How to Think About Fintech Investment from an Investment Banker
Background: In this conversation, Alicia Roisman Ismach interviews Eddie Galvan of Wellesley Hills Financial, an investment banker specializing in fintech. They discuss the role of investment bankers in helping fintech companies with sales mechanics, raising capital, and establishing credibility. They also explore the different rounds of investment and when companies should consider working with an investment banker. They touch on the various sources of funding for startups, including high net worth individuals, family offices, and angel investors. They also discuss the potential for Canadian fintech companies to raise funds from US investors and the current landscape of fintech investments. Finally, they address the challenges faced by bootstrapped companies in bridging the gap to institutional funding and the interest of banks in investing in fintech companies.
Takeaways:
Investment Bankers can play a crucial role in helping fintech companies with sales mechanics, raising capital, and establishing credibility.
The different rounds of investment, such as pre-seed, seed, and series A, are determined by factors like revenue generation and product-market fit.
Funding for startups can come from various sources, including high net worth individuals, family offices, and angel investors.
Canadian fintech companies can attract US investors by demonstrating focus, traction, and a plan for growth in the US market.
Bootstrapped companies can bridge the gap to institutional funding by nurturing relationships with VC firms and investment partners.
Banks are increasingly interested in investing in fintech companies and may have accelerator programs or VC arms to support them.
Transcript:
Alicia Roisman Ismach (00:00.036)
We are doing this conversation with experts from the industry for Atlantic Canada and the Atlantic Fintech companies and we are trying to bring all the knowledge and expertise that is in the industry so they can see how they grow to their companies more efficiently and faster. With the same type of information their peers have in the fintech centers around the world. You are representing one of the investment banks that specializes in fintech and is one of the leading in this field. So I am really excited talking to you today and hearing from you everything about what you do and what your firm do and if you can introduce yourself and your company for our companies.
Eddie Galvan (01:01.672)
Well, first off, thank you for having me on board. Alicia. This is great. Now, I met you at a conference and it was just two kindred spirits that kind of came together. But effectively, We're an investment bank focused on the Fintech you know, ecosphere. When you think about Fintech, you know, I think of it in three concentric circles. You have software, you have payments, and then you have Fintech. And we sit right in the middle there and help companies think through sale mechanics. You know, how do I sell my business?
(How do I) think about growth mechanics? How do I think about raising capital for my business? And then telling that story all the way through. I think what's important from our perspective is that you sound credible every step of the way. So I'm getting pinged left and right, know, speaking of, you know, folks all at the same time, ping, ping, ping, ping But no, you know, I think being credible.
Alicia Roisman Ismach (01:53.922)
It's every time That happens every time you close the deal how that works.
Eddie Galvan (01:58.577)
No, it's every time someone wants to call me to ask me a question, I get pinged. As I was talking, I started getting pinged: I should probably find something where I can silence those things, but I don't have this.
But no, think Establishing credibility is really core to our thesis. Everything has to make sense every step of the way. How much money I'm raising, for what initiatives, for what programs, for what products, for what go -to -markets. Let's create and articulate a cohesive strategy around that growth objective or the sale objective, really identify the blue sky potential of the company to extract as much value as possible. And it's one part art and it's one part science. You know, there's The science part that's going to be, listen, these are my financials, this is my growth, this is my margin, right? But any real estate agent can come in and say, these are your KPIs, this is your growth, these are your financials. Really where our strength and benefit comes from is really understanding the business, the business model, really understanding the story, articulating a pathway to a sale or a growth round, right? If it's a sale, who's the right buyer and why are they the right buyer? How do we think combining them strategically. What does that look like from a financial perspective? Does that make sense? Is it credible? Can we extract value from that perspective? And so it's more than just reviewing the financials piece. You know that's part and parcel to the overall business profile and the business things that we do, but really we're storytellers and we help you articulate you know that vision of a story. We create that vision of a process so that we can maximize the value that we bring to our clients.
Alicia Roisman Ismach (03:40.464)
So for the companies that are hearing this introduction, how (do) they know that the time, the right time for them to talk to an investment banker. I know that companies normally when they go with the pre -seed, seed, they are doing it, of course, pitching angel investors, pitching family offices, pitching VCs, but the investment banker, when is that role for a company important to have among their capabilities, so when they can approach one?
Eddie Galvan (04:16.115)
Yeah, I typically where we get involved is when the founder or family team or management team needs to focus on sales generation, right? Trying to raise capital and while you're also trying to generate revenues is a very difficult thing. People tend to underestimate the amount of time that is required to tell your story, to open up a data room, to do diligence, to talk with folks. And a lot of times they're not just talking to one or two people. A lot of times they're talking to hundreds of people
Right In order to you know maximize the opportunity for someone to you know invest you know into the company and that takes a lot of time away from product development, it takes a lot of time away from sales... A lot of times you know if you were a startup You you as a startup you wear many different hands. You're not only the CEO, but you're this you know you're the late lead sales expert, You know you're not only the lead sales expert. You're the CTO. You're not only the CTO, you're the chief product officer. You know the strategy officer the off. You know the operating officer. You you meant you wear many different hats and you being away from your ability to generate revenues in the business, which is going to, by the way, create the greatest amount of value in that business, is tough. And so typically, when we get involved, folks cannot be away from the business. They're at a critical point in their gestation where they really need to hyper -focus on generating sales, generating products, delivering on the product roadmap. And when we come in, we help alleviate a lot of the problems that they have.
Assuming they have these problems, not everyone has this problem. But in finding a lead, right? And just like a marketer gets you a qualified lead, that's what we do, right? We go out, we tell your story, we find the right guys, we screen them for serious interest, and by the time they get to that CEO founder, they know that these guys have passed the litmus, they've passed that kind of first tier of pass -through in order to get to the point where they're talking to management and now they're serving as a qualified lead. Alternatively, if someone were to go out and try to raise capital, well, they're talking to everybody. And again, that takes a lot of time, right? And so you have to weigh the opportunity cost, doing it yourself versus hiring someone and outsourcing that completely just to be a bit more efficient. Now we'll say not every VC likes to have an investment banker in between them and the company, right? So you will find some VCs that don't like it. They don't like talking to an intermediary.
Eddie Galvan (06:45.445)
I think part of the reason is there's a level of sophistication that they now have to contend with that they didn't have to before. Part of the reason is they want to have a personal relationship directly with the founding team. And so sometimes an intermediary can either support or not support that. And so they just tend, some, not all, they tend not to like working with them. And then some, just as a matter of fact, will tell you straight up, well, if you can't go out and try to raise money on your own, how can we count on you to raise revenues for your business at the end of the day? And that last viewpoint is a bit draconian in my opinion. As you will know, VCs have multiple reasons why they're going after a certain company and ultimately they're working for that 10 times return at the VC level and so they're into having that relationship, becoming in at a structure that's advantageous for themselves. Don't get me wrong, everyone makes money in this in this cycle, right, but they tend to be a bit more controlling over the fundraising process, you know, than not.
Alicia Roisman Ismach (07:54.885)
Yeah.
Eddie Galvan (07:56.917)
But when it's appropriate for us to come in, it's really when folks need to focus on delivery of the product roadmap. It's when they need to focus on generating revenues, on developing partnerships. And then all this other time, taking away to try to raise capital is just noise relative to the growth of the business.
Alicia Roisman Ismach (08:18.104)
A question about the rounds, the rounds of investment. When we talk about, you know, everybody talks about pre -seed, seed, Series A, et cetera. But how (does) the industry looks at the round, (is) there is some level of delivering success or delivering results that are expected for a company to call themselves that they are in a Series A, other than the amounts of the money? Because we know that sometimes the amounts of the money can be higher in seed than companies that look like a Series A but still was a seed round and sometimes the Series A is lower and is more conservative and it's still a Series A. So what really differentiates between the seed and the Series A for the company that needs to decide which stage they are?
Eddie Galvan (09:07.605)
You know it really depends on the company those lines are becoming super blurred seed pre -series A, series A, where do you fall in the pantheon of permutations that exist to raise capital and the reality is it's really just dependent on the company how much seed have they raised, how much friends and family around have they raised at with their product, are they generating revenues? know, typically from a seed perspective, you're for the most part, pre -revenue. And then as you tier up, you you start making revenues, you start discovering that product market fit, the efficacy of your solution as contemplated at that early stage, it's starting to fulfill and starting to be realized. And so that's when you start seeing, you know, the transition from more of a seed / family and friends round to a series A and and Bs for growth and so on and so forth. I would say just from my conversations with VC firms in the past six months, I would say that folks are generally wanting to see it about a million in revenue. And then of course, since one of the payments, Fintech software ecosystems, much of that reoccurring or recurring, recurring in its SaaS ARR reoccurring in its transaction space, meaning I can count on that transaction happening.
A restaurant can count or A POS software can count on a million dollars per restaurant to happen every year. Now not the same person every year paying for that right? The customer is different but it's the same dollar amount so that in that particular case it's reoccurring in nature. So greater strength and efficacy is weighted on those sorts of transactions but the know that benchmark that litmus folks are looking for or in they call it one million dollar range.
And by the way, it's different for different companies. Some companies require a lot more money to get stood up. And so they may not be at that point, that million dollar point, but they may be on that arrival. They may be showing the growth profile to get to that point. And so folks will take that into account in their assessment of the investability of the company.
Alicia Roisman Ismach (11:29.134)
Have seen any other models recently for investment in startups that is not VC and not angel investors? Are other players in the market investing today in fintech companies?
Eddie Galvan (11:44.223)
Yeah, listen, I think there's a lot of high net worths that are out there. We call them in our world accredited investors that are qualified to make individual investments into risky proposition that is the core of the VC landscape, especially in this ecosystem. Family offices are starting to get into the fray and starting to capital to work. Friends and family rounds... I'm advising one company right now, it's a B2B Payfac with an AR automation on it and they had, you multiple tens of millions friends and family round. These were hyper successful and BD payments experts that exited at really large valuations. And so for them, they already had that substantiation or that experience. And so for them, was easy to get that quote unquote friends and family around. Now they're in market raising an additional, it $20 million for growth. Those guys are different typically from the folks that I'm sure that you deal with that are straight of the way, first time entrepreneurs have a great idea, putting pen to paper, really developing a strategy, developing a framework, develop a business model that they think they can scale. That's typically who you're working with. And those guys, listen, it's hard, but the fastest way is friends and family. Who do you have in your network to help you at least get the first iteration going and then you get into the seed and the realm.
Obviously you have your angels, they exist. There's a bunch of networks out there that are angel specific. A lot of high net worths join angel networks and they invest as a coalition or as a group. Those are good and typically how you get access to those is that you'll find someone as part of whatever angel network and then they share your pitch with everyone.
Eddie Galvan (13:40.399)
But it's hard. It's hard. Listen, I'm the first in my family to graduate high school, right? And so I never had anyone around me to invest in anything that I would ever do, right? So a lot of that is socioeconomic.
And so in the absence of having those people around you, then it's your job as a pure, pure -plate entrepreneur to find those folks. And it's hard, it's not easy. And this is why, and not so much at the seed or pre -seed or pre -series A level, but certainly at the series A, B, C, as an investment banker, we have lot of those relationships. And so the pathway to market is a lot faster, least theoretically, a lot more efficient from our end, but it's hard if you're not from around the circle.
Alicia Roisman Ismach (14:27.332)
When you talk about investments and the companies and the type of investments and how to get to the relations that they need, have you seen companies create interest in them for investment without reaching out to the investors themselves, other than having a representative as an investment banker? There are ways that companies can gain interest and attract investors without going and knocking on their doors?
Eddie Galvan (14:58.611)
Yeah, I mean like, you know, a lot of folks, they pitch in pitch competitions or they go to, know, other accelerators that help them out, right? Y Combinator being the branded one. But there are a number of other accelerators that are part of banks, part of other companies that serve to, for lack of a return, accelerate those ideas into fruition to give opportunities to folks that may not be surrounded with you know, folks that have the means to invest on a one -off basis and they quote friends and family around. So, those are great because those accelerators also provide, you know, a level of mentorship. And the way to think about those guys is they're kind of a variation of, you know, of an advisor and investment banker, you know, that serves that particular part of the value chain, you know, in this ecosystem. And they're great because they do provide significant value. Now, the value comes out of premium.
It comes at a cost and so long as you're comfortable going down that path. And by the way, sometimes you don't have any other choice. I go back to if you're not surrounded by a wealthy network of people who can invest, then you are where you are and you've got to be okay with that and you've just got to find the opportunities as they see fit. Again, that's part and parcel to being an entrepreneur. People are going to want to see that sort of hustle. And I would also say that I think that's what people are looking for in general from an investability standpoint. One thing is the idea, and that's
And one thing is the story. But really it's going to be in the people, know, is this person the person that's really going to get this thing going? Has he demonstrated or she demonstrated the capacity to really push forward and realize the subject of their ambitions? And so my recommendation for folks that are seeking capital is to go down every pathway, right? See what works. And by the way, not all accelerators are the same. Not all VC firms are the same, just like they're diligent in seeing the companies and the management team, so should the company and the management team be diligent in them and making sure that it's the right fit. And that's sometimes lost in these discussions because there's such a mad dash to raise capital because they're always running out of money or they don't have enough. And that's just the story, unfortunately or fortunately, because you learn a lot of lessons by being in that position that are super important for the growth of the company.
Alicia Roisman Ismach (17:26.392)
One question about the investment for the Fintech entrepreneurs in our region... or should companies here from Atlantic Canada raise funds from the US? A lot of companies believe that being from a region means that it will take you longer and the only later stages you will be able to raise from the US. While we have seen some companies being successful raising funds in the US earlier. We know that there is an advantage in raising from the US because it's their market at the end. But do you see investors today in the US interested in investing in companies that come from Canada?
Eddie Galvan (18:13.919)
Yeah, yes I do. Again, it's a hop, skip, and a jump from Canada to North America. The regulatory environment is different. The licensing requirements, depending on what sort of Fintech payments software company that you're developing, are different and nuanced per the region. But so long as there's an ambition to grow into the U .S. And by the way, every Canadian company probably has an ambition to grow into the US
You have to demonstrate some level of focus. So, earlier on, it's important to be focused within a particular geography. The moment you start talking about being a more global platform as a startup, all that communicates is that any monies that you get is gonna be spread out, and it's gonna be broad, and it's not gonna be narrowly focused. And so you're gonna be demonstrating this lack of focus that is not attractive to lot of investors, whether they're an angel of VC, growth equity, or P .E. firm, they really want to see a level of focus with respect to you developing the regular channels or the regular revenues to get you to a point where you can demonstrate that there is buy -in to the product in the general market. So I would say first off, there is a need and importance to be focused regionally. That said, given the proximity of Canada to the US, of course anyone can deduce that the next step for any Canadian company is the US market. And sometimes it could just be the US market first and foremost. And so, I would not be shy going out to US investors. And In fact, I would say the great thing about being a Canadian company is that you're not a part of the Silicon Valley, New York or Boston factories of startups. So you're off the beaten path, meaning you haven't been shopped around. No one really knows of you. So in some level, you have this scarcity value because you're creating things that might not be being addressed in certain other areas. addition, if you show traction in your own region and your approach is novel, yeah, I think there's significant value in going to U .S. firms and demonstrating that your company is one to invest in and potentially they can be advisors to help bring them into the U .S. market. So I would not be shy to go out to U .S. investors. Some investors have mandates in the U .S. only. And so again, this is where you have to do your diligence.
Eddie Galvan (20:38.61)
But obviously we would go, if you would hire us, at the, call it series B, less so than series A, but series B, C, D level, we would help you filter those folks and put you in front of the right folks that could move relatively quickly. And know the space enough where the diligence period is gonna be as intensive for someone that perhaps doesn't know the industry as well.
Alicia Roisman Ismach (21:04.74)
And how (do) you see the landscape on fintech investments in these first two quarters of the year? Do we see things are coming back, growth in the investments? Are we still in the place where everybody's looking at what will happen in the future? What is out there for fintech entrepreneurs to raise funds?
Eddie Galvan (21:29.513)
Yeah, listen, I think generally the market is in a pretty steady state right now. Anecdotally, as I speak with folks, the industry is sitting on the largest amount of dry powder in the history of the industry, period, full stop, ever, ever, ever, ever. So people want and need to put capital to work. But I think a couple of things have happened. There's some volatility with respect to interest rates. There's a lot of macro things going on. that people our our commerce outlines for You have this upcoming election in the US that has given some firms and investors pause There is some level of know some level of volatility , you know internationally and so I think you know all the all the macro stuff certainly isn't helping the environment , but as I said to a number of other clients, that stuff doesn't really matter at the end of it. If you have a good platform and you're generating revenues and you're generating traction, in the absence of revenues, you're demonstrating operationally that you're those match marks and milestones, right? And you can demonstrate that pretty clearly. Well then no, then you get out in front of these guys because most guys are probably taking the approach, and say guys, most company founders might be taking the approach that we should sit on the sidelines and try to get a bridge around, quote unquote, bridge around, until such time the market is better, it's a better investing market.
I disagree. I think if you have the traction, then you need to be out in front of those: and why wait? Why wait? I was having a conversation with a startup company that were doing about a million of ARR and they asked me, why don't we a bridge round? Let's go out to folks, do a bridge round to a Series A. And I thought to myself, well, that just doesn't make sense to me. First off, going to anyone cold and asking them to give you money in the hopes that you get to that stage is a very risky proposition. You're not going to get an investor that's going to be and especially someone that's coming in cold and learning the story for the first time, to give you money on the hopes that you might raise some money to keep you going, especially if you're burning capital.
Eddie Galvan (23:45.161)
Most companies at the early part of their gestation are burning capital. And so no one's going to have the appetite. And when I say no one, I should say that it's a lower probability of folks that would be willing to invest under those circumstances. And so the best thing to do in that case, if you are going to wait, you can go back to your cap stack, get the bridge around from the cap stack, so long as they're able to provide additional capital and give you the time to conduct a series A round. That's the real answer at the end of the day, and so, and this really underscores the importance of having a good cap stack, some folks that are willing to back you, and then folks that have the capacity to inch you forward in the case that you come up to a spot where you need additional capital.
That's the right answer. But going to anyone cold and asking for a bridge to a Series A, you need to be in a Series A. If you're at the Series A, if you're making a known and you have these contracts and you're showing the channel partnerships and you're creating the requisite standard operating procedures and you're providing a level of infrastructure to scale, you're ready. You need to go. I would not wait.
Alicia Roisman Ismach (24:56.624)
We have a lot of entrepreneurs here with good companies. Most of them have bootstrapped and even bootstrapped to pretty late stage in the company not only for the pre -seed and the seed round but they don't have the relations in the industry to go after the institutional round that they actually should be going according to the size of the company to grow to the next stage. So how they can bridge that gap?
Alicia Roisman Ismach (25:41.454)
that they have between the actual stage they have and not knowing the relations in the industry. So existing investors supposedly were the ones to bring them the rest of the big good investors to join for the next round. Now they are on their own. What they should do?
Eddie Galvan (26:02.763)
Yeah, you know, it's funny. And that answer is a bit more complicated than just, you know, than saying, hey, you know, what does a bootstrap company do? Because bootstrap companies come in all shapes, sizes, right? There are bootstrap companies that are generating, you know, over 20 million of revenues, know, owned by a single person. And then that person wants to raise growth equity in order to put the company forward. And I would say, I would say typically, and this is just from my
I would say investors do get pause in those environments because what they're really investing in is in a minority position of the company, meaning the founder still has full control. So that investor has to have a relationship with the management team. So it's incumbent of that management team founder to nurture and invest in those relationships because it's very hard to get someone to invest in a minority position reasonable structure in that scenario, right? Because they typically want to have some level of influence, some level of control, understanding that having a minority position, you do have some rights, but you don't have control. Whereas when you're investing into a bootstrap company that is just getting off the ground, well, someone investing into that company is going to command greater control and influence over the capital stack of that company. Any dollars that go in is going to turn into a meaningful state in the company. you know, those guys don't have as much leverage, you know, and funny enough, those guys are probably more investable than the guy that has actually demonstrated that success, right? It's a bit counterintuitive that the guy that has demonstrated, or for I should say, that has demonstrated that success, that has built that 20 million dollar company, looking for a minority round you know, probably has a more difficult time. And again, this is just anecdotal from my experiences. It's not always the case because a lot of times you can see that as consolidation platform. Certainly you can get investors to back that platform as a consolidation play and then use that person's winning algorithm and formula to buy other companies and implement that formula within those companies and create an opportunity. So those opportunities exist, but I would say they all rely on your ability to nurture those relationships at these VC firms and investment firms, growth equity firms.
Eddie Galvan (28:29.789)
You have to get out of your comfort zone. A lot of that can be accelerated with an advisor like, know, like Wesley Hills Financial where we can, you know, look at your business. We can think about who would be right to come in, who has experience, who could be put on the board, who can bring you into various markets, who are the guys for you to cultivate that relationship with. And it's a lot easier for me to call up, you know, Tom at a certain firm and say, hey man, I have this opportunity. I think it's really interesting. I think you need to take a look. You know, we put together a package. You know, this is worth your time.
That's completely different than you caught up time that you don't even know and say hey here I am Let's have a let's have a discussion. Don't get me wrong You have to do both at the end of day, but you know, it's a lot easier with a warm introduction Long story longer you have to work to cultivate those relationships just like you have to work to cultivate those client relationships just like you got to work to cultivate those vendor relationships yet you just have to be in the scheme of cultivation at the end of the day
Alicia Roisman Ismach (29:30.67)
So we are over time. Last question for a short answer. Are banks investing in fintech companies?
Eddie Galvan (29:39.977)
So banks are investing in fintech companies. And so I sold a software company to PNC Bank, which is the fifth largest bank in the US. And I did so under the basis that I thought the digital banks, without a retail footprint, deferred different cost base, were entering the market unabated and capitalizing on the SMB market to that bank's detriment.
I also think that there is a tier two and tier three of banks that are so far behind technology -wise, relative to the Citigroups of the world, relative to the Bank of America of the world, to the J .P. Morgan Chases of the world, that they need to actually think about a software fintech and payments investment strategy, whether it be from a majority perspective or minority perspective where they can have some influence on the development and roadmap of that company should they invest heavily into that company. More and more those companies taking an active interest in fintechs across the across the stratosphere of fintechs.
There's interest in cyber, there's interest in fraud, payments, fintechs, insurtech, really across the board. And so, yeah, think banks, and some banks, by the way, have their own accelerator programs. Citigroup has one, they have their own VC arms. And so, yeah, I would look to banks as potentially a funding resource to finance the growing concern that is your company at the end of the day.
And I mean, be thoughtful. Typically, that means the larger banks or tier two banks, some of the regional banks that are smaller, probably not as equipped, but I wouldn't rule them out necessarily.
Alicia Roisman Ismach (31:31.752)
This has been fantastic. We have so much to think about and I know that many of the companies will start thinking about a lot of opportunities that they were not sure that they can apply to them. Thank you very much. Will not be our last conversation and see you in the next. Thank
Eddie Galvan (31:49.375)
Thank you, Alicia. I really enjoyed this and looking forward to the next one. Alright, bye.
Alicia Roisman Ismach (31:53.38)
Thank you, bye.