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Fintech's $ 138 Billion Opportunity
According to the industry Venture capital deals have reportedly rebounded significantly since being temporarily suspended in March as housing orders swept much of the country.
As a seed stage fintech Investors, this has certainly been our experience: "Hot" deals are funded faster than ever before, and we are increasingly seeing that the large multi-tier global funds compete for the earliest access to companies. However, based on our experience and anecdotal conversations with other early-stage investors, that excitement didn't carry over to Serie A.
We have increasingly wondered if the Series A fintech market is really as hot as it seems. As pre-seed and seed-stage investors, we know that the health of the Series A market is of vital importance.
In early October 2020, the Financial Venture Studio compiled a brief overview of the Series A fintech market and shared it with more than 100 investors with whom we work closely. Despite the high numbers suggesting a healthy market, our research suggests a market that remains in flux and has a significant impact on early-stage founders.
Why Serie A is so interesting
While the seed and pre-seed fintech market continues to generate significant interest from entrepreneurs and investors, in some ways it's also one of the easiest parts of the market to fund. The check size is smaller, the new business pace is the fastest, and while the potential returns are also the highest, this is also the part of the market where information is scarce. Perhaps counterintuitive, the fact that there is so little information about a company – aside from a plan, team, and perhaps some early anecdotal evidence to back the vision – actually makes it easier to trigger in deals where those data points match to press. There is just often not much more to explore.
Similarly, companies that raise Series B capital tend to have objective evidence that the idea works. Businesses tend to be revenue-generating, small teams have grown and become more sophisticated in how they work, and most importantly, a company's governance functions have (hopefully) taken shape. The simple existence of a board member with invested capital means that some of the more existential risks of the earliest stages have been mitigated.
In contrast, one of the big milestones for any startup was acquiring a Series A from an institutional investor. In addition to a capital injection (which is often 2-3 times the total capital of a company since its inception), this “seal of approval” gives credibility to a small business that is trying to hire talent, sell it to customers and, in most cases, raise significant follow-up capital.
It is therefore important that Series A investors remain active. Otherwise, many of these emerging businesses may fail due to a lack of investment, even if they are able to demonstrate early market traction. The Series A funding market is one of the – if not most critical – funding phases in the innovation economy as it acts as a bridge between shoddy early innovation and large-scale commercialization.
So it stands to reason that the dollars invested may not be the best barometer of ecosystem health. What really matters is the volume of companies financed and the variety of product approaches pursued.
The Post-COVID Series A.
After the initial shock of the pandemic wore off, the VC community had to get back into business, which admittedly is more difficult for funds that write checks for $ 10 million and like to meet founders in person. Still, Series A investors were keen to let entrepreneurs know that they are and will continue to be “open to business”.
As investors became more familiar with the new normal, they were more open to a virtual due diligence process. Of the companies we surveyed, only 15% said they did not make a Series A investment during the COVID-19 labor restrictions. Of the companies that made a Series A investment during COVID-19 (~ 85%), about half invested in a company with whose founders they had limited or no relationship prior to starting housing orders.
With the move to a virtual environment, the process is more important than ever. Numerous investors have cited their renewed focus on a structured approach to sourcing and diligence. The interpersonal aspect remains important to closing a deal, but customer testimonials, recommendations from trusted seed-stage investors, and a deeper review of metrics are paramount when evaluating investors.