Some startups are raising capital too early and with many suffering a ‘down-round’, according to Techstars managing director Chris Adelsbach in a research interview with FinTech Global.
Finding innovation is not a problem for Techstars, with their mantra being that they’ll go wherever the entrepreneurs are. If there is a lack of support in Berlin, Paris or parts of India, Techstars sets up operations there to change this. One of the areas the company doesn’t have an accelerator is Silicon Valley, as from their point of view, they are already well served, Chris Adelsbach said.
However, one risk in the current market is a sense of too many accelerators, with Adelsbach seeing far fewer in the future. Accelerators have been responsible for a big chunk of the funding into FinTech companies, with the top two most active investors in the space both being accelerators, according to data by FinTech Global. Since 2014, 500 Startups and Y Combinator have both been responsible for over 100 investments each in the sector. One of the things that separates Techstars from other accelerators is its equity-back guarantee. This allows companies to later repurchase equity bought by Techstars for the same price originally paid. Adelsbach believes if more accelerators adopted a structure like this, there would be a decline in their numbers.
Despite a current abundance of capital in the market, which the number of accelerators has contributed to, a lot of companies are still struggling to raise their Series As. Companies have not had too much trouble raising early-stage money and seed rounds, but a growing number have struggled to go on to raise a Series A. While Adelsbach agrees there is a gap in funding, the more pressing matter is companies raising capital too early due to the ease of access to funding.
Adelsbach said, “There probably is a gap but what you have to realise is that you need Series A metrics to raise Series A.” He described a situation, which is not just present in FinTechs, where companies will raise their seed round on the hopes that in 12 – 18 months they’ll be hitting £100,000 MRR, but then they’ll only reach £20,000 MRR. “Great companies often get this timing wrong. So what do you do? You raise a seed + round and go back to your investors and hope you don’t suffer a down-round for that. If you’re a good management team and are making good traction, but its just taking a little longer, you’ll probably raise the money.”
There is innovation around the world, and great companies can be found anywhere, Adelsbach said. However, there are still the main players, such as Silicon Valley, New York and London, where most of the capital goes. He said, “There are very strong ecosystems in Europe, Paris, Berlin, and Stockholm, but when you actually look at where the VCs are and how large their funds are those three cities are the lion share of Europe, excluding London.” So, when looking for funding most are going to look towards the US, as there is so much capital there and it is more available for companies, he added.
Adelsbach said, “Around two thirds of British companies that raise a Series B and beyond, will raise it in America. This is interesting if you think about Brexit. If you’re a British company and you reach a point where you’re ready to spread your wings and expand, two thirds of companies are raising money in America.” If a company goes to Sand Hill Road to look for capital, most of the firms will only supply capital if they can get to the company within 15 minutes, which means you’d likely have to move there. He added, “where are you going to move to? Are you going to grow that business in America or in Europe that has even less money? If there is a Series A or B crisis , it is felt far more acutely in Europe.”
The team’s the key
Angel investors have made up nearly a third of all FinTech investments since 2014, with them accounting for 32.3 per cent of transactions, according to data by FinTech Global. While angels have represented a high number of investments, their activity is starting to decline. In 2016, their involvement fell by 51 transactions and $300m. Of the 1666 angel investors in the FinTech space, Chris Adelsbach has been the most active, having completed 33 deals since 2014.
When investing in a company, a major aspect Adelsbach looks at is the team. If the idea is not ready to be invested in, then he’ll keep in contact with them and see where they are six or 12 months down the line.
Adelsbach said, “A lot of what people are doing is not unique. We see this due to the sheer scale of applications we get from all over the world. What I am looking for is a strong team with a driven CEO and technical supporting cast of co-founders. This is what led me to be an early investor in companies such as Atom Bank, Monese and Everledger. I’m not investing in Series A or B metrics, I’m investing in the team ultimately.”
If it is still a great idea, then the one with the best team is going to get the support. One of the key things is a group that can accept mentorship and will work well together. After finding a good company, Adelsbach will then bring in the experts to help them with their business.
Copyright © 2018 FinTech Global