Fintech Funding Gap: How can early-stage startups navigate this major hurdle

D’Arcy Whelan | Image credit: Outward

There is a major problem that affects almost all early-stage startups – the funding and expertise gap between their seed and Series A rounds.

Ask any founder of any type of startup who has navigated through this and they will tell you that it is one of the most difficult and precarious stages of their company’s journey. The seed money has been used up to build a minimum viable product and carry out market testing, but then a big leap forward is required to increase institutional investment so that customers can be acquired on a large scale. Finding an institutional investor who has the capital, let alone the right level of expertise and network, can be tough, and here we have one of the first major hurdles for early-stage startups.

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The complexities of early-stage fintech growth

This gap, between seed and institutional investment, is even more pronounced for fintech startups, and arguably not well addressed by generalist VCs who do not always have the necessary domain expertise for fintechs navigating an often unique set of challenges. Most fintech startups will need to develop complex technologies and undergo extensive regulatory compliance. Then there is hiring senior operators who can be expensive in financial services compared to other sectors. In the case of B2B fintechs, proving business sales cycles on the available runway can be very challenging.

A generalist VC firm may have the capital, but unless they have people with connections and deep industry knowledge who have been through these challenges multiple times, either as fintech founders or backers of fintech companies, the value they will be able to add with this. the scene is limited. That is if they even see the potential in the first place. We know first-hand from our portfolio that many generalist funds pass on fintechs at the pre-Series A stage. In fact, those from our portfolio that have outperformed the most unloved in the early stages. Founder bias, business model bias, and lack of domain expertise all contributed to why they were overlooked.

The fintech funding gap

We refer to this post-seed, pre-Series A stage as the “Fintech Funding Gap”, as it is where an abundance of fintech start-ups seek capital from much-needed specialist firms like ourselves, and where demand far outstrips supply. . If we zoom in on the UK market, the number of fintech funds deploying capital in the country can be counted on two hands. Based on the size of their latest funds and % allocation to the UK, we have found that there is a supply of approximately £0.3 billion. This value is dwarfed by the £6bn (20x) of potential demand required by the early fintech ecosystem looking to raise rounds between £2-5m.

Early-stage fintech startups need to look for VC firms that provide capital in the post-seed, pre-Series A gap, as well as knowledge and networks to scale and reach Series A/B and beyond, where there will be a larger pool of investors with capital readily available for larger, later-stage rounds of £10m or more.

Now is the time to start

What do things look like as we enter a potentially generation-defining recession, against a background of soaring inflation and a decline in investment? We’ve already seen an unprecedented number of tech companies announcing layoffs as valuations are slashed and VCs tread more cautiously than anyone can remember.

We are entering a new world, and while it may feel unsettling, we and many others feel that now is a good time for founders to start companies, and for early-stage VC firms to support them.

Those who raise their seed and Series A rounds now will, when the market returns to normal and the economy begins to grow, be in a strong position, with sustainability and a rational mindset baked into how they operate.

The VC ecosystem may be going through a period of correction, but there is still a lot of dry powder available for startups, especially when they reach Series B and beyond. The big difference we will see over the next year or so will be a return to more sensible and sustainable deals that are in the long-term interests of founders and investors.