Archives for the month of: November, 2014

London could just become the FinTech capital of the world if all the predictions are to be believed. The proximity of the Shoreditch tech scene to the financial center in the City of London provides a distinct advantage over Silicon Valley. However, there are still barriers to overcome if the FinTech revolution is take hold.  Take a short walk from Liverpool Street to Old Street by the back streets to see how different the two world’s are. Just north west of Finsbury Square the tall glass skyscrapers of the City are replaced by low-rise warehouses and Victorian factory units.  These are home to the emerging tech scene.

FinTech startups are not a homogeneous group. There are two distinct types; those who are tackling the legacy functions that are deeply embedded in the corporate structures and those that disrupt by dealing directly with the consumer and bi-pass the banks altogether. Therefore, some startups can’t avoid working with corporate clients. This is not an easy relationship. Although, there is a recognition that innovation has to come from outside the corporate structure, the system works against this happening. There is a big imbalance between a global banking institution and a tiny startup. This so often leads to the source of innovation being strangled at birth. At the very best, the startup can easily become a jobbing shop for the bank.

There is a trend for the banks and systems integrators to set up accelerators and innovation centers. However, they have little understanding of the environment needed for the startups to succeed and the over-bearing influence of corporate sponsors reduces their ability to innovate. In general startups should be given as much freedom to innovate as possible. This means an extremely light touch from the corporate sponsor. The best solution is to provide money directly to the startup or to third party accelerators and let them get on with it.

The second type of startup is the disruptive one. Although the term disruptive is over-used,  this is generally what they set out to do. They have the power to transform the way the consumer and small businesses are accessing financial services and will shake the banking world to it’s foundations.  Whether, it’s internet based challenger banks, bitcoin exchanges, new payment platforms or crowd-funding, these businesses will radically open up the sector.

It is important to nurture both types of FinTech startups.  The banks should be sensitive to the way they interact with the startup world. Issues such as IP ownership are important to startups and the banks need to relax their supplier vetting policies to allow smaller companies to provide solutions. The Government needs to protect disruptive startups by giving them a level playing field, cutting red tape and offering tax incentives to investors.

FinTech is exciting. Let’s make sure we don’t lose the opportunity to take the lead.

Blog by Paul Dowling – Co-Founder of Dreamstake  the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Join here Dreamstake.

 

Startup founders are often a bit reluctant to engage with lawyers early on because they are afraid it might cost them too much. However, there are startup friendly lawyers out there and they can add value to an early stage business in numerous ways. Most good startup lawyers are prepared to invest a bit of their time into helping founders on the basis that they could well be the success stories of the future.

However, not all lawyers are suitable for startups. Many simply do not have the expertise to help or do not have a fee structure that works for the startup community. It usually comes down to a firm that has one or two partners that are passionate about startups and are prepared to provide initial support on a pro bono basis.

The reasons that I like to involve a lawyer very early on are as follow;

  1. They are usually very bright people with good business knowledge. I increasingly believe that they can make suggestions for business models and other complex issues. They can also do this from the perspective of knowing what is and isn’t legal.
  2. They can protect the company by making sure that sensible shareholder agreements are in place. They are able to get the various partners to agree something between themselves and therefore act as honest brokers.
  3. They can ensure that the company doesn’t inadvertently miss out on tax breaks such as SEIS and EIS. They can also ensure that they don’t fail to qualify by falling in one of the many traps.
  4. They can help to ensure that your company owns it’s own IP by putting the right contracts in place with employees and subcontractors and by helping with patent and trademark applications.
  5. They can help with the legal aspects of fundraising and support negotiations with potential investors.

So I would recommend finding a good lawyer very early in the startup process. The best will outline the ‘must do’ list and take a pragmatic view that will allow you to spread your legal costs.

Blog by Paul Dowling – Co-Founder of Dreamstake  the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Join here Dreamstake.

In a recent blog I mentioned the growing funding gap for tech startups in London.  This lies somewhere between the SEIS tax break level of £150K and the point where VCs get interested in investing at nearly £1M. Between these two points it is becoming more difficult to attract investment.

VCs are unwilling to engage at seed level unless there is clear evidence of traction (usually revenue streams). Therefore, angels are the only source of funding for many entrpreneurs. However, there is a limit to the amount an angel will invest in a single startup. They are building diversified portfolios to reduce their exposure to the risk of failures. This results in a larger number of small investments in as many startups as they can keep an eye on. In fact, research has suggested that an ideal portfolio of tech startups would comprise as many as 25 companies over a lifetime of investing. In the UK this has driven the average individual investment down from approximately £100K to around £50K.  This clearly suggests that a founder looking for £500K would have to find 10 angels.

So how do you build a flock of angels?;

Use a platform – A platform such as Dreamstake takes some of the work out of identifying angels. By building a database, checking credentials and helping to understand their needs, a platform can save time and effort. The platform can provide the data needed to match startups with specific angels.

Find a lead angel - Not all angels want to lead a round. Many are happy to fall in behind someone that they trust. It is a good plan to identify a smart investor with either sector or functional experience to bring to the party. This individual will attract other potential angels as well as adding value by bringing contacts and expertise.

Attract other smart angels – There is no reason to stop with one smart angel. Make a list of people who would add most value to your business. This could be individuals who have made money by selling businesses in a relevant sector.

Be proactive in deal-making – Once you have a lead angel or a core of angels, be proactive about finding others. This is basically a sales process. Be very organised about it. Plan who to approach and how to go about it. Ask others for introductions.

Makes sure they are real angels – Unfortunately, there are too many people out there pretending to be investors. They probably want to sell you consultancy. Check their credentials on linkedin and challenge them right form the start. Ask them how much they invest and how often.

Do not ask for too much – Clearly the more you ask for at this round the bigger the flock of angels you need to gather. Plan your funding rounds to avoid the gap as far as possible. It may be more realistic to stay close to the £150K mark and use this amount to robustly prove the business model before moving to VC level.

The good news is that there is more money available for UK based startups than ever before. It is just a case of planning carefully to avoid the gap and accepting that syndication may be the only answer at certain levels.

Blog by Paul Dowling – Co-Founder of Dreamstake  the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Join here Dreamstake.

The European tech startup scene is definitely getting hot.  It’s been a long wait but London’s tech city is now producing world class startups and it’s tempting to jump right in as an investor. You may well be an investment professional working in the city. Maybe some of your friends have already made a killing by backing a startup on the way up. However, be careful, early stage tech investment is highly risky if you haven’t been involved before. Here are a few tips to minimize the risk and increase the return;

  1. Get a basic understanding - Don’t jump in until you have a basic understanding. Most tech startups follow a process that is laid out in The Lean Startup by Eric Ries.  This defines the stages that startups go through before scaling. As an angel investor you will often be investing in a team with a prototype (MVP). The idea will still be unproven. Once it has been tested in the market, VCs come in with larger sums to scale it up.
  2. Invest alongside more experienced investors - This is a great strategy. Look out for startups that have already attracted a smart investor. This can be someone who understands the technology or the market sector.
  3. Diversify – Risk can be diversified by investing across asset classes and by spreading your investment over a portfolio of startups. Investing £500K in one tech startup is highly risky. However, investing £50K each in 10 startups is safer. This is especially true, now that the SEIS tax break will mitigate some of the downside risk.
  4.  Watch the trends - The startup world is driven by trends. Timing is everything. Mobile is big and ‘internet of things’ and hardware startups are emerging. It’s important to understand the underlying trends, whilst being careful of the hype.
  5. Beware of vanity metrics - Startups are often fueled by buzz. They need to attract users by making loads of noise over social media. However, many of the metrics they will quote in the pitch deck have little significance. There is little value in a million like on Facebook if this was bought through an expensive ad campaign and doesn’t translate to revenues.
  6. Network - Be where the startups hang out and talk to them. You learn a huge amount from founders.
  7. Mentor – If you have a lot of experience in a sector, such as banking, offer to mentor on a fintech accelerator. This is a great way to stay close to the action and learn the ropes.
  8. Specialise - You may want to gain deep knowledge of a particular type of tech startup. Fashion tech and fintech are both hot areas to invest in, where London has a natural advantage.
  9. Join a platform - Of course we mean www.dreamstake.net!  This is our very own tech startup investment platform. It brings order to the startup scene with a rating algorithm, offers free investment workshops and provides a platform for co-investment.
  10. Enjoy - Most angels get involved for the buzz.  Tech startups are exciting. They disrupt conventional businesses and make a big impact. So remember that it has to be fun. Invest in teams that you like, doing things that excite you. Engage with them and offer support.

Blog by Paul Dowling – Co-Founder of Dreamstake  the world’s first tech startup platform to match founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders can create profiles on the platform and get direct introductions to investors. We are constantly looking for great early stage tech startups. Join here Dreamstake.