It seems that when it comes to funding for fintech startups, sky is the limit… Investors splash the cash on British startups as per City A.M. As quoted in this article, according to data released by consultancy KPMG, fintech funding is reaching new records. Fintech companies in the UK have attracted $48.5bn (£37.4bn) of investment in 2019, up 91 per cent from $25.4bn a year earlier.
That’s quite a big jump, even in the Fintech world. Volumes were also up, as the number of deals reached a six-year high. You can see similar trends across other European countries, Asia, and the USA.
It is a nice painting if you do not bother to scratch the surface. When you do, it shows a slightly different picture.
Sky is blue, birds are singing… or are they?
Early stage fintech funding took a dip in 2019, while late-stage funding reached a five-year high as per Business Insider.
Fintech funding might be reaching new records but behind the numbers, the picture is a bit different. The reality is that a few big, late-stage fintech companies are raising gigantic funding rounds to scale and to try to (finally) monetise their huge customer bases (Monzo, Revolut). They need to continue to raise funds because scale is the game, and they are not making enough, if at all, money to sustain their growth. Albeit, that can be at a knock-off valuation like British neobank Monzo in June. Tough time to fundraise.
Meanwhile, funding for early stage fintechs is drying up. A few possible reasons for that:
- from investors being worried that the flurry of fintechs that emerged over the past few years will never live up to their expectations of disrupting incumbent banks…
- …to venture capitalists being conscious that small subset of the financial services industry in terms of profit pools, are already too crowded (e.g. UK retail banking apps)…
- …to some of the investors preferring to stick to their first bets rather than make new ones!
For how long will the continue flow into these promising although sometimes unproven business models?
Will fintech funding reaches new records in the midst of a pandemic?
Well, you might be living in the middle of the Amazonian forest or on a tiny remote island cut off from the rest of the world. If you are not though, you will have realized that economies globally are not doing so great, thanks to Covid-19. Fintechs are not immune to that. What it means for startups, and the Venture Capitalists that back them, is that there is going to be a bit of natural selection at play.
It will be harder to raise funds if your business model is a bit of a moonshot “I will acquire customers and figure out later how I make money”. This can be fine in normal times, but harder to justify now. More generally, it’s usually tougher to invest into innovation when you are trying to deal with a complicated situation, because you lack the vision past your current problems.
Growing risk-aversion
In an economic crisis, investors tend to be more risk-averse. Even natural risk-takers like venture capital firms. Because on the other end of the equation, you have their own investors, the limited liability partners (LLPs). Not all of them, but some for sure will feel the pressure from the economic contraction, which means that they will be less likely to commit more funds to their existing VC bets or even answer capital calls.
And we are not even talking about new funds – not the best time to get started in the investment industry. Will fintech funding reach new records? So far, we have not really seen existing private equity and venture capital firms struggle too much to raise funds. It has been a bit a walk in the park for the household names when it comes to fundraising. There has been also a flurry of special-purpose acquisition companies: long story short, it’s a listed acquisition vehicle used to take a private company public. Same purpose (pun intended), different financial technique.
However, it’s not because funds are awash with cash, that they will be more relax about their investment criteria. These will actually tighten, as any growth assumptions will be severely challenged. And the startup valuations derive from growth assumptions…
…so you better have some a solid business model or be very good at pitching…!