A new report has found that only 1 in 10 fintech startups succeed with seed/angel investment dropping by 57% between 2010 and 2017. In 2010 average seed funding was $6.84m, a figure that fell to just $3m despite total funding rising from $205.3m to $851m, reinforcing the growing competition in the fintech market.
The report also suggests that later stages have grown with average funding up from $20.31m in 2010 to $1.566bn in 2017; the total funding in 2010 was a measly $156m compared to 2017’s $6.9bn.
Eric Kryski, CEO of Bullish Ventures explained in the report: “Startups should not be looked at as some get-rich-quick scheme. Most fail miserably. Furthermore, nearly all of the successful ones that you have heard of were grinding for 2–3 years before you even knew about them.
“Even if you happen to be part of the minority that succeeds, you will most likely be running your business for 7 years before you see a large return. There is a lot more to the startup dream when you actually crunch the numbers.”
The report also suggests that as many as 60% of companies fail to make it past pre-Series A funding to later funding stages, with only the most weathered and product-driven graduating to the more lucrative later rounds becoming the 1 in 10 that succeed.
This is down to two significant changes in startup financing: diminishing regulatory barriers to entry into the world of high-risk, high-reward investing for different types of investors, as well as the democratisation of startup financing.
Previous capital raising options limited private companies to fund raising through only accredited investors (FIs, hedge funds et cetera)– historically the wealthiest 2% of Americans.
But the JOBS Act and, specifically Title III, CROWDFUND Act, introduced by Obama in 2012 and implemented by the SEC in 2016, allowed companies to raise from anyone up to $50m under Regulation A+ and up to $1 million under Regulation CF.
These new exemptions opened up investing to more than 240 million Americans who previously could not invest, now able through newly regulated crowdfunding platforms, opened up in the SEC’s “Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers”.
Crowdcube, the leading crowdfunding platform in the UK, told bobsguide alternative and VC funding was more of a hybrid option: “Crowdcube has supported over 700 raises for startups and growth businesses and crowdfunding is clearly part of the established funding landscape for entrepreneurs, with venture capital firms often choosing to invest alongside the crowd. Crowdfunding offers the chance to channel support from retail investors and build support without depending on the hard-to-penetrate world of angel investors and VCs.”
Having funded some of the UK’s well known fintechs – Monzo, Revolut, WiseAlpha and goHenry – Crowdcube believes these types of startups are particularly attracted to crowdfunding “because it provides not only growth capital but also helps to develop the brand and the community around it.”
But greater options to initial startup funding does not necessarily translate into sustainable and enduring fintech companies.
David Schwartz, CTO of blockchain cross-border payment company Ripple, also spoke of the growing failure of fintechs coming to market via alternative funding, ahead of the announcement of their new incubator:
“The idea is to level the playing field. If someone has a great idea and decides to go down the ICO route, they’d basically only get one round - they’ll never get a second round - so how much money should they raise? If they raise $3m and build a product, then what? If they raise $50m in a few weeks and the idea doesn’t stack up, then what?”
Schwartz suggests that patience over acceleration is the key to success - something lacking from VC mentality - even if it comes at a cost to the parent company:
“We’re trying to level the playing field by offering support to someone with a good idea and a credible plan but needs that patience absent from Venture Capitalists.
“I joke that having an incubator is like hosting the Olympics. You know it’s not going to fund itself, but do you really want to be the country that hasn’t hosted it?”