Our goal is to make our fundraising campaign one of the most transparent crowdfunding campaigns ever. Most crowdfunding campaigns talk about the upside but not many explain the downside and the risks. Within this article we wish to explain the inherent risks involved in investing, and some potential reasons why an investment in CityFALCON may not be the right choice for you. See more info on our investment round here.
First, we would like to provide a few reasons why you should invest in CityFALCON as part of our crowdfunding campaign. We are multi-award winning lean FinTech start-up, redefining how financial news is aggregated, curated, distributed and consumed, and we have already started negotiating revenue generating deals with several popular names in the financial services sector. We’ve also won awards and recognition from Twitter, Ministry of Ontario, Standard Bank and UBS.
However, the purpose of this article is to highlight all of the potential risks involved in investing in our campaign. Over the period of last two years, we’ve met with several investors – angels, VCs, and corporate venture funds. Some of the angels invested, however several others didn’t. We’ve raised £420K in funding till date. Here are the top 11 reasons why they chose not to invest in the company.
1. Investing in Start-Ups is Too Risky
Naturally a valid concern, some studies show that only 10% of start-ups actually succeed. Similarly, the investment is illiquid and investors are concerned that they will not get their money back.
We absolutely agree that it’s high risk high return investment. We would only advise that a start-up investment be purchased if it is part of a larger, diversified portfolio, and that it be funded with capital that you can afford to keep locked away for the next 5-7 years. In some countries, the government compensates for the riskiness of start-up investments, e.g. EIS tax benefits in the UK.
There have been relatively few start-up successes in the UK, when compared to Silicon Valley in the United States, but things are improving in the UK:
- King Digital acquired by Activision for ~ £3.8bn on November 3, 2015;
- Microsoft acquired Swiftkey for ~ £173m on February 3, 2016;
- Magic Pony acquired by Twitter for ~ £103m on June 20, 2016;
- Bowers & Wilkins acquired by EVA Automation for ~ £122m on May 3, 2016;
- Onefinestay acquired by AccorHotels for ~ £118m on April 5, 2016;
- Newsflo Acquired by Elsevier for estimated £45-£66 million on January 12, 2015;
- VocalIQ acquired by Apple for ~ £33-£66m on October 2, 2015;
- Semetric acquired by Apple for the estimated £33m on January 21, 2015;
- Dark Blue Labs and Vision Factory acquired by Google for the estimated £31m on October 23, 2014;
- Tweetdeck acquired by Twitter for ~ £28 – £31m on May 24, 2011.
- Start-ups Investing Guidelines by AngelList
- Start-ups Investing Risks by AngelList
- Why I Have Invested 20% Of My Portfolio In UK Start-ups (CityFALCON Blog)
2. Sole Founder
Most VCs and institutional investors tend to prefer a team of founders behind a start-up, rather than one single founder.
While each investor has their own opinion regarding the optimal leadership structure of a start-up, the correlation between start-up success and the number of founders is mixed, and depends on which statistics you are looking at. With more than one founder, there is higher potential for founders’ disagreements and conflicts; so much so that an equal number of start-ups fail for this reason as they do because of a lack of multiple founders. Also, the number of founders is typically more relevant during the early stages of the company.
Aware of the challenges facing the sector, our founder dedicated his time to developing his coding abilities prior to starting CityFALCON. With ONE leader and a strong team of capable individuals directed towards ONE mission, we encourage you to judge our company strengths based on our past achievements and milestones.
Because of having a sole founder, we made sure that our advisory board is really strong with entrepreneurs, and well-connected senior finance professionals. See our full team here.
Some examples of successful companies with single founders include:
- Tumblr (Acquired in 2013 by Yahoo for ~ £856m);
- Plenty of Fish (Acquired in 2015 by Match.com for ~ £519m);
- Vitrue (Acquired in 2012 by Oracle Corporation for £191m);
- SinglePlatform (Acquired in 2012 by ConstantContact for ~ £80m);
- Dropbox (was initially founded by Drew Houston who invited Arash Ferdowsi upon demand from Y Combinator);
- FireEye (Went Public in 2013, market cap of $2.7bn);
- ServiceNow (Went Public in 2012, market cap of $11.58bn).
- Rebekah Campbell: Sole Founder vs. Co-Founders
- How Learning to Code Helped on my Entrepreneurial Journey (CityFALCON Blog)
- The Single Founder Dilemma
- Startup Dirty Laundry: Conflicts That Kill Partnerships
- Entrepreneurs, Listen Up: You Don’t Need A Co-Founder Anymore
- The Case for the Single Founder Startup
3. Low Users and Revenue Traction
The company doesn’t have enough traction in terms of number of users and revenue.
The process involved in achieving traction and scale, when comparing product-based and service-based start-ups, is very different, as we explained in our candid post last year. For product companies, it takes time to build a product, however once built, users and revenue can be scaled up very fast. In the case of product-based start-ups, especially at an early stage, we believe that investors should focus on quality of the product, the team, and evaluate the overall opportunity; instead of relying on traction as a validation of an idea and opportunity. If our product is proven successful, there could be several companies in the financial or media space who could be interested in potentially acquiring our company. There are several examples of companies being purchased simply for the product/proprietary technology, even before the company started marketing or got any traction.
- Why I Would Think Twice Before Building a PRODUCT Startup Again in the UK (CityFALCON Blog)
- How to Scale a Business: Not All Business Models Are Created Equal
- Service vs Product – Running a Service Business is Hard, But is Running a Product Business any Easier?
4. “High” Valuation
Many venture capital funds, angel investors and private equity firms believe that a company without revenue and users should not be valued in the millions.
While much harder to apply a specific quantitative value to it, start-ups that have developed products can offer significant value, despite not yet earning revenues. Valuations of fintech start-ups are generally higher than other tech companies, due to a more affluent client base, higher exit valuations, and higher overall expenses. We’ll provide a detailed rationale for the valuation of CityFALCON in a subsequent post shortly.
Examples of Past FinTech Valuations:
- Tandem raised £22m at a £65m pre-money valuation
- Mondo raised £6m at a £30m pre-money valuation,
- Revolut raising £8m at a £40m pre-money valuation
- Wise Alpha raised £0.6m at a c. £5.5m valuation
Examples of Companies Acquired in FinTech and MediaTech:
- Markit acquired by IHS Inc. for ~ £3.3bn
- Braintree acquired by PayPal for ~ £593m
- Topsy Labs acquired by Apple for ~ £135m
- Klout acquired by Lithium Technologies for ~ £125m
- GNIP acquired by Twitter for ~ £90m
- MoneySavingExpert acquired by Moneysupermarket for ~ £87m
- Tweetdeck, acquired by Twitter for ~ £25m
- PeerIndex, acquired by Brandwatch for ~ £10m
- How does an early-stage investor value a startup? Seedcamp
- Cheetah Mobile acquires News Republic for $57 million
- Why Most Start-ups Worth Investing Are Worth At Least £1m Using ONE Fundamental Financial Concept (CityFALCON Blog)
- The Mystery of UK Start-up Valuation (CityFALCON Blog)
- UK unicorns – how much did they raise in their seed rounds? (CityFALCON Blog)
5. Competition from Financial Giants
CityFALCON will struggle to compete against the large financial ‘giants’ who have substantial cash reserves and market power.
Our approach has been to initially focus on the underserved segments of the market, and then use this client base to expand and compete for the same clients as the larger financial news providers.
Our strengths are 1) Innovation – Quality of product and a focus on user experience, and 2) Competitive Pricing
Competition would be a more valid concern if we were operating within the general consumer space, where we would face much-larger competition from the tech giants such as Google, Apple, Facebook, etc. However, in the field of financial services, our competition is slow-moving, and hesitant to implement disruptive technology. Rather than worrying about these companies, we focus on staying ahead of the new, nimble start-ups; and keeping up to date with the latest changes in technological trends, especially artificial intelligence. We also operate as a lean start-up, maintaining a much more strict cost-management strategy which means that we only need a fraction of the resources that the big giants have.
- Why Investors Should Get Excited about the FinTech Revolution (CityFALCON Blog)
- Fintech’s $138 Billion Opportunity
6. B2B and B2B2C Sales Challenges
You’ll struggle to sell to financial institutions, and sales cycles could be as long as 2 years.
We do not have a sales team. From the beginning, our strategy has been to build a product that sells itself, similar to the strategies previously adopted by start-ups Slack and Atlassian. We focus on search engine optimisation, creating quality content, and improving our exposure, allowing companies and clients who need us, to find us. Also, our B2C play is our best B2B strategy. We have generated more than 10 inbound business leads, and signed proof of concept agreements with major institutions after their employees used our free B2C product.
- This $5 Billion Software Company Has No Sales Staff
- No salespeople for us, says CEO of $4 billion startup Slack
7. Reliance on Certain Data Sources
You’re relying too much on Twitter’s API, and they could potentially cut off the service at anytime.
When we first started off two years back, we were relying primarily on Twitter, however now we have expanded our source database to provide a more diversified stream of news. Several direct sources have been added, including the Financial Times, Seeking Alpha, MoneyControl, Benzinga, etc. Therefore, our actual reliance on Twitter is fairly low. Similarly, you cannot compare us to cases where start-ups were building functionalities using Twitter’s API, so that they could compete with Twitter themselves in the future (e.g. Meerkat). At CityFALCON, we simply use their data. Moreover, Twitter seems to be focusing on increasing its data revenue.
8. No Buy/Sell Recommendation
You provide news, but you do not provide any buy / sell / hold information.
Stock markets are complicated, and not many services or funds can routinely beat the market itself. We at CityFALCON recognize this, and if we truly believed that we could outperform the market regularly we would be running a fund rather than building a product-based start-up. While machines and big-data monopolise the way trades are made, we believe that investing as an activity requires in-depth research and intuition; and we see this as an area where we can add significantly more value.
- Man vs. Machine in Trading and Investing (CityFALCON Blog)
- Difference Between Stock Market Investing and Trading – Don’t Mix Up the Strategies (CityFALCON Blog)
9. “B2C is a Lost Cause”
Most VCs believe that B2C business models, unless you have massive scale, are not investible.
At CityFALCON, we are not just focused on generating revenue and profits, our larger purpose is to solve problems and improve the technological infrastructure available to individual investors which allows them to make educated investment decisions. We feel that there are enough companies operating within the financial services sector with their primary objective being to target financial institutions, hedge funds and P/E firms simply because this is where the large revenues come from. Also, the B2C market is actually quite big:
There are about 250 million visits per month to Yahoo Finance via desktop
In the case of our product, consumers get access to all of our services for free, and in return they help us curate financial news. This model allows us to keep our analyst team lean, while still maintaining an up-to-date database of curated news. Also as mentioned above, some of these users have also opened doors for us with business leads.
10. Doing “Too Many” Things
You’re doing too many things and you need to specialise on only one product, one target audience, etc.
Rule number one of running a start-up is that there are no rules. We try a lot of new approaches. We look at things very differently from how they have been done historically, and are ready to fail in order to eventually succeed. As an example, we launched London Value Investing Club last year to build a community to generate higher than inflation returns. We didn’t have any planned revenue model, but wanted to learn from our target audience. Today we have more than 750 members, several of them use CityFALCON regularly, and they regularly help us find business leads, and may even invest in our crowdfunding round.
11. You do not have a Centralized Workforce
With CityFALCON staff distributed across the globe, your team is not as effective as it could be if it operated in a centralized location.
By not limiting ourselves to the UK markets, CityFALCON is able to screen the entire globe to find top talent for each role. Irrespective of the physical distance, CityFALCON integrates breakthrough communication technology which allows the team to collaborate just as effectively as a centralized team of employees. This model has been successfully implemented by several tech companies, and is only going to increase as the pace of globalization increases in the years to come. With our team, we utilize software and platforms such as Slack, Skype, JIRA, Hubspot, and more to effectively manage the security and efficiency of our operations.
Investing in start-ups is very risky and not for everyone. There are both company and sector specific risks involved, and before making any investment you should consult these risks carefully. If you think that we can manage these risks, express your interest to invest in our upcoming crowdfunding round here.