FinTech Connects… with Michael Kempe, COO, Link Group
Michael Kempe is the Chief Operating Officer of Link Market Services (LMS). Part of Link Group, LMS is a leading share registry and financial services provider.
I had a call with Michael to discuss how a fintech startup grows from seed to scale. We talked Brexit, company structure and how the fintech scaleup journey differs from startups in other industries.
Michael will be moderating the panel Coupling scale with innovation during the Infrastructure and financial scale panel at the FinTech Founders Forum at this year’s FinTech Connect. The FinTech Founders Forum brings together the leaders of Europe’s largest fintechs to engage in a series of interactive panels and keynote presentations. The audience will hear about the growth journey of some of the most impressive scaleup fintechs, with a combined investment total of $3.4bn.
What are the key stages of growth in an organisation’s development?
Fintechs break the mould with their growth phases. While a traditional company might have a lengthy development period funded initially by debt, with equity raises following proof of viability or even profitability, a fintech’s growth narrative is somewhat different. As disrupters, built around highly scalable IP (intellectual property) with low marginal costs, they can grow much more rapidly than traditional firms and gain access to equity funding at a much earlier stage. A fintech can move very quickly from a startup to a comparatively mature company.
With earlier access to equity funding, through consortiums or private equity, and the potential for very rapid growth, fintechs might adopt the governance principles and operations of a mature company at an earlier stage than their traditional counterparts. While traditional firms will be able to grow their operations and management structure in line with their business development, fintechs will move very quickly from startup to scaleup and will need to build their team to cope with this.
The excitement and, for want of a better word, buzz around fintech has provided a faster route to growth. Of course, with that comes higher risk. We have seen some fintechs grow very rapidly and get all the way to IPO or acquisition, and we’ve seen others have a lot of investment but not really go anywhere. Part of that is because fintech was traditionally focused around financial areas of the market, but has rapidly grown into all sectors regardless of whether that’s education, consumer or anything else. That has created a different dynamic.
What we have seen around scaling growth stages, is regardless of how companies grow, there is a need for help at each stage. The concern with companies that grow very fast is that they grow from a small number of people doing a bit of everything to a much larger organisation with lots of component parts. This creates a challenge for fintech companies that probably isn’t seen in other sectors.
What are the key takeaways from your previous case studies?
The real issue is making sure that structure is put in place a long time before IPO. I mentioned previously that fintech companies tend to grow at a slightly different rate and have a slightly different dynamic than ordinary companies. What we’ve seen is that those that have been successful have started to think about their long-term plan much earlier in the cycle than those that have been unsuccessful.
With companies like Network International and Boku, what we have seen is the structure in place ensuring support has set those companies aside to be successful in reaching IPO. What we do know and what we do see from those takeaways is that the skill sets of different people are very important.
The entrepreneurs that have the idea are not always the right people to run a structured organisation. Their ability, knowledge and drive are essential to keep the company moving forward, but they’re not always the people who like having structure and governance around them. It’s about getting the right blend and diversity into those companies very quickly.
If you want an absolute takeaway, I would say that as a company grows, it needs to get the right diversity in and put the right structure around the company without dampening the disrupter spirit.
What are the key trends in investment in fintech in the UK?
How long have you got? I did laugh at that question, because oh my goodness, how do you even begin to start answering that question? It is a humungous umbrella question.
But, I think the simplest answer is that fintech is no longer fintech. As already mentioned fintech was originally about putting efficiency and clever technology into financial institutions. Quite simply, that’s just the tip of the iceberg now.
Fintech is in every single part of our lives. It’s moved from simply looking at financial institutions to business clients, B2C small businesses and probably most importantly, and where the biggest trend is, it’s now on consumers.
When you look at that, you see that the financial element that gives fintech its name is driving out into disrupting traditional financial ways of working for consumers.
What hurdles/opportunities do you think Brexit will present the fintech scene?
What a great question. Well, the uncertainty that Brexit creates has multiple aspects behind this. Brexit for the established organisations is a very different market event to get hold of. For bigger firms, exchange rate risk, trading risk and all the things we read in the news on a daily basis are clearly causing material difficulties.
Within the technology space, just things like data protection and the UK potentially becoming a third country overnight could have huge ramifications around all of these things. What that does for fintech is create an opportunity.
Uncertainty always provides an opportunity for someone. In this scenario it allows startups to get a foothold in the market and really look at research and development. Meanwhile established firms are having to look at the regulatory and market change that Brexit is clearly going to drive through. When you see what’s going on at the startup phase in areas like Funding Circle, we see a lot of small companies who are looking at localised initiatives in the short-term.
Additionally, the people side of Brexit in terms of what it will mean for employees – the exchange rate risk and the change in regulation – allows an opportunity for more nimble companies to come in and challenge in a way that they haven’t before.
Brexit also provides a bigger headache to companies that have already listed, than companies that are starting up. The downside is that the IPO market is slow, because of the uncertainty that Brexit brings. Until we get that certainty again, we are not seeing those investment rounds at IPO in the same way we were seeing a year or two ago.
What governance and funding considerations are needed pre-IPO?
As with all companies it’s about understanding not just what the journey to IPO is, but also what the journey 3-5 years after that is. Companies often make the mistake of focusing purely on the funding round and not how they move beyond, it is important to view the IPO as the start of a journey, not the end. That’s a mistake we see regularly - it’s really got to be a case of looking at the different staging posts and funding rounds and working out what you’re going to achieve. That requires the right structure and governance.
The most important things to remember are getting controls around that governance right, keeping costs where they should be versus revenue and understanding what your key milestones are. Companies need to ensure that their board and committee meetings go smoothly, that they are compliant with legal and regulatory obligations, that directors’ interests and conflicts are monitored and that they have a Corporate Social Responsibility (CSR) strategy in place. It is imperative for startups to implement appropriate controls and reporting, providing them with a sound governance framework that mitigates risk and gives effective oversight. It is equipping themselves with good governance that allows companies to gain the confidence of investors and attract funding. A mistake we often see in startups is the excitement of building something means that people don’t fully comprehend the value against each part of build or stage of scale.
What are the different considerations fintech companies need to consider versus other companies?
Fintech companies by their very nature are disrupters and grow quicker than traditional companies. Typically, fintech provides a solution to a problem and therefore, their growth tends to be quite rapid compared with other firms.
That speed of growth provides its own areas of challenge in keeping up with demand, getting to the next level and competing against other companies. The rapid nature of take-up and scale of fintech gives it a very different set of challenges to the ones that traditional firms face.
You can be an industrial giant like Dyson and create vacuums, but their challenges were about getting product to market. Fintech products can hit the market quickly and the ones that are taken up can grow quickly. You have a different set of challenges in the industrial sphere compared to the fintech sphere.
The fintech sphere is all about managing the growth in a way that allows your company to keep that revenue growth, keep costs under control, and keep to regulation. It’s more a governance set of challenges than a marketing and sales set of challenges.