The capital markets channel has grown substantially over the last decade as funds like JAM FINTOP, BankTech Ventures, Canapi Ventures have successfully raised funds to invest in early stage fintech. The LP's of these funds tend to be forward-thinking banks that are investing as a mechanism to stay in tune with developments in the fintech space and often purchase the products of fintechs that have the backing of a notable venture fund.
From the perspective of the fund, returns are generated back to the LP's whenever a recapitalization event or refinancing event occurs. These capital events generally take place after enterprise value has been created post investment. Value in the context of a fintech is usually associated with new annual recurring revenue through new client acquisition so the fund managers often have a vested interest in helping their portfolio companies grow value through new client acquisition often being willing to make strategic introductions to the LP banks who are going to buy and utilize the technology.
The main consideration with regard to the capital markets channel is two parts. First, the ability to access strategic capital that can be used to acquire talent or ramp new client acquisition efforts. Second, once a fintech has obtained financing from a venture fund, there is a significant opportunity to gain warm introductions to LP's, which in this context are often community banks that have invested capital into the fund. Given the incentive the fund has as the fintech grows annual recurring revenue, the fund will often do all they can to assist the fintech in their growth efforts. From the LP banks perspective, the portfolio company introductions often act as a mechanism for the bank to stay in tune with the fintech space without having to stand up a specific innovation or commercialization team to accomplish this effort.
Costs or economics associated with this channel are often minimal outside of the economics the fintech has given up to acquire early venture capital. While these costs can be high expensive in the context of equity provided to the financial partner there are only minimal costs associated with being able to access the LP's of the fund that invested in the fintech.
There are several ways to compare capital markets providers in the context of the introductions that will accompany a venture investment. Evaluating the LP's of the fund are among the most important things a fintech must be doing in their efforts to find the right venture partner. Understanding the LP's in as much detail as possible including asset size, focus on either consumer or commercial banking depending on the focus of the fintech and the bank C-suites emphasis on innovation are all important.
While the main goal of the partnership with venture capital and capital markets providers in general is to obtain early-stage growth capital there is much more to the equation the fintech needs to understand in their diligence process. Vetting and understanding the needs of the LP's is equally important along with the fund providers process for helping their portfolio companies be successful.
While evaluating the capital markets in the context of venture capital there are clearly many considerations as it relates to the terms and conditions of the capital. Paying close attention to those various aspects is of paramount importance. However, developing an understanding of the process the fund goes through to make sure their portfolio companies have success is equally important. Understanding the resources the fund provides along with the contacts the fund has should be a significant part of evaluating a capital partner.
Developing a process for evaluating a capital partner is the best place to start. Depending on the market focus of the fintech, each capital markets or venture fund will have a specific set of objectives and fund parameters they are working from. Understanding these parameters along with the management resources, advisor contacts, and LP contacts will all be crucial to the success of the fintech's ability to grow annual recurring revenue and get to the next fundraising milestone.
Fintech's are often in a position where any capital is good capital. However, developing a relationship with a truly strategic partner that can help the fintech grow is the ideal situation. Creating competition between capital providers along with developing a deep understanding of the resources provided to the portfolio companies should weigh heavily in the evaluation. Choosing a partner that provides productive capital with terms that are mutually beneficial along with the set of resources the fintech needs should be the main focus of the process.
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