It has just become harder to raise capital
The challenges for FinTechs in raising seed capital are already significant. One of the likely outcomes of the COVID 19 Pandemic is a reduction in the amount of available capital. CB Insights project that global seed funding will have fallen steeply in Q1 ‘20, down 22% relative to Q4 ’19 in dollar terms. In Asia, they predict that the decline will be more acute, down 37% relative on the previous quarter. In the post-financial crisis environment of 2009, Series A, B and C rounds were down year on year by 40%, 41% and 46% respectively. While we do not know whether the squeeze on funding will be as acute, it is reasonable to assume that accessing capital will be harder across the board.
The challenges of raising capital at seed stage
A key challenge of raising capital at seed stage is that often the product or service has not yet been validated through tangible revenue. Without working technology, the offering is difficult for investors to visualise. So often, investors are investing in the management team and an idea. FinTechs with only a pitch and no demonstrable product reduce their chances of raising that all important seed capital.
The importance of a prototype
For many FinTechs, not only will working technology help you to raise capital, it can be an essential step in your product validation journey. Prototyping will allow you to maximise clarification of requirements while producing the minimum amount of code. A good prototype will allow investors and prospective customers to connect with the product on an emotional level.
Valuation for start-ups is more of an art than a science. While it is difficult to generalise about the uplift that working technology will give a start-up valuation, based on analysis of UK deal data Seed Legals estimate that companies with a prototype command valuations of up to £750k. Under the Berkus Method of valuation which was created specifically to value pre-revenue start-ups, up to $500k is allocated to the valuation if a prototype is in place. However, to get from idea stage to prototype typically takes a start-up 6 months to a year, during which period of time it will burn through a lot of money.
Why a good pitch is important
Putting together a good pitch is not just about creating beautiful slides or talking passionately about your product. Investors are as interested in a compelling and well understood business model as they are in a great product – you need both elements to build a great company. After all, the two main issues that top the list for failed start-ups are a business model that is not viable and simply running out of money.
Rigorous thinking is required by a leadership team to create a common future view, giving themselves and their potential investors confidence that their proposition will be a commercial success. Using relevant analysis tools and techniques, key financial projections, market positioning and growth planning data will be established and articulated - the support structure to a great product story.
Done properly therefore, a good business idea is significantly substantiated through the data-driven construction of a business pitch.
Even with an experienced management team in place, pre-revenue companies need access to an ecosystem of professional services, external advisors, potential clients and investors. Quickly identifying the right partners in the ecosystem can fast-track getting a product to market fast. While it is difficult to put a value on this, Berkus does, allocating a maximum of $500k to the strength of relationships as a mitigator for market risk. Start-ups should be looking for introductions to the right investor groups, a community of like-minded peer firms to learn from and of course channels for potential clients.
How Opus Una can help
Through Opus Una Engineering, partnering with Opus Una Consulting, we have launched an exciting new initiative: Turbo-Traction, specifically designed to help start-ups that need to raise seed capital and validate their product
Fast, cheap and output focused: we create all necessary fund-raising assets, at a fixed price in a fixed period of time (3 months), while allowing you to continue to build your business. Outputs include:
- A working product prototype showcasing the key business proposition
- Investor deck and supporting analysis
- Brand assets
- User validation approaches and stage 1 build planning
In order to create high quality outputs, pre-requisites are a clear business idea and a committed management team. We will then work with you to pressure-test the idea and business model before creating the deliverables above and connecting you into our FinTech ecosystem.
In an increasingly challenging capital-raising environment for start-ups, raising at optimal valuations to fund runway for 12-18 months is critical. Based on feedback from our clients and our start-up experience, we believe Turbo-Traction is the answer for start-ups looking for a (turbo) boost towards an investible product.