After record year, fintech interest shows little sign of slowing

Fintech investing reached new heights last year and the stage is set for another big year.

This could make it again one of venture’s most active sectors and a competitive category for top deals.

Behind the rise are several key factors. One, consumers and businesses continue to adopt new products. Second, walled gardens in the industry are cracking open to innovation in insurance, banking, consumer finance and digital currencies.

Last year, for instance, insurance technology and blockchain saw record investment, with insurtech companies alone attracting $2.1 billion of funding, KMPG reports.

Also fueling the industry: Activity is accelerating in Europe, led by the U.K., where expansion outpaced that of the U.S.

The one down spot last year was Asia, particularly China, where deal value fell after three years of growth.

Some caution, however, is in order. U.S. early-stage fintech deals declined, and rich valuations could restrain activity.

With a lot of capital waiting to go to work, “we will see the same pace” of investing in 2018, said Rick Yang, a partner at New Enterprise Associates. “This is such a big market opportunity.”

Rick Yang, partner, New Enterprise Associates. Photo courtesy of the firm.
Rick Yang, partner, New Enterprise Associates. Photo courtesy of the firm.

This shouldn’t come as a surprise. Last year global fintech investments hit a high water mark, with $16.6 billion invested in 1,128 deals, up 20 percent in investment value and 10 percent in deal volume, CB Insights reports. Both were five-year highs, suggesting momentum was building.

In Europe, for instance, deal value jumped 121 percent, though investing in Europe is only about a third of what it is in North America, where deal value rose 33 percent. Asian funding slipped 10 percent.

Running counter to funding, U.S. early-stage-deal volume fell to a five-year low as investors piled into late rounds.

The year saw a doubling of big rounds, with 35 deals of $100 million or more, and eight new unicorns born, CB Insights says.

As a result, the median global late-stage pre-money valuation climbed 35 percent to $173 million, according to KPMG. The figure has nearly tripled in six years. (See chart below.)

“Maybe some of the early easy segments have been carved out” at the early stage, suggested David Blumberg, a managing partner at Blumberg Capital.

From a sector perspective, 2017 was a year of two seasons. The first half saw VCs focused on artificial intelligence and machine learning.

“It’s really getting to a point for financial services where it’s becoming more important,” said Thomas Whiteaker, a partner at Propel Venture Partners. “I do expect these megatrends around AI to continue.”

Thomas Whiteaker, Propel Venture Partners. Photo courtesy of the firm.
Thomas Whiteaker, partner, Propel Venture Partners. Photo courtesy of the firm.

In the second half, the industry turned its attention to cryptocurrencies, ICOs and cryptoinfrastructure, sparking debates, including about pricing a convertible note following a token offering, and whether blockchain can spawn viable business models in real estate, supply chain and elsewhere.

It also saw the SEC begin to take a hard look at these fields and firms.

Looking ahead, these broad trends should continue to spark interest. So should plays around open financial-services APIs, regulatory technology, and the implementation of the European Union’s new Payment Services Directive, or PSD2.

Some investors sense an easier regulatory environment may open up in the U.S., the U.K. and France for consumer fintech companies, creating new opportunities there.

“I’m still quite bullish on the field,” Blumberg said.

To Blumberg, the confluence of greater processing power and better access to large datasets has enabled more companies to better understand and employ data. Companies have the opportunity to optimize algorithms and lower costs in the process.

“Combined, you’ve got a Ferrari,” he said.

David Blumberg, founder and managing partner, Blumberg Capital
David Blumberg, founder and managing partner, Blumberg Capital.

A specific area of interest is the small-and-medium-business market, which big banks often ignore because profit margins are slim.

One investment is Fundbox, which is developing a cash-flow tool. Blumberg is on the lookout for similar ideas that can benefit from data and machine learning, in areas such as trade finance, supply chains and exchanges.

Regtech is another focus, along with the new General Data Protection Regulation, or GDPR, rules in Europe, where fines can be substantial. One investment in the area is identity verification service Trulioo out of Canada.

Also on the prowl in fintech is Whiteaker, though in a measured way.

Last year “wasn’t super active for us,” with just four new investments, Whiteaker said. “The reason is valuations are pretty crazy. We were a little more conservative than the year before.”

With big-checkbook strategics exceptionally active in 2017 and perhaps less so this year, valuations could start to level off. “I do think it is starting to normalize,” Whiteaker said.

He added that he sees opportunities in locating and creating datasets for AI-driven analysis. Opportunities also exist in enabling legacy companies to keep up with the changing market, such as bringing new tools to wealth managers.

A younger generation of consumers rejects the walled gardens of the past, and banks need to extend services to places such as Yahoo Finance.

Propel also sees international as a focus in 2018, aiming to be more active in Mexico and Brazil.

“We’re pretty bullish on both, due to the size of the market and the fact that there aren’t a lot of solutions down there yet,” Whiteaker said. “What’s old for us is new for them.”

Europe also draws his interest. Propel kicked off its international investing operations in 2017 and is close to completing its first deal.

In some ways Europe is ahead of the U.S., Whiteaker said. In insurtech, for instance, fewer regulatory agencies lessen the regulatory burden.

“We’re seeing more innovation,” with websites offering price comparisons and helping consumers determine their needs for home, life and auto policies, he said.

At New Enterprise Associates, one focus remains fintech infrastructure. This includes providing the architecture to access datasets and ensure security, such as fraud protection.

One example of an existing investment is Plaid, which connects applications and bank accounts. “We’d love to find more of those,” NEA’s Yang said.

Other big opportunities lie in “continuing the theme of empowering the consumer or individual,” whether to buy insurance and real estate or make investment and retirement decisions, Yang said. “That’s where we get excited. That said, there is a lot of noise in that space.”

That means having a nice front end isn’t enough. NEA portfolio company Robinhood, for example, took the time before launching to build out its product offering, including in-house customer support tools.

“We understand how high the bar is to be successful,” Yang said. “You have to get it right.”

With entrepreneurs that have the right market knowledge, “we’re going to continue making investments in fintech for a long time,” he said.

Download Data:

U.S.-based early-stage fintech activity slows

Global fintech investing hits record

Later-stage fintech valuations rebound

Later-stage fintech valuations rebound

Year Global median pre-money valuation ($M)
2012 $62.00
2013 $54.00
2014 $192.00
2015 $130.00
2016 $128.00
2017 $173.00
Source: KPMG.

A man uses an iPhone 7 smartphone to demonstrate the mobile payment service Apple Pay at a cafe in Moscow on Oct. 3, 2016. Photo courtesy Reuters/Maxim Zmeyev

 

Additional Data

Global fintech investing hits record

Later-stage fintech valuations rebound

U.S.-based early-stage fintech activity slows