Over the past years, fintech has cemented itself as one of the biggest verticals in the Luxembourg ecosystem. Ben Prade, partner at GP Bullhound and Claudio Alvarez, partner and co-head at the London office, share their take on the ecosystem, fintech trends and fundraising.
Last year, GP Bullhound opened an office in Luxembourg to strengthen its position “as a leading advisor and investor in the technology sector.” What steps have you taken in the past year to meet this goal?
Ben Prade: We have already brought our flagship event series to Luxembourg twice: the Annual Tech Predictions is an internationally recognised conference drawing on the in-depth research we perform globally about the trends ruling the tech industry. It’s an outstanding opportunity for the local tech community to meet our most senior colleagues from different locations and exchange about how the predictions might impact the Luxembourg ecosystem.
During 2022, our Luxembourg team continued to concentrate on the local market and support local companies, including pro-bono work for a local startup incubator. We have also been busy participating in numerous tech-focused events, meeting with founders of local companies, and increasing our knowledge of the local market.
In which areas do you see room for improvement in Luxembourg’s ecosystem?
Ben Prade: In conversations with local entrepreneurs and through our observations, we think that there are a few areas that can make it even stronger.
- Greater accessibility to growth capital and better education of what these types of investors expect.
- Luxembourg has a strong angel-series A investor base who have a specific level of risk and return requirements. This influences companies to pursue growth at almost all costs. As companies are starting to mature in size and attract later-stage investors, with larger pools of capital, they need to be aware that their requirements will differ. More emphasis will be put on prudent expansion that may be at odds with existing investor and entrepreneur mindsets.
- Attraction of international companies and investors.
- We see Luxembourg as the tech gateway to Europe: a neutral party, with easier language fluency and a strong regulatory environment that should be welcoming to international parties. An influx of foreign tech firms would help create more jobs and sales opportunities for Luxembourg-based startups and easier access to international markets. However, we feel there is a lack of awareness of the benefits of opening a European HQ in Luxembourg to most large firms and the government should aim at targeted education for firms in countries with strong overlap of the tech ecosystem.
How do you expect AI and ML to impact the fintech sector in the coming years?
Claudio Alvarez: AI/ML bring plenty of promise to the fintech industry, notably with the recent advent of generative AI. Key areas where this development will improve existing products and solutions include:
- Credit scoring: Traditionally, credit scoring has relied on humans to manually review and assess credit applications. However, the rise of alternative lenders and advances in AI/ML has shown there is potential to revolutionise the way that incumbent lenders assess the creditworthiness of borrowers and make lending decisions.
- Behaviour-based investment predictions: Combining AI to analyse historic asset performance and NLP to gather information from multiple media outlets, provides a new interesting method to forecast and predict asset price movements.
- Customer onboarding: As AI chatbots evolve and are augmented with biometric authentication, we are seeing interesting developments in the customer onboarding space. Large financial institutions and fintechs including Citi, Starling and BofA have all been seen adopting advanced authentication in their business.
What other fintech trends are you keeping a close eye on?
Claudio Alvarez: One of the sub-verticals of fintech we are seeing significant traction in is tools and software that support the “Office of the CFO”. The Office of the CFO encompasses technologies that can assist CFOs in making strategic decisions and automating processes within the Finance function. These tools are particularly useful for startups and SMEs which may lack the financial sophistication found in larger, more established, businesses.
An additional trend we are closely tracking is the need for robust ID verification and anti-fraud solutions. 93% of banking fraud attacks occur online which is why we need more sophisticated methods of authentication. There’s the continued evolution of Digital KYC, and the implementation of physical biometrics and behavioural biometrics all in order to mitigate the risk of fraud and identity theft.
What advice do you have for fintech startups looking to attract funding?
Claudio Alvarez: When raising investment from venture capital there are many guiding principles that can help attract funding, below are some key points:
- Momentum – To maximise success of the round, startups should ideally raise whilst the business is on-track / outperforming the business plan and delivering strong unit economics. Strong financial momentum gives investors confidence in the business model and the ability of the management team to deliver the plan. Additionally, running a fundraising process whilst the business hits key commercial milestones provides investors with further comfort and excitement in the round!
- Clear strategic initiatives and use of funds – It’s important for founders and startups to clearly communicate the use of proceeds of the round and how this fits in with the wider strategic and growth objectives. Articulating the vision and demonstrating several avenues for growth is a great way to persuade funds to invest.
- Terms – Ensuring founders and businesses are aware of the potential consequences and impact of rights and clauses in the term sheet is vital. Key terms to negotiate/be cognizant of include liquidation preference rights, anti-dilution provisions and boardroom makeup.