A Digital Financial Future: Attracting Investors and Funding for Start-ups
We attended ‘A Digital Financial Future’ held by international law firm Rooney Nimmo at Barclays Rise on 19 November 2018.
During this anticipated and well-attended event, solicitors and advisors from Rooney Nimmo, the respective panellists and speakers gave insights on how to attract funding from investors, the strategy for approaching Initial Coin Offerings (ICOs), a novel fundraising scheme, and the vision of our digital future.
In the following, we have summarised our key takeaways for you.
There is capital to be invested out there!
2017 has certainly been a record year in terms of investment volumes. Globally, there is a growing appetite, in particular from both the US and China, for equity investments in financial technology (FinTech) companies. Whilst economic circumstances are extremely difficult to predict, there is seemingly no material indication that the 2017 investment trend would be interrupted in 2018 and 2019.
What are investors looking for?
As an entrepreneur or a start-up, it is of paramount importance for your business to come up with a sound and attractive business plan for potential investors. Although there is no ‘secret sauce’, there are key features investors are looking for when making investment decisions and these include:
1. Having solid and modular technical platforms that allow your business to scale rapidly;
2. Having a comprehensive understanding of trades, regulations, competition and how technology impacts the given markets; and
3. Having a management team with a diverse and complementary skill set that can offer a holistic view and understanding of your business for future growth and development.
In other words, a viable and sustainable business case must be singled out for the specific project or business. Ascertaining whether there truly exists a market demand for the project or business is critical. There is unfortunately (but perhaps naturally) a tendency to identify a market need without adequately considering if such need is compatible with the specific project or business.
Furthermore, a company that sticks to its DNA, its initial business model, is likely to gain greater favour among investors. For start-ups and entrepreneurs, to stick to what they do best is a more compelling strategy than to venture into unknown markets and risk losing the corporate identity that attracted investors in the first place.
Tips for negotiating with investors:
Although there is no ‘secret sauce’ to success, there are some factors entrepreneurs and start-ups may consider before negotiating with investors. These include:
1. Having a comprehensive view on how the specific investor or investors operate and what their strategic goals (besides making a profit) are. The relationship with investors is likely to be long-term and as such the goals and vision of the specific investor or investors should align with that of the entrepreneur or start-up. To find out how the specific investor or investors operate, it may be useful to undertake independent research and to reach out to some of the investor or investors existing portfolio companies;
2. Formulating short-, medium- and long-term goals and objectives. Founders and management teams often attach a (very) high value to their business in initial funding rounds as they showcase their confidence in the undertaking. However, this is likely a double-edged sword as it may put immense pressure on the business and its managers in terms of meeting investors’ expectations. Furthermore, by having a high initial valuation, the business may be less well-placed for future funding rounds; and
3. Considering whether the specific individuals on your management team can execute and achieve your business’ goals and objectives. Building a management team that can do so will be critical in relation to onboarding investors.
In summary, investment strategies for potentially high-growth companies require consistency, complementarity, sustainability and a balance between short-, medium- and long-term goals and objectives.
Should companies consider an ICO?
There was resounding agreement among the panellists that ICOs are here to stay.
ICOs as such are not regulated in the UK. However, there is a need to look closely at what assets (for example, securities, donations or payment instruments) are offered through the ICO. ICOs provide a different way of raising early-stage investments, although it may not be viable for all types of businesses.
Significant risks (including legal risks, regulatory risks, commercial risks) exist with regard to ICOs and these have also attracted considerable attention from a tax perspective. Entrepreneurs and start-ups should take note of the gradual build-up of legislation and development in the regulatory approach by regulators who have been looking increasingly at the secondary market for cryptoassets in relation to, amongst other things, investor and consumer protection.
Finally, as ICOs are digital in nature, they may be launched and promoted through the Internet on a global scale. To this end, it should be noted that the legal and regulatory treatment of an ICO is likely to differ across jurisdictions. Notoriously, the US Securities and Exchange Commission will analyse all ICOs on basis of the relevant US federal securities laws and regulations and case law, including specifically the so-called ‘Howey-test’.
The cryptomarket has matured and the large number of retail investors who lost money was, in some ways, a wakeup call for the market. This has highlighted the importance of classifying cryptoassets from a legal and regulatory perspective in terms of making ICOs commercially viable fundraising schemes.
In the future, ICOs may be a valuable financing tool as they may be able to fill a fundraising gap between seed and venture capital and more mature fundraises such as Initial Public Offerings (IPOs).
Are We Ready for a Digital World?
Professor George A. Walker (Centre for Commercial Law Studies, Queen Mary University of London), a senior fellow at the Bank of England gave his initial analysis of how the world may transition to a digital financial future.
Imagining a future with smart devices, institutions, societies and ultimately, a smart world, the overall theme was that existing principles could guide viable developments in social and financial technology. There lies a powerful potential to create a future mapped by digital information and data management as the world becomes increasingly digitalised and datafied.
The core assets of highly successful companies, such as Google and Facebook, can be said to be the vast amount of information and data that they hold. However, ‘information’ does not fall within the traditional definition of property under law, although information is undeniably a highly valuable asset.
Defining ‘information’ is one example of the many challenges that regulators (will) face in our transition to a digital world and economy. Digitisation places considerable pressure on our current regulatory system, and it must be ensured that laws and regulations are sufficiently flexible to encompass emerging concepts. New legal concepts, frameworks and approaches will be essential in the coming years. The speed and accuracy of these developments are equally crucial in allowing new industries to develop in a sound legal and regulatory environment.
This article was written by qLegal student advisers Matthieu Pierre and Yvonne Wan Qing Khoo. Follow us on social media (Twitter , Instagram) for more updates, and visit our website if you want to get in touch with us!
qLegal is a law clinic based at the Centre for Commercial Law Studies, Queen Mary University of London. qLegal provides free legal advice to tech start-ups and entrepreneurs across the UK.
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