Fintech companies are becoming significant players in the U.S. economy, with firms such as Credit Karma, Tradeshift and Plaid enjoying extraordinary success as they use technology and innovation in an effort to transform the financial services industry.
In 2018, for example, fintech investments in the U.S. reached $11.9 billion, a new annual high, according to CB Insights.
But despite the favorable trend, fintech startups also face the same reality that all startups do – raising the capital to launch a business is no easy feat.
The good news for fintech entrepreneurs, though, is that we are well past the time when investors might have viewed fintech as a fad that would pass.
“I think that most investors have come to understand that fintech is here to stay,” says Kirill Bensonoff (www.kirillbensonoff.com), a serial entrepreneur and an expert in blockchain.
“Finance is getting more and more high tech each year.”
Still, coming up with sufficient capital to start any business – whether it’s from your own savings, a loan from a relative, or cash from an investor – can present a formidable problem.
“One lesson I’ve learned over the years is that successful entrepreneurs must be persistent,” Bensonoff says. “You will face challenges and one of those could be raising capital. Perseverance will get you through.”
Options for raising that capital include:
- Venture capital. Venture capitalists might be inclined to invest in your startup in exchange for an equity stake if they think there’s a chance they can score a big return. But they will need convincing. “The failure rate for new businesses is high, so it’s only natural for investors to be skeptical about whether you can pull it off,” Bensonoff says. “Any investment is a risk, and venture capitalists know that. But smart investors want it to be at least a calculated risk, not a roll of the dice.”
- Crowdfunding. If venture capital is not an option, crowdfunding could be the next best bet, Bensonoff says. Online crowdfunding platforms allow you to make your pitch in one spot where a myriad of different potential investors can see it. Examples of startups that used crowdfunding are Oculus and Skybell.
- Angel investors. An angel investor is an accredited investor who uses his or her own money to invest in a small business. Not just anyone can be an angel investor, though. They need to have a net worth of at least $1 million or a minimum annual income of $200,000. Bensonoff himself has served as an angel investor for some companies.
- Self-funding or “bootstrapping.” For those who want to bootstrap their fintech company, relying on their own money rather than the investments of others, there are options. Some people tap into savings or retirement accounts. Many keep their day jobs and make their startup a side business until it takes off. “Bootstrapping has always been an important approach to my life,” Bensonoff says. “I had to rely on my own money and hard work to succeed, and I had to remain frugal. When bootstrapping becomes a way of life, it opens up new opportunities.”
In Bensonoff’s view, raising capital to launch a fintech company isn’t any harder – or easier – than raising money for any other type of business.
“I think a good company in any sector gets funded,” he says. “So for entrepreneurs who want to plunge into the fintech sector, the key is to develop something that’s useful and satisfies an economic want.”