes of sales, their expertise can be invaluable.
  • Considering PE investment also involves looking at where interest between you align – and where they may differ. Many potential challenges (described in detail later in the guide) arise due to a lack of focus on aligning interest and clearly stating goals early on during the negotiation process.
  • Access to contact and customer networks: PE firms often have vast networks of contacts that can help you connect with business experts as well as identifying and engaging with new potential customers.
  • Streamlining operations: Fintech companies are often defined by rapid growth. Internal business processes may end up lagging behind, hindering efficient operations. PE firms are often experts in the organisational and financial sides of running a business and can assist with optimising business operations and daily management.
  • Financial insights: While Fintech companies may be experts at their financial offerings, they are not necessarily well versed in the regulatory and financial compliance issues of all the regions where they are active.
  • Objective insight: Passion and speed define the development of Fintech companies. Without those, the company would not have grown to its current size. However, getting an external, objective, data-centred evaluation of your company from a PE can help identify areas needing to be addressed if you want to reach the next level.
  • Higher profitability: As illustrated by BDO UK data, the likely result of PE investment and assistance is that your business will grow revenue and become more profitable.
  • Exit options: PE investment is an opportune avenue for Fintech company founders and management teams looking to exit the company and reap the monetary reward of many years’ hard work.

2. What are the factors that affect the valuation of a Fintech?

  • Technology: Including your products, services, intellectual property, and R&D. Also, how old and future-proof your technology stack is.
  • Industry trends: Both on the macro- and micro-level. Also includes how your solutions match where the industry and customer preferences are headed.
  • Competition: Who your biggest competitors are and why are you better positioned than them via technological or financial moats is central for investment.
  • Revenue: Includes current revenue, historical growth, retention rates, annual recurring revenue, and customer acquisition cost.
  • Revenue to cash flow: Turning revenue into positive cash flow and growth in liquid assets.
  • Growth potential: Opportunities for increasing revenue and profitability.
  • Sales: Upsells, retention rates, and historical sales performance.
  • Runway: How long you can keep operations going without injection of new capital.
  • Potential future sell-on: Interested future parties or your potential to IPO within a set timeframe.
  • Software stack: Unique competitive advantages of your software and solutions, related IP, and futureproof level.

3.    What are PE firms looking for?

  • PE firms are looking for a substantial return on investments in three (double) to five (triple) years. After the end of that period, they will be looking to either sell their part of a company on to others or otherwise create a return (for example by selling shares after an IPO).

Download a copy of BDO’s Private Equity and Fintech guide.

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