Is Private Equity doing enough Due Diligence on Fintech Startups?

I’ve read a number of pitch decks these past twelve months with some sort of Fintech invoice finance scheme or new early pay finance technique. Pitch decks are considered an essential fundraising tools, whether you are going after $500,000 or $20 million. It usually starts with a PowerPoint presentation

Mostly, if it relates to something to do with trade or business credit, it starts out with something like how there is a tremendous liquidity gap in the market, we have a better mousetrap because of our proprietary data or algorithms, and can help make better decisions.

I often feel Microsoft has done a tremendous disservice to the business community by allowing them to reduce a complicated subject, commercial trade credit and finance, into a slide show.  PowerPoint is and always will be a sales tool, in many cases used to spin why we are going to take over the world. Many times key questions are left unaddressed.

So in the name of due diligence, here are the questions I would like to see addressed in a pitch book:

  1. What is your sales origination strategy? Don’t just tell me you will use referral partners, banks, accountants, etc. to generate flow.
  2. How well do you really understand your markets current baseline of options and who and what you would need to displace? I mean EDI is still around for decades, although there is better technology. There is a reason for that, it is super hard to displace the status quo.
  3. Who will you sell to, don’t just tell me the CFO? Do you know how hard it is to reach that job title, even at a $30M company? Who has authority to write you a cheque and how does the decision process work?
  4. What do you understand about credit, capital and bank markets and the structural changes beyond what you hear? This is not just about how great your tech is.
  5. What managed services will you provide – analytics, onboarding, compliance, training, etc. Technology is usually relatively easy to build in this day and age, whether its a single-invoice finance platform or new scoring model. This is not to belittle the technology, because the innovation has been awesome, I’m just saying there is much more.
  6. What challenges and barriers will you face and how you will overcome them?
  7. How well do you understand the incentives in the world you are selling into, and by incentives I mean what drives a person to act. I believe money talks, ie, bonuses tied to metrics.

In this Twitter and Snapchat world, are we doing enough critical thinking?  In the world of trade credit, having to slog through a 150 page prospectus, or read the latest detail on Basel or Dodd Frank regulation on Lease Accounting is not fun.  Heck, understanding the Uniform Commercial Code and how liens are registered is boring, but important.

What do you think?

p.s. Check out the pitch deck Dwolla used to raise $16.5m - http://www.businessinsider.com/18-slide-pitch-deck-lands-payment-startup-dwolla-165-million-2013-4

Don't forget to sign up for TFMs weekly digest delivered to your inbox every Monday here 

Related Articles

Discuss this:

Your email address will not be published. Required fields are marked *