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Leading startup investment insiders told us what they're looking for in the perfect fintech

Yoshikazu Tsuno/AFP/Getty Images

Rajeev Gupta knows about startups and what’s needed to attract funding for them.

The former investment banker and technology investor has had his own startup, Geckolife, and has also worked at Goldman Sachs and Tribeca.

Now he’s a partner at Alium Capital, a technology-focused crossover investment fund looking after sophisticated investors wanting to get in on smaller, high potential projects overlooked by the big players.

He’s recently closed a couple of key investments in local Sydney fintech startups. In Australia, fintech is mostly driven by local companies, with 512 Australian and 67 offshore companies operating locally, according to analysis by KPMG.

One of Alium’s investments is Stockspot, a robo-adviser fund manager founded by Chris Brycki, a former UBS and BlueLake Partners portfolio manager.

If you were betting on people, Brycki is as close to a sure thing as can be. He started investing at age 10 and was a fund manager when still in his teens.

In May Stockspot raised $3 million in a series B capital round. Among the investors was ETF Securities founder Graham Tuckwell, Alium Capital and Toby and Ben Heap of H2 Ventures.

Gupta at Alium knows that a successful startup isn’t about the superficial cliches of health-sapping junk food, doing all night coding sessions and cool warehouse-style offices.

Alium has invested a total of $100 million in parcels ranging from $250,000 to $5 million, and has looked at more than 400 companies.

Gupta approaches each investment the same way, in a series of stages.

“It’s multi-faceted,” he told Business Insider. “There are a few phases. You have to absolutely start with phase one. Phase one is, you must understand the individual, their demeanor, their leadership capability and their ability to grow a business.”

Rajeev Gupta. Image: Supplied

For Stockspot, he met Chris Brycki for the first time last year and was astounded at his level of confidence, his maturity and his ability to control without upsetting anyone.

At that first meeting, Brycki quietly answered all questions. If he didn’t immediately reply, he acknowledged the question and said he’d get back to that shortly.

Gupta thought Brycki handled himself well.

“It shows he’s got clarity of thought,” says Gupta.

“We look for that in every investment we make. The individual must have clarity of thought and be orderly.

“If you are going to build — and we believe strongly that Chris will build a multi billion dollar business, he will probably have a few hundred, if not a few thousand people — you need someone who’s always in control without being arrogant.”

The second element for investment is technology: understanding the product being built, who’s responsible, and how scalable it is.

For Stockspot, Gupta spent a day in the Stockspot offices, sitting in on meetings, seeing the team face-to-face, asking questions, studying the development plan.

He told Brycki: “I want to come in, I want to spend a couple of hours with the devs (development team), I want to go through the architectural plan.”

Gupta believes it’s important to see a startup using the right tools to build a product and to see who has responsibility for which elements.

He observed Brycki start one meeting and then leave.

“He lets people be autonomous,” Gupta says. “The developers and the product manager were in there debating but Chris didn’t need to be there because he’s empowered them. I felt as though there was a quite good chemistry between each of the people working on the product, and the people that are in product management or the sales side.”

The third phase for Gupta, and his two partners, is to talk to customers.

“We spoke to a few of their existing customers, with regards to what they liked about the product,” he says.

“We went and saw two accounting firms, and discussed with them what was the benefit of using Stockspot and vis-a-vis other products.”

They asked: Has it improved your life and, if so, would you continue to use it and by how much more, on a magnitude, could you add to the business?

Chris Brycki. Image: Supplied.

And they went online looking for reviews, on pages 10, 11 and 12 of the Google search results. What did the early adopters find?

“We found that it was reasonably positive,” says Gupta. “There were one or two that were negative, from an onboarding standpoint; but largely they were positive, four to five star reviews.”

The final piece is to look at the market. Will it sell?

Globally, there’s been a huge shift to index funds in recent years and Stockspot has the inside running to benefit from the trend.

“Then you look at the financials and start modeling,” Gupta says. “You model what you think the business will do from an AUM (assets under management) standpoint, month to month. Then you have a three-year view and in five years, this is what the AUM may be. Then you work out an acceptable cost structure and then you work out how potentially profitable this could be.”

Most pitches for investment can be dismissed in half an hour or so.

With Stockspot, the underlying demand is there. Every month, money’s going into super, people are retiring and more and more people need to work out where to put their money in.

And Stockspot offers a fund with lower fees, between 0.5% and 0.79%, when others can be 1% to 2%.

“It’s a business that just seems to have tailwinds, run by a good guy with good technology,” Gupta says.

In a way, Brycki was ahead with Alium from the start. He was speaking to financial services professionals. They immediately understood what he was talking about.

Brycki told Business Insider: “This was the third round of funding that we’ve raised money from, so I think with each round I’ve probably got a bit more experience in terms of the whole pitching process and preparing for the pitch and getting all the materials in one place.”

Brycki uses a 30 to 40 slide deck, depending on the investor and their knowledge of the industry. Half of them in the pitch itself and half in appendices anticipating common questions.

Here is one of his slides:

Image: Supplied

He’d never met Gupta and the team at Alium.

“We had been referred to them by a mutual contact,” Brycki says.

“Looking at all the types of investors we have, typically we have some sort of connection with them, either having dealt with them in the past, or been referred to them.”

Brycki saw Alium as quite casual compared to some of the others where they have partners lined up plus an investment committee of four of five people listening to the pitch.

“I think they (Alium) only really launched maybe six months before we were pitching to them,” Brycki says.

“They didn’t really have a formal process, just ‘You come in at this time and you’ve got an hour to pitch to us, and this is the information we want to see’.”

The Alium team had a lot of questions around strategy.

“I was lucky with those guys, because they all come from a wealth management and finance background,” says Brycki.

“Not all of the investors I pitch to necessarily understand financial services and wealth management and asset management, and financial advice.”

The process of looking for the next funding round is exhausting and takes energy away from building the business. “You spend months doing that and your focus gets taken off your product and improving things internally,” says Brycki. “Probably in 18 months’ time you start to think about that same process again.

“From a business perspective that I’ve realised that when you’re looking at investors, you’ve got to look two steps ahead and not just your current round.

“There’s a lot of value in actually finding investors that have deep enough pockets to fund future rounds as well. Because it saves you a hell of a lot of time and stress and hassle, going out again.”

Early stage funding

Many startups complain early-stage funding is hard to get.

However, a study by KPMG shows Australian fintech investment is strong with $US675 million invested across 25 deals in 2016 despite an overall global decline in investment in the sector.

Gupta at Alium also doesn’t fully believe that early stage funding is difficult.

“It’s the ones that are probably not getting the money that are saying that,” he says.

Since Alium started a year ago, it has made 30 investments, ranging from $250,000 up to $5 million, for a total of almost $100 million.

To get there, Alium has met about 425 companies.

“I think it’s hard to start any business, but I think this environment has made it very easy for people to start businesses,” he says.

“They think they can raise money easily. But if you’re not a great leader, if you don’t have great experience, if you don’t have great technology, and your market size is restricted, you’re not going to raise money from anyone.

“When you start out, you’ve got to work hard and you’ve got to continue to man the boat, maintain that velocity. But it can be challenging. If you love what you do, it’s not hard to do it.

“I think it really comes down to the individual and the product. There are so many great people we meet with a bad product, and vice versa.

“But when you get that combination right, you therefore minimize your chances of failure. That’s what we’re looking for. We’re just looking to support and make money. I want to give it to the guy that I trust.”

And Gupta thinks a lot of founders and entrepreneurs think investors are at the top of the pile because they’ve got the money.

“But I had a start-up, and I had 1,200 days of challenges,” he says. “And then had one day of glory when you sell it off.”

“The ultimate person at the top of the chain is, in fact, the entrepreneur. People with money are purely facilitators, and we want to be seen as a friendly facilitator. Truly entrepreneurs are sitting at the top.”

Viv Stewart, ‎CEO at VentureCrowd, the online arm of Artesian Venture Partners, and a co-founder of the Sydney Angels Sidecar Fund, says investors tend to look at what they know and the same goes for fintech opportunities.

Investors are drawn to what they know

“In Sydney and Melbourne there is a very high concentration of people who have financial services expertise or work in financial services,” he told Business Insider.

“They have had an oversupply of information around whole range of different financial services, such that they might consider themselves reasonably financially literate. So when you put together financial [services] and technology, they are half way to understanding.

“When it’s framed in financial and investment terms, then even people who don’t understand the tech (and no-one really understands blockchain, even those who’ve invested in it don’t have a clue) understand.

“What investors look for? Well, they try to find those things that they can anchor on, that they understand.

“They look at the market opportunity. Is it a large market opportunity? And has it been demonstrated in some way through traction? So, usually, in Australia anyway, they would like to see traction in this country with potential for Asia and USA and, if it’s a later stage business, Series A or B, they would like to see global traction of some kind.”

Then investors look for experience.

“In fintech, I think that there’s a bit more of a weighting towards experience because of the regulatory context in which fintech wants to operate,” he says.

While a startup team might be young and hungry, they get marked down if they don’t have experience in financial services.

“You can’t have couple of inexperienced 20 somethings trying to break into a market that’s heavily regulated by ASIC and APRA,” says Stewart.

“The really useful validation for investors is the external validation. Revenue is the most impartial one of those.

Viv Stewart. Image: Supplied.

“How is it actually performing over time. Is it flash in the pan? Is it a steadily growing annuity style business? If it’s SaaS, is it growing at the right rate? For software, we look at monthly recurring revenue and annual recurring revenue.

“There’s always also a blend of project based revenue versus recurring revenue and investors are much more impressed by the recurring revenue.

“In terms of the business model as well, people look at the strength of incumbents, Is it intensely competitive or is it blue ocean?

“Is it deferred by legislation or other barriers to entry? Is it hindered by legislation and various other barriers to entry?”

Fintech can be particularly vulnerable to the whims of regulators. Financial services is highly regulated and getting more so.

And what will the founders do with the new capital? How long will its last or, they say in startups, What is the length of their runway?

“If the capital raising doesn’t give you at least 12 months of runway, investors will see that as a warning sign,” says Stewart.

“They typically want to see 18 months, ideally. They would look at the valuation. Does it seen reasonable?”

Warning signs

Investors also see warning signs when founders aren’t responsive.

“Entrepreneurs who don’t listen and don’t seem coachable, that’s a massive red flag,” he says.

They don’t just want to throw their money in and walk away. They want to know how their cash is being used and how the business is performing.

“I look for signs of the entrepreneurs being disingenuous when they are in the courtship phase,” he says. “Are they responsive? Are they open to feedback?”

And at the top of an investor’s mind is the potential return. What do they get for their money and when will pay day come?

A win is typically getting two to 10 times their money back over two to seven years.

“That’s just my ballpark,” says Stewart. “The earlier in the stage of business, the higher the return you want.

“If you are investing in the angel stage, you’re targeting at 10 times plus return on your money, expecting that the at least half the investments are going to fail.

“If you are investing at a venture capitalist sort of private equity stage or pre IPO stage, you are likely to get much lower. You should expect to get lower returns but with lower risk as well.

For entrepreneurs, a win is to survive.

“You look at the number of fintech companies that are already established and are being established every month in Australia and it’s mind boggling,” Stewart says.

“In banking and payments, it’s a huge campus. At the end of the day, you have got to come back to the fundamentals.

“If you are interested to invest because you think you can make some money, you get involved with a company. Do a bit more research and understand an area that you like.

“If you are not a professional investor, then you are probably better off to identify with a couple of companies or enterprises that do specialise in it and try and better potentially invest alongside them.

“That’s what we are doing, providing an opportunity for those investors to get an entry point into private companies. Not the gamble approach, investing alongside professional investors who are doing all that work and getting the opportunity to kind of invest with them on the same economic terms.

“It reduces the risk massively if that list is of the people who do this for a living and investing their own money in a deal. Otherwise you might as well throw your money in the air while you are driving in the car.”

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