In our work at STB Venture Capital we see hundreds of financial technology (“fintech”) companies. We ask all companies to submit their startup profile through the Gust web site — our submission page is here. Most of the time, we have to reject a proposal because it does not fit our preferred profile – we spend almost half of our time saying “no” to many teams.
One of the obvious rejection filters is that we invest only in “fintech” startups, or the ones that can help financial services institutions move in adjacent areas such as retail. We do not invest in new entertainment complexes/movie theaters, specialty bakeries, action and adventure movies, food home delivery, recruitment platforms, or ergonomic wheelbarrows. These are all real life examples of proposals we have received and rejected. A simple search on our web site, or our Gust profile, will show that we invest in startups from the financial services industry.
The second large category is the “idea startup”. We constantly see proposals that, while being potentially great ideas, miss the key ingredient of showing “traction”. When an angel investor puts money in a startup at the idea stage, she/he accepts a collection of risks, from team building to technology development and market acceptance and size potential. We do not invest at this stage, and constantly send those proposals to our friends that run accelerators and/or incubators (“incubaccelerators”) – for example Startup Bootcamp Fintech in London and Singapore has great annual programs for fintech startups. We are investing in companies that already have a product or service, a skeleton team, and either revenue, or customers committed to pilots (not one pilot…)
From the remaining startups in our list, a more careful selection process begins. I have said publicly many times that the first thing we look at is the team. I am not saying that it is the only ingredient for success, however it is the one that makes everything else possible. We have seen many times great teams being able to pivot/zigzag from one idea to another and succeed — been there, done that… So a company of one founder where all the work is done through a collection of service providers does not cut it for us. Neither does the two founders team that has a list of people ready to leave their jobs after they receive funding. These are all valid scenarios, it’s just not us willing to accept these risks.
Next on our list is the technology part of fintech. As an example, a great idea and team with a prototype developed in Excel does not cut it. Or a php “alternative insurance” web site with no links behind. Or the wireframe demo of the next generation of mobile banking. Or a professor that will join the team as an advisor and developers (to be hired) will develop the code implementing the algorithms that he published in research journals. All real life examples… Once again, nothing wrong with being in this stage, just that a VC fund focused on Series A (read SBT Venture Capital) will not fund such a startup.
Another deceptively simple filter is “do you generate revenue”, or “is there a market for your product/service”. We spend most of the time here, because financial services is an industry changing fundamentally before our eyes, and a startup with no revenue today may be tomorrow’s $1bill company (a.k.a. an unicorn). That’s why we are willing to accept pilots (emphasis on “s”), also because we know how long it takes for an established, incumbent bank, to accept and deploy new ideas — see my personal experience post on this topic.
The VC investment process takes months — the fastest we have invested was two months, the longest almost one year. While nerve wrecking for the entrepreneurs, and inevitable for VCs (we need to conduct our investigation, due diligence, boring but necessary legal aspects), the length of the process gives us the added benefit of experiencing “traction” first hand. We are fine with $50k revenue in March, if it’s July and you are still at $50k from March, question mark… The market takes longer to develop then you initially thought, sales cycle are longer than estimates (aren’t they always? predictability being almost as good/bad as predicting software release schedules). All this data needs to be disclosed, and we use our own methodology and market assessment to make a decision.
The last criteria I will talk about is market size. We have seen many great companies that will succeed in making their founders rich — but not their investors. And I am not talking about fraud (we encountered some of those as well), but about getting to 30 people, $4mill in revenue, $1mill in profit per year, and no growth because the market for the product/service is not growing. Also called a “life style” startup — in the sense that the founders make excellent money, but investors get their money back plus a small dividend. The purpose of VC investments if to make bold bets on startups that have the potential to fundamentally alter the financial services landscape — otherwise we are not interested.
And after all these filters, we are looking at a list of over 30 excellent startups, and we can invest in 5… But that’s for another post.
On another topic: I will be presenting a workshop on VC term sheets at FintechStage Milan, scheduled for March 30th and 31st 2015.