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The Green Sheet Online Edition

March 09, 2020 • Issue 20:03:01

Prosper and scale with professional investors

By Dale S. Laszig

The race to make digital commerce faster, safer and easier takes money, talent and technology. Accenture reported global fintech investments rose to $55.3 billion in 2018, doubling 2017 activities. Researchers attributed growth to escalating valuations in China, which accounted for $26.7 billion of overall funding, and growing demand for digital banking and payment solutions.

"Even if you discount the massive [$14 billion dollar] Ant Financial transaction, we'd still have a record year for global fintech fundraising, with strong activity in many corners of the world, so these are broad-based gains," said Piyush Singh, managing director, financial services in Asia-Pacific and Africa at Accenture. "It's hard to tell whether we'll be able to keep up with this pace of torrid growth, but one thing is for sure: Many investors have woken up to the fact financial technology can add a lot of benefits to businesses and consumers alike both in developed and developing markets, which is why we keep seeing an increase in fintech activity."

The Accenture study also found an uptick in the 2018 deal count. "The number of fintech deals also grew significantly, to 3,251 globally ‒ up approximately 19 percent from 2017 ‒ as venture capital investors, private equity firms, traditional banks and insurers combed the world for the newest technologies in payments, banking and wealth management," researchers wrote.

A crowded stage

Global thirst for investment capital has inspired Shark Tank-style competitions for tech startups that present solutions to judging panels and prospective investors, partners and customers. The Finovate conference series, launched in New York in 2007, features seven-minute fintech demos on a big stage. The conference has expanded internationally, with events in London, San Francisco, Berlin, Cape Town, as well as locations in Dubai and Asia.

Finovate organizers describe the event, which features finalists selected from thousands of hopefuls, as part sales demo, press conference, analyst briefing and tradeshow in one. Tens of thousands of attendees watch more than 2,000 demos from hundreds of companies, enabling presenters to reach the greatest number of people in the least amount of time, organizers stated.

Travis Dulaney, PayFi founder and CEO, called Finovate a machine for attracting investors. PayFi and strategic partners, Linked2Pay and BuckZ Payments Inc., demoed at New York's 2019 FinovateFall. The three contestants showed different ways to leverage PayFi's AI-based capabilities, Dulaney recalled. "Today's nuanced, sophisticated demos help companies that use APIs tell their stories," he said. "It's no longer a simple proposition of 'here it is and here's how it works,' but a layered approach involving multiple interfaces."

Go-to-market strategy

Amid fierce competition, tech startups frequently seek investors with funds, vision and strategy to help them grow and scale. Convincing financiers to take a chance on unknown startups is far from easy, however. David Daily, angel investor and founder of Cutter, said, "The bar has been raised over the last few years to receive funding consideration from professional investors. No longer can a simple business plan or great idea receive funding; there are just too many start-ups to choose from with traction, customers and revenues to prove their viability."

Greg Cohen, operating partner at Lovell Minnick Partners, agreed fintech companies must demonstrate more than basic proficiencies to attract investors. "Requirements vary with different types of investors, such as venture capital, growth equity or traditional private equity," Cohen said. "But in general, it helps for companies to be in segments with a good size addressable market. Ideally, they are growing businesses with good margins, low attrition and a scalable go-to-market plan with some sort of track record proving the plan."

Lane Gordon, managing director, M&A and payments strategy at Preston Todd Advisors, suggested companies evaluate different partnership models based on their challenges and opportunities. An investor that takes on debt will manage debt repayments while the company can continue to call its own shots. A minority partner, by definition, takes a backseat in the company, with some representation on its board.

"Minority partners may occasionally be outvoted, but they still have a voice in an organization, and their expert guidance can help startups who have been going it alone," Gordon said. "When you've been the sole captain of a ship, it may make sense to hire a few Navy captains."

Baseline requirements

Companies in large markets with high-demand product and service offerings are attractive to investors, especially those with great teams, Daily noted. But they must be ready for long days and nights and ideally meet the following baseline requirements:

  • Minimum viable product (MVP): MVP, a concept introduced by Eric Reis in the bestselling book Lean Start-up, is a product that enables companies to learn as much as possible about customer behavior with the least amount of effort.
  • Paying customers: Paying customers prove that a company can sell a product or service.
  • Key performance indicators (KPI): KPI is a quantifiable measure for evaluating an organization's or individual's success in meeting objectives.
  • Annual recurring revenue (ARR): ARR is a subscription economy metric that shows gross billings generated over one year of a subscription-based service offering.
  • Average revenue per user (ARPU): ARPU is a measure of revenue generated by an individual that companies use to evaluate per-customer revenue potential.
  • Gross margin (GM): GM is a percentage that indicates a company's net sales revenue minus cost of goods sold that shows remaining sales revenues after production costs.
  • Customer acquisition cost (CAC): CAC measures a company's costs related to converting a shopper to a buyer. "Having a good CAC model demonstrates market potential," Daily said. "A CAC that is equal to 12 months of revenue is not very good; three to four months is better. I'm currently working on a deal with a CAC of one month."
  • Customer lifetime value (CLTV): CLTV measures the revenue value over the expected duration of the customer and company relationship.

Daily advised those seeking capitol to have a good idea of where your company fits in the market and why you want investment capital, and be prepared to demonstrate your solution's potential to grow and create recurring revenue streams. He also noted that not every company needs to work with professional investors; there are other ways to grow and scale a business.

"Make sure that as a founder you have domain expertise in your chosen market," Daily added. "Be ready and able to eat, sleep and drink your chosen business for at least the next 10 years, or choose something else."

Partnership dynamics

Cohen likened bringing in capital to getting married, with accountability and transparency holding the key to successful relationships. Once you take money, you have a partner who will expect timely updates with real numbers and data, he stated. "This will be a real partnership, so get to know your investors and vice versa," Cohen said. "Don't hide important data points and get to learn how they operated with past investments. Do you think about growth and the opportunity similarly? You'd be surprised how often there is a strategy mismatch post-close."

Gordon agreed, stating, "When you bring in an equity partner, you have to mentally prepare, especially if you're not used to working with others. Make sure the benefits of the partner's expertise and guidance outweigh any downside of shared decision-making."

Gordon further noted that investor partnerships don't fall into one bucket. Portfolio managers and minority partners have inherently different structures. A quasi-strategic or private equity partner takes a direct interest in your company, unlike a strategic, privately-held partner that makes you part of an investment portfolio.

To have and to hold

Aisera and Norwest Venture Partners are a good example of a happy investor/fintech marriage. The partners completed a $20 million Series B funding round in February 2020, with additional participation from Menlo Ventures, True Ventures, Khosla Ventures, First Round Capital, Ram Shriram and Maynard Webb Investments. Aisera plans to use the capital to grow and deploy its advanced AI platform for IT, HR and customer service environments. The partners issued a press release filled with customer endorsements, celebrating Aisera's 350 percent year-over-year growth rate.

"Every wave of IT innovation creates a new set of challenges," said Matt Howard, general partner at Norwest Venture Partners, in a statement. "Aisera addresses those challenges, as the founders are seasoned entrepreneurs with deep expertise in service desk, security, and customer service cloud solutions. We are thrilled to be part of their new journey."

Muddu Sudhakar, Aisera CEO and co-founder and self-described serial entrepreneur, thanked employees and investment partners for helping the company transform the enterprise service experience. And he thanked the market for "bringing the tsunami."

"It's never one person," Sudhakar said. "My team of 100 and repeat investors understand my strengths and give me the support to keep on innovating. Matt Howard has been with me for almost 20 years."

Technology journey

Sudhakar previously launched Kazeon, acquired by EMC in 2009; Cetas, acquired by VMware in 2012; and Caspida, acquired by Splunk in 2015. As he reflected on his technology journey, Sudhakar said prior product launches and deep dives into different facets of technology informed Aisera's complex, AI-driven design. The platform's basic language skills and adaptive learning help it recognize, automate and resolve service issues. Its ability to solve high-demand requests makes it scalable, he added.

"When I ask a specific question, the system answers accurately in a manner that customers appreciate," Sudhakar said. "Our AI constantly learns from our growing base of 12 million users and currently answers between 60 to 70 percent of questions without humans. I measure success by asking, 'how many questions have you resolved this week?' Scale means nothing without accuracy."

Sudhakar acknowledged that being an entrepreneur isn't easy and isn't for everyone. He characterized it as a winding trajectory with many sleepless nights and bumps along the way that also requires you to invest in the long haul without knowing where it will end. "Repeat investors are like customers who keep coming back to buy products from you," he said. "I am fortunate to have customers and early adopters who are willing to take this journey with me."

Place your bets

The fintech tsunami, like early ecommerce, is disrupting the commerce ecosystem, Gordon stated. "We're seeing historically aggressive multiples with pure play technology companies, many of which have no profitability or are even losing money," he said. "This could be the start of a new era, similar to the birth of the internet in the early 2000s."

Gordon sees the new era as a seller's market for the traditional side of payments, suggesting pure play technology companies are still in "early days." It's unclear if GAAP [generally accepted accounting principles] will apply to companies like Amazon, Google, Apple and Tesla, he stated.

"Consider the growth rate of cloud-based solutions that are locking up so many customers," Gordon said. "If you use a solution like Quicken or QuickBooks, you're probably don't care about saving $2 a month for whatever they charge online, because it's a convenience. Once they have you in their system, you're probably there for the long journey and I think investors are placing bets on that."

Cohen agreed that the financial technology environment is ripe for speculation. "Investors understand the odds and recognize that not every company in their portfolio will make it," he said. "The entrepreneur may have one bet but the fund or investor has many and can't bring the whole fund down on one bet." end of article

Dale S. Laszig, senior staff writer at The Green Sheet and managing director at DSL Direct LLC, is a payments industry journalist and content development specialist. She can be reached at dale@dsldirectllc.com and on Twitter at @DSLdirect.

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