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Ch.3 Funding of Early-Stage Fintech Companies

Updated: Apr 1



  • Fintech founders at the pre-seed stage bootstrap their start-ups using their own savings and may raise money from family and friends.

  • Once they have a minimum viable product, founders may approach angel investors for the seed funding required to survive the Valley of Death.

  • Fintechs with monthly recurring revenue may pitch venture capitalists who will want to know the size of the total addressable market and the skills of the founding team.

  • To scale and grow their business, fintechs raise capital through a series of funding rounds (Series A through F) until potential exit via an initial public offering or acquisition.

  • Early-stage funding may take the form of a convertible note, a simple agreement for future equity (SAFE), preferred shares, common shares, or venture debt.

  • A capitalization table shows the pre-money and post-money ownership at each funding round, reflecting dilution from broadening the investor base.


Growth Stages and Funding Rounds

Start-ups, like people, grow in stages, passing through different periods of development. Over the first 20 years of life, a human being grows from childhood through adolescence to early adulthood, with physiological changes occurring at each state. Similarly, over the first 5 to 10 years of its life, a fintech start-up may pass through 3 distinct stages: early stage, growth stage, and late stage and exit. Each stage has its associated challenges to overcome, particularly raising funding. Investors will monitor key benchmarks to evaluate a start-up’s progress along its journey. At each stage, a fintech may raise capital by issuing different financial securities to scale the business.


Figure 3.1 illustrates the growth stages of a fintech start-up, the associated funding rounds, the benchmarks of its development, and the likely investors at each round. The solid black line shows the evolution of the start-up’s cash flow. Finally, it shows the implied value of the business, called the enterprise value (EV). Despite the dilution of the founders’ equity stake at each funding round, the EV of the business should grow, assuming it does not shut down or go bankrupt.




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