2018 was a record year for European investments in FinTech.
The sector saw $34.2 billion invested, more than doubling the amount raised in the previous year. With an average of $8.5bn VC being invested in UK-FinTech per annum, capital raising is an area of deep consideration for many of our clients.
And for firms either looking to raise or hoping to sell, preparing for proper due diligence (DD) is fundamental. However, the DD considerations will differ according to the stage of the FinTech in its lifecycle, which itself will determine the key value drivers for the business and therefore the areas of focus for due diligence.
With this in mind, I recently spoke to CFOs of high growth firms 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, but please get in touch if you would like to find out more.
Due diligence considerations
For seed-stage companies, investors are likely to be heavily focussed on the market opportunity. It is therefore important for FinTechs to clearly identify the addressable market in their business plan and substantiate any assumptions around the market in a robust way. Investors will also aim to vet the management team, the founders being the lynchpin of the organisation and instrumental to the delivery of the business plan.
As businesses begin to grow and develop traction, investors will continue to place a lot of focus on the commercial opportunity but may shift their focus to other areas such as top line growth, quality of client base, replicability of tech and scalability of the platform.
Financial, operational, regulatory and tax DD considerations may begin to take priority over commercial as FinTechs start to become profitable, with investors likely to subject margins, track record of product development and cash conversion, among others, to thorough due diligence – firms should be well prepared for these metrics to be tested.
Risks for pre-profit businesses
There are a number of key due diligence risks commonly faced by start-up and pre-profit businesses, including ‘key man’ risk, inadequate governance and poor regulatory compliance. For example, FinTechs with strong entrepreneurial flair will need to incentivise those who are key to the business to remain in the business.
In addition, firms should not underestimate the importance to investors of a robust control environment and should look to ensure they have positive interactions with the regulator (where a regulated activity is being conducted).
In conclusion, the rapid growth of the FinTech industry, coupled with the increasingly complex regulatory requirements creates a complicated environment that even the most savvy businesses may struggle in. It’s imperative your business is prepared and understands the risks involved in order to attract investors or potential buyers.
If you would like to find out more about key due diligence considerations for your FinTech, please do not hesitate to reach out to me.
Catch highlights from the breakfast seminar in the video below.
Deloitte Private hosts a regular series of events for CFOs and Financial Directors of FinTech businesses. To learn more, or register your interest for future events, please visit Deloitte.co.uk/FinTechCFO
There are a number of key due diligence risks commonly faced by start-up and pre-profit businesses, including ‘key man’ risk, inadequate governance and poor regulatory compliance.