René Andres under the supervision of Prof. Jörn Block from the University of Trier conducted a comprehensive study on decision making of growth venture investors. They did a “conjoint-experiment” with 798 investors, in which each participant was asked to make a series of decisions between several growth ventures that were presented to her/him. Their survey brought up some interesting facts on what is important for investors.

Revenue growth has the highest relevance

It turned out, that revenue growth is the most important criteria for investors, followed by the value-added of the product or service for costumers. The third most important criteria is the relevant track record of the management.

Source: Andres, René; Block, Jörn (2017): Decision-making when screening growth ventures.

Investors also showed a clear preference for business models with a lock-in design which makes it difficult for customers to switch to another provider (e.g. marketplaces).

Later Stage Investors focus on Profitability

Mr. Andres and Mr. Block further analyzed the importance of the mentioned criteria by investor type. For Venture Capitals (VCs), the most important criteria is the revenue growth of the venture, whereas for Corporate Venture Capitals (CVCs) it is the value-added of the product or service for the customer. CVCs put the highest importance to the criteria of current investors. For VCs as well as CVCs the profitability was the least important criteria in contrary to buyout funds, growth equity funds, and family offices. Interestingly, growth equity investors seem to put more importance on the track record of the team than VCs.

Source: Andres, René; Block, Jörn (2017): Decision-making when screening growth ventures.

Majority of Funds have an IRR of 11-30%

The researchers also asked respondents about the average IRR of their fund, resulting in the graph below.

Source: Andres, René; Block, Jörn (2017): Decision-making when screening growth ventures.

One rather consistent pattern they found was that investors with entrepreneurial background were associated with higher financial performance. We were happy to support this study as a participant.

Venionaire supported this study as one of the 798 participants.

You can download a comprehensive research report here.

Last year European investment volumes were on decline not least due to political reasons: the turbulent political year of 2016 gave us Brexit, elections and referendums all across Europe (Italy, Austria, France), directly influencing the stability of financial systems and caution of investors. Similarly in the US: the elections, as the period of political uncertainty has influenced the investors on the other side of the Atlantic, too. However, when looking east, political stability in the Asian – Pacific region brought about the complete opposite: a lack of significant political events and turbulences gave the impression of economic stability. This fact directly reflected on the upward trends in Asian FinTech ecosystem investing activities.

So how did we get to where we are now? 2015 has brought us plenty in terms of innovation and investing activity within the area of financial technology, the developments in the year behind us did not pick up such a fast pace. In 2015, we witnessed the strong emergence of innovative financial services delivered through a blend of various channels, combining various platforms and technological tools: the terms such as blockchain, API or POS became closer to the customer and in a way part of a daily conversation. These innovations have been fuelled by huge investment injection of $46.7 billion in value on global level. However, according to KPMG’s analysis of 2016, the FinTech market shows signs of slowing down. The decrease of almost 50% brought the investment value on a total of $24.7 billion.

Investment by FinTech Segments

Banking/Lending has been the dominant segment when it comes to the number of companies raising funds (29% of companies that raised funds belonged to this segment).

However, the segment of Payments/Loyalty/E-Commerce is the one where the total funds raised value is highest. Companies categorized in this market segment have raised 39% of total funds raised by the entire Fintech industry in 2016.

M&A, PE, IPOs and VC deals

When analysing the structure of financing deals, the increase in venture capital activity is noticeable in comparison to 2015. According to KPMG, M&A and PE FinTech deals dropped considerably in 2016, while the venture capital investments reached $13,5 billion, even more than $12,7 billion in 2015.

The reasons for such a boost are mostly three gigantic financing rounds in China. The funding round to Ant Financial that occurred in second quarter last year was $4,5 billion heavy. Besides Ant, two more historic financing rounds, each over $1bn, significantly increased investment numbers in China.
Luf ax.com – $1,2 billion and JD finance – $1 billion.
After these three giant investment shots, China outpaced the US for the first time with $7,7 billion in total value of deals (28 in total), with an 84% increase in comparison to 2015 ($4,2 billion).
Except Markit’s $5,5 billion merger with HIS, there were no significant IPOs in 2016, either. The expectations are that the trend will pick up in 2017, as we have more mature companies in the market. The most active FinTech investor was fund and accelerator 500 Startups with 39 investments. In June, they announced raising a $25million separate Fintech fund for investing in early stage companies globally.

Key Q4’16 indicators

KPMGs report found that the last quarter of the year showed some revival of the investing activity. The VC funding increased from $1,9 billion to $2,1 billion between third and fourth quarter of the year, though still not near the previous year’s numbers.
On the American continent, VC investment revolved around $1,1 billion in Q4 ’16, not deviating too much from the previous year’s results for the same period.
In Asia, VC funding jumped to $680 million after a year’s low of $200 million in third quarter. The rebound was mostly driven by a $ 384 million deal in the last quarter.
Europe has stayed relatively stable, sitting on $319 million of investments in the industry. This result still remains lower in comparison to the same period in 2015 (around $350 million).

FinTech Future?

The appetite for investing has certainly not vanished, neither is the appetite for innovating. 2017 is the year that can bring revival in terms of more overall activity in the market and possibly some significant shifts that would include big investment deals and the appearance of some new innovative solutions. There are three major drivers to this possible scenario:

• As soon as we experience some political stability, the expectations are that the trends of investing will pick up the pace
• Regulation that should take force in 2017 (PSD2) will stimulate innovation in the field of FinTech, leading to even more aggressive investing activity
• The strong upward trends of technology adoption in emerging markets could fire up the payment segment (mobile to mobile just might be the key feature in 2017)

Whilst we only know what the future holds once it becomes our present, we can do our best in predicting it by shaping it.

Sources:

• KPMG – the Pulse of Fintech Q4 – data highlights
• The 2016 VC FinTech Investment Landscape by Innovate Finance
• CB Insights, Fintech Trends Report, 2016
• Pitchbook, 2016

How to make it on the Road to Dakar? Winning the race with a strong investors’ brand. In this blog series, we explore what it takes to get your investment tools in order by looking at the following four major areas: research, deal flow, portfolio management and network management.

There is some truth to the saying that “investing in early-stage tech is more of an art, than science”. However, just as the Paris-Dakar rally is not won purely based on enthusiasm and gut feeling, but rather the adequate handling of the right machine and equipment, early stage investors also need to be adequately equipped to perform. Funnily enough, we found out that although a majority of investors deal with innovation and technologies every day, they stick to excel spreadsheets, word documents, as well as paper and pencil for their own work. “The blacksmith’s horse has no horseshoes” is resounding in our day and age as well. To be fair, technology for this industry has only evolved a couple years ago and the adoption rate is rising. The need for a technology stack is not only directly correlated to the rising complexity of the business, it is particularly necessary to track one’s investments effectively as well as providing resource efficiency. Investors have to balance their fix costs as they have a direct negative impact on the IRR. Whether you are mostly looking for a deal flow at the very beginning, or just started to improve your inner processes, or find yourself in the need of a better way to track a large number of investments: you will have to choose if you stick to the old way or implement a digital technology stack for your early stage investment business. Ultimately, you want to choose the best machine if you want to get to Dakar.

First quest: what does my machine need to be able to do

To guide you through the windy and sandy maze on your route to Dakar, we have divided the technology stack into four major areas:

1. research,
2. deal flow,
3. portfolio management,
4. and network management (including business intelligence, monitoring and internal communication).

 Technology stack for Research

VCs provide research: a) to gather the important expertise b) to be known as an expert in the field and c) gathering inbound deal flow. Thus to make it onto the race track, the rally driver needs to prove his skill and practice.

Gathering Expertise

Just as the race driver needs to first train to become one, investors need to do their homework – this is a time investment which needs to be made. There are many useful tools providing valuable data and information to facilitate your research such as

• Product Hunt,
• AngelList,
• Crunchbase,
• EVCA

or paid services such as

• Pitchbook,
• CB Insights,
• Bureau van Dijk

which should be systemically followed in order to understand market dynamics, technology trends and current developments of valuations – as prices (multiples) will change in hype-cycles just like publicly traded companies. Apart from increasing the likelihood of successful investment strategy, venture investors need a deep understanding of markets, investor landscapes in a certain field and eventually deciding upon certain investment niches over others. The distribution of supply and demand of innovation across industries is critical to analyze in advance of a deal (as far as possible), as you will need to exit an investment down the road.

The pricing usually varies, depending on the functionalities and features a user prefers. Below is the table showing the comparison of free and pay services for some of the useful research platforms. See our table of software features.

Free databases like Crunchbase (in its basic version at least) and Product Hunt represent useful tools for general information, data mining and getting a quick overview of markets and competition. However, if your ambition is to dig deeper and generate high-quality information and real insights – including news and analysis, we recommend CB Insights, BvD and Pitchbook (make sure to verify if company data is 100% correct through a commercial registry, though). For the access to structured, official commercial register data on the global level we recommend Kompany.com.

As a company with a focal point oriented more towards European markets, our machine of choice is Pitchbook. The platform contains a better database of funding histories, valuation, series terms, information about the investors and startups and much, much more. The integration is well executed, as it enables exporting possibilities and integrates directly with other platforms, such as Salesforce and Microsoft Office Suite.

Be known as expert and gather inbound deal flow

A simple but effective way to strengthen your presence in the ecosystem is simply by publishing valuable insights through platforms like Medium for blogging, Quora for Q&A interaction and Slideshare for presentations. Your public presence will not only boost your reputation as a market professional, it will also help to gather inbound deal flow. The better your market reputation, the stronger you are as an investor, the higher the quality of deal flow and eventually your negotiation position will be when it comes to terms and valuation. If a large number of startups are addressing you as an investor, you will statistically have a better chance to select superior deals, but you need to know what you are looking for.

The platforms used for presentation of content (Medium and Slideshare) come in very practical packages, as the free versions offer a broad range of possibilities for raising awareness of your brand. For the purpose of sharing content, we consider Slideshares basic service more than enough. Depending on the preferences and subjective orientation, its Silver, Gold and Platinum subscription models offer upload benefits, monthly tracking of leads and geo-targeting, depending on the chosen model.

Conclusion

Research comes as a starting point, the first lap of your long and intensive race. It is also the point where you start assembling your powerful motorbike that should get you to the finish line before the other contestants. Be careful, power is not everything. The machine has to be balanced out according to your needs and adjusted to the conditions of the race. In the next lap, we will pay attention to the deal flow, the next critical piece of assembly you will need for your powerful drivetrain.

Some of the best practices from investors like Andreessen Horowitz or Sequoia that are using various platforms for their public presence could also be of use to you:

Blogs:

• The Internet Is Your Movement by Andreessen Horowitz
• Four Numbers That Explain Why Facebook Acquired WhatsApp by Sequoia on Tumblr)
• David Teten Blog

YouTube:

• Sequoia Capital’s Doug Leone on Luck & Taking Risks by Sequoia