The role of venture capital is invaluable, especially in the period of growth where a business seeks to commercialise its product or solution. In the modern world, venture capital is a result of the structure of traditional capital markets. Typically, an entrepreneur with an idea has limited funding options. They can turn to banks for loans, but the risks inherent with start-ups compels banking institutions to impose high rates that can deter the entrepreneur. Bankers finance businesses that can provide hard assets to secure the loan and the reality is many start-ups lack these assets.
Against this backdrop, venture capital fills the void by providing the finances that companies need to meet their going concerns. Successfully meeting this need requires venture capitalists (VCs) to identify ideas that have the potential for good returns on capital (for its participants), and deliver value to entrepreneurs that helps them to thrive and reap rewards from their efforts. In essence, VCs buy into the start-up’s idea, nurture it to maturity, and then exit when the business is mature enough to be supported by the institutional public-equity markets.
In recent years, the fintech (financial technology) sector has become attractive to venture capital firms. This is largely due to a growing pool of start-ups that are not afraid to challenge the business processes and interfaces of incumbent financial institutions. In 2018, close to 1,300 venture deals were closed in Europe and North America that were worth more than $15 billion (according to Pitchbook).
Armed with funding, fintech companies are continuing to redefine the financial services experience for consumers while challenging the status quo. From branchless banking to roboadvisor services and cross-border payments, these companies are picking spots within the wider financial industry and coming up with models that leverage technology. The result is applications and solutions that transcend borders and give smaller players a competitive advantage in global markets.
Thibaut de Roux, the former Global Head of Markets for HSBC Bank Plc, has over three decades of management and technical experience in global capital markets. He has witnessed the growth of the fintech sector and appreciates its role within the international banking and financial services industry. Mr de Roux is also part of the fintech ecosystem, primarily as an investor, advisor and board member with a focus on technology.
Innovating for the Future
Aside from the fintech industry, venture-funded start-ups have been making their mark in the world on many other fronts. While some small companies and entrepreneurs might experience a feeling of ‘impostor syndrome’ as they compete against the big corporations, many are successfully competing and incorporating trends that make an impact. Some of these include:
- Artificially Intelligent Data Capture: Numerous systems of record rely on manual methods to capture data. However, Artificial Intelligence (AI) is being modelled to learn how to gather and organise data based on the questions that users want to be answered.
- Design Over Code: Traditionally, developers will write the code for an application and then focus on building the user interface around it. However, users are coming to expect better user designs and experiences, which is leading product development cycles to focus on the design first with the code built around it.
- Adoption of Development Tools for Business Uses: In the past, design and development tools have primarily been used by designers and developers. However, many of these tools are being used by those in non-technical roles with increasing intensity and forming an important aspect of workflows for business-focused teams.
- Proactive monitoring: Start-ups in logging and monitoring are moving away from passive monitoring and introducing solutions that embed proactive monitoring in their processes. While this has the potential to be a major factor, entrepreneurs still need to educate the market on why it is important.