LONDON — Startup app-only bank Starling announced in January 2016 that it had raised £48 million ($70 million) from quant investor Harold McPike, one of the largest early-stage investments for a tech company in Britain.
But at the time of the announcement, Starling had received just over £3 million from McPike.
The startup only received the lion’s share of the investment — £30 million — this month. It means Starling had to wait 16 months to receive over 60% of it.
An analysis of documents filed with Companies House by Business Insider shows that McPike’s investment came in three tranches:
- December 2015: £3.15 million;
- July 2016: £14.84 million;
- April 2017: £30 million.
A spokesperson for Starling confirmed that the investments were staggered as part of McPike’s fundraising and said the money was released in phases “in line with the business passing certain milestones.” Starling wouldn’t comment on what those milestones were.
The investment highlights the ways in which venture capital investors who make risky bets on startups can use different structures to limit their potential losses if things go wrong.
Ben Kingsley, a partner at law firm Slaughter and May who coheads its fintech practice, told Business Insider: “It’s not extraordinary, particularly for an investment in something as complex as a banking business, which faces significant regulatory hurdles.
“You can well understand why investors would want to structure their investments on a milestones basis in the current environment. It’s not a certainty that the Starling will fly.”
Starling was little more than an idea and a prototype when McPike came to it. In July last year, it received its provisional banking licence — most likely the milestone that triggered McPike’s £14.84 million investment.
By setting goals to hit before unlocking capital, investors can make sure a startup doesn’t burn huge amounts of cash with little to show for it.
Kingsley said: “From a startup’s perspective, if you weren’t able or weren’t willing to structure your investment in this way there’s a good chance that you wouldn’t be able to find an investor who was willing to take the risk. At the moment the challenger banking market is certainly challenging.”
He added: “When you see what’s happened recently to Tandem, which has temporarily lost its banking licence — it’s quite a risk to be putting substantial capital into an aspiring bank before it’s demonstrably become a fully-fledged bank.”
Tandem, a rival startup app-only bank, thought it had secured a £35 million investment from House of Fraser in December. The investment helped to secure its banking licence and fund its launch.
However, House of Fraser’s Chinese owners pulled out after just £6 million was invested, blaming Chinese capital controls. This has set back Tandem’s launch and means it has lost its banking licence.
Starling has had the opposite experience. The £30 million capital injection has helped it meet capital requirements and the company this week announced that regulators have lifted restrictions on its banking licence, meaning it is now a fully licensed bank. The company plans to rollout later this year.
Starling’s CEO and founder Anne Boden says in an emailed statement: “We’re now able to move forward with our mission, to provide a step change in banking and help more people to have a healthy financial life.”