Early Stage Investments in Fintech Ventures: Investors and Their Decision-Making

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Fintech (financial technology) is currently a vibrant sector with a total global investment of $46.7 billion in 2015 and 24.7 billion in 2016 (KPMG, 2016). Global year-on-year venture capital deals amounted to $140.6 billion in 2015 and $127.4 billion in 2016 (KPMG Enterprise, 2016). Despite the recent decline in investment, the amount is sizeable. Fintech ventures pose opportunities for entrepreneurs, investors and the clients of financial services (EY, 2014), it also however threatens incumbent banks by challenging their legacy business models and infrastructure by means of superior services and lower prices (Annette, 2015). A key component to the development of this sector lies in the equity financing of entrepreneurs and start- ups by angel investors, corporate venture capitalists (CVCs) and venture capitalists (VCs) (KPMG, 2016). New sources of funding for entrepreneurs, which will not be covered in this paper, are Crowd-funding and Accelerators (Drover et al., 2017). Not only are entrepreneurial ventures a key source of job creation (Ojala, 2002), they are also important for the growth of the economy as a whole (Timmons & Bygrave, 1986). However, many startups require external financing to ensure growth (Hisrich & Jankowicz, 1990). Thus, successfully obtaining capital is critical to entrepreneurial ventures. Equally, early stage investors must have the ability to identify potentially prosperous investment opportunities for a return on investment (ROI) and risk mitigation. It is therefore important for early stage investors and Fintech entrepreneurs to understand which criteria are critical to success and which shortfalls lead to rejection in the fundraising process. Drover et al. (2017) analysed the total body of literature published between 2004 and 2017 on early stage investing and identified that whilst research on venture capital investing is mature, the field of angel investing has been less researched. Drover et al. (2017) structures the total body of work published on entrepreneurial equity financing by investor type; angels, CVC and VC. Also, the majority of the research is sector-generic e.g. (Mason & Stark, 2004; Maxwell et al., 2011). Drover et al. (2017) identified a distinctive lack of focus in previous research on the impact of socialisation in the decision-making process. Based on a literature review e.g. (Maxwell et al., 2011; Paul et al., 2007; Sudek, 2006; Van Osnabrugge, 2000; Wiltbank et al., 2009), a summary of decision-making criteria for early-stage investing was identified. These decision-making criteria may also be relevant to early stage Fintech investing. However, sector-specific decision criteria, such as in research on early stage investing in the field of technology by Mason & Harrison (2003) or biotechnology by Baum & Silverman (2004), can add specification and practical value to the subject of early stage investing. Academic literature on early stage investing in Fintech ventures is currently sparse. This paper therefore investigates investment decision-making in Fintech. Following the suggestion of Drover et al. (2017), the impact of socialisation on the investment decision process is also analysed. The research questions are: a) What are the most important factors to early-stage investing in Fintech ventures? b) How does the increased level of socialisation within the investment process impact decision-making? Firstly, this paper critically reviews the literature and identifies key findings of relevance to practical early stage investing. Secondly, the research design is outlined and justified. And finally, it presents the findings of the research and the resulting conclusions.