PayTM’s IPO might have disappointed public market investors last November but its early backers still earned a handsome return from the flotation of India’s most valuable fintech start-up. Early stage fintech investors looking for the next PayTM need to focus on four key factors – and these are not necessarily the priorities of investors in other tech sectors. In our experience, seasoned founders, proven monetization, a real ‘moat’ around the product and a full technology stack are key considerations.
India is becoming well-known globally for its unicorns. According to TechCrunch, we now have 81– double the total at the end of 2020 – and start-ups raised US$39 billion during last year. Of these, fintechs were the most-funded, raising US$ 10 billion last year compared to US$ 3.2 billion in 2020 and US$ 4.3 the year before that.
Abundant capital alone does not guarantee that every company you invest in will one day be worth a billion dollars, though. Identifying the right investment opportunities requires a robust set of criteria based on business fundamentals and a long-term view. As we have built up our portfolio of 17 fintech investments in India, Flourish has developed its own, sector-specific approach to this.
Fintech is different
We often start with the people: in Fintech, founders with the experience and ability to manage the financial sector’s complex regulatory and risk challenges tend to have 10 or more years’ experience in the field. That means we tend to look for seasoned founders with extensive real-world experience, rather than younger entrepreneurs whose main asset is a promising idea.
For us, it is essential that the start-ups products meet real and clear needs – and that there is evidence they can be monetized. We obviously want to see strong growth in the user base, but a “value hook” that is already generating revenue from payments, loans or other products is critical in fintech. For example, applications that provide credit are measured on the value of their loan book, which provides useful insights into how the product can be monetised in future.
We also ask whether the founders have identified an underserved market sector or a new way of servicing customers. Assessing the differentiation of a fintech’s business model naturally involves understanding user behaviour. If the new product plays into existing customer habits, this is a positive indicator of strong future demand. If it demands that customers do something new, it will face greater challenges in achieving widespread adoption.
Similarly, a product or service that can be communicated simply to customers, without using jargon, has a greater likelihood of appealing to them. And if it fits with the requirements and priorities of regulators and policymakers, this too checks an important box for us.
Full stack
The core technology preference underlying our investments is scalability. We want to see the digitization of the whole customer journey, whether they are taking out a loan or purchasing. This requires full-stack technology for end-to-end digitalization – any Fintech proposition that depends on analogue processes is likely to struggle.
We also believe that successful investors need to have a clear sense of what they are trying to achieve. At Flourish, we want to back entrepreneurs whose innovations contribute to a fairer financial system. This year, we are going deeper into embedded finance – a key investment theme for us – and beginning to explore the potential of decentralised finance infrastructure to reduce transaction costs and improve financial inclusion.
Private equity and venture capital firms investing in Indian fintech are not going to find the next PayTM every time. Early-stage investment is an inherently high-risk activity and the time and performance pressures facing many funds add to the challenge. So investors like Flourish that are in the fortunate position of being able to provide long-term capital have a real advantage for any fintech investor: that of patience.
Authored by Anuradha Ramachandran, Investments Director, Flourish Ventures