The funding gap is a problem, but you can still get your startup to IPO
As the owner of a financial technology company, I’m used to reading about the importance of the fintech sector to the UK economy. But to the extent that ideas need to be developed and executed, the financing of a technology business can be just as important as the IP.
It was therefore with interest that I attended an event this week, “Bootstrap to IPO”, hosted by Innovate Finance, the London Stock Exchange, and the British Business Bank.
Lack of UK funding
My business, Essentia Analytics, incorporates behavioural science and data analytics into a cloud-based decision support tool for professional investors. We’ve raised two rounds of funding so far, as we develop our product and expand operations.
I have observed a clear funding gap between angel-sized (£100k-£500k) and Series A-sized (£2m-£10m) investors. Those larger seed funds that would meet this demand in the US don’t yet seem to exist in the UK.
But as I heard clearly at this week’s event, there’s also a distinct funding gap at the Series B-sized (£10m-£20m) level – ie for capital typically used for scaling beyond the UK.
This situation stands in contrast to the healthy and vibrant funding environment found in Silicon Valley. There, investors and venture capitalists are as well known as some of the companies they’ve helped bring into this world.
Traditionally, the UK’s standard of ‘financial literacy’ has been much lower; too many UK businesses still rely on one relationship for their finance. Indeed, some 80% of small businesses go straight to their high street bank for funding and many give up when they are turned down.
However, between crowd funding platforms, government grants and co-funding by the British Business Bank, there are now more options available to SMEs than most people realise.
2014 saw strong growth in the peer-to-peer/invoice financing market – accounting for £0.75 bn in new finance – double 2013 levels. Compared to an overall banking market which delivers £30-40bn in new lending, this is still a drop in the ocean, but the dynamic is a positive one.
Meanwhile, the British Business Bank has committed £300m in the last 18 months, via a range of smaller finance providers, like angel syndicates. A third of that into money has been invested in fintech companies.
These developments are all good news.
Can crowdfunding help fintech?
My internal jury is still out on the question of how well alternative finance sources such as crowdfunding can work for fintech, particularly when it comes to technology to power the enterprise. Trying to explain your business idea to an investor who doesn’t have first hand experience of the problem you’re solving is very difficult. “The crowd” as a shareholder base can also make it harder to raise finance in the US, where there are stricter regulations around accredited investors.
Also, these alternative pools don’t solve the problem of what comes after angel funding. US investors are increasingly identifying opportunities in UK fintech and companies like mine find US investors to be more proactive about taking risk. And for most tech companies, ours included, the US is where the largest customer base resides, so the pull westward is strong.
That said, I truly believe that the UK is a special place to do fintech research and development. The quality of the technology and data science talent is world-class, and whilst the cost of living is high, the cost of human capital in our space is very compelling when compared with Silicon Valley.
UK fintech has grown at a rate of knots in the last couple of years. Innovate Finance is part of a deliberate attempt to foster an ecosystem in which financial technology businesses can thrive, and, in my opinion, events like “Bootstrap to IPO” represent those efforts very well.