FutureAdvisor, Fintech and the X-Factor

It’s a familiar scenario. The press is abuzz with the news that an up and coming firm, in this case Future Advisor, has been sold for a gobsmacking premium. In a recent blog post from Mark Polson, founder of Lang Cat the platforms, pensions and investments consultancy, asks: “how do you value (relatively) early stage businesses in a sector which is as hot as ‘fintech’? Good question and one that Mark tells us has two reasons:

• The proprietary innovation technology that FutureAdvisor has.
• Brand matters.

 Both true, but it occurred to me that it might be worth spelling out what ‘brand’ actually means in a world where the word is commonly mistaken to mean something else (often a logo and maybe some ads).

Back to the question: It would be tempting to reduce the value of such a firm to simple formula: take the earnings for the last year and multiply it by whatever the prevailing ‘X-factor’ actually is. But FutureAdviser was acquired by BlackRock for more than the triple X-factor, so if you’re building a financial services business, it might be worth pausing for a moment to ponder on what buyers really value and figuring out what companies that have been bought at a premium actually do, then keeping this in mind when building a valuable business.

1. Find a true source of differentiation

Unless, as in the case of FutureAdvisor, you have a unique technological advantage, or develop a truly proprietary process that allows you to offer value at a lower cost, this is not as easy as it looks and it’s probably accomplished by specialising in a niche where your firm can excel and establish a dominant brand presence. HEALTH WARNING: don’t kid yourself that you have a differentiator when you don’t – “better customer service” or “the best staff” don’t count, much as you’d like them to. More than anything investment services firms put rather too much faith in the competency and quality of their staff. Since everyone says that (and let’s face it people in investments services move around rather a lot) they’re not as much of a differentiator as most investment services bosses seem to believe and they’re most definitely not critical in the valuation to a potential buyer.

2.  Grow Strategically, not just for the sake of it

This is just a little word of warning for anyone who thinks that any growth is good growth. It isn’t, because unfocused growth dilutes resources and blunts your real competitive advantage and that’s as much about what you do as what you don’t. It may seem counter intuitive, but turning away business could help your valuation fly.

3. Love your customers and make sure they love you

Spend on having a relationship with them, understand them, talk to them and anticipate their every need. The strength of the relationship is difficult to measure, but make no mistake, most valuation experts believe that the expectation of future revenue is grounded in how well you meet current customer needs.

4. Have a competitive market strategy

Is it sustainable over time and does it constitute a sustainable competitive advantage? As in the case of the recent BlackRock acquisition it will fill a void in terms of a growing and well-funded niche. Irrespective of technological advantage, beware the peril of building an unfocussed proposition, which will in turn lead to dilution of the critical ‘X-factor’.

5. Attract and invest in a ‘bankable team’

That doesn’t just mean a top management team, but the succession team who will be left running the business when the senior management retire post acquisition (as will probably be assumed).

Add to this what FDs are paid to know: acquisition values are driven up by bullish growth projections (all backed up with believable and verifiable facts that aren’t the product of an over active imagination, or worse still, accounting manipulations), cracking down on unnecessary overhead like fancy offices, or cars, or ego boosting advertising.

All that said, do spend on marketing, but spend well. A strong brand can and does contribute to understanding your business’s true source of differentiation; strategic, value driven growth; the quality and length of customer relationships through understanding them better than the competition; building competitive advantage supported by a decent competitive market strategy and attracting that bankable team.

Where's the real value in your business? Is the innovation of robo technology the only way of creating a premium valuation these days? I'd be interested to hear what you think.

Philip Browne  is a leader in wealth management, investment services & pensions. An expert in translating digital innovations into customer value, he is responsible for masterminding the exceptional growth of several financial services brands.