Fintech companies pursing payments, lending, and wealth management have attracted the lion’s share of the fintech dollars over the past several years. Bitcoin and blockchain companies, too.
So where are investors looking today?
The answer is insurance, infrastructure, credit scoring and customer-facing apps, or services. Another emerging area of interest appears to be crowdfunding, where Reg A filings now permit non-accredited investors to participate in equity fundraising.
This is according to interviews with a more than a dozen fintech GPs who say new untapped areas of fintech deserve the attention as older sectors begin to play themselves out.
The greatest interest is for insurance, where the focus is broad, stretching from life, casualty, auto and property to cyber and healthcare, and where companies such as Lemonade and Knip have come away with big funding rounds. Infrastructure is another top category and has already seen deals for such companies as Plaid and Spout. Clearly, strategics are interested in the space.
Among the areas losing some steam is lending, where firms are beginning to show more hesitation in the wake of the LendingClub sell off. Money is still going into the space, as financings for Social Finance (SoFi) and Prosper Marketplace show. But investors seem to be looking beyond unsecured lending for new approaches and insisting on highly efficiency customer acquisition strategies.
At the same time, GPs still seem to struggle with the use case for blockchain. Many find it hard to tell how big a role blockchain will play in tracking securities ownership or money transfers, despite its potential for greater security and lower costs.
At General Catalyst Partners, Partner Spencer Lazar said one big focus of his is insurance, a space where the firm has already made investments, including in Oscar. The space is seeing a lot of seed activity, but not yet a lot of A round deals.
Consumers generally have a negative view of insurance, however its value proposition is clear if it is delivered at a fair price, he said.
“The space is about as large as they come,” Lazar added. “We now have all sorts of new capabilities because we live in a mobile-first era. I think we’re starting to see proof points in the market that enterprise value can be built.”
Among the companies that attract him are those that use the Internet as a broker and seek new ways to distribute personal and commercial insurance online. “The Internet is a fantastic way to distribute information-based products,” he said.
Another area of interest for Lazar is blockchain, now that the early hype has largely dissipated. Inefficiencies still remain in financial transactions, such as remittances, and blockchain potentially provides the benefits of speed, security and a lower transaction cost.
“I think you’re starting to see large companies take blockchain seriously,” Lazar added. “I think it’s worthy of re-examination.”
Ravi Viswanathan at New Enterprise Associates says fintech infrastructure is a top area of focus. Fintech innovation could bring about a rewriting of the IT stack and emerging platforms will enable apps to perform tasks such as retrieving data and adding analytics, said this general partner.
“We’re still in the early innings,” Viswanathan said. “The infrastructure layer is something I’m very excited about.”
Another space with appeal is the confluence of fintech and SaaS. A candidate company might be one developing an app, or service, to bring modern software and a modern UI to payroll, accounting or 401K planning for small and medium businesses.
“There will be some really big companies coming out of this generation,” Viswanathan said.
Homebrew Partner Satya Patel sees life, property and casualty insurance as an area of interest, and says the industry isn’t always aligned with how customers live. It relies on brokers who don’t add much value.
“It’s a very active space right now,” and so far Homebrew hasn’t invested, Patel said. But “the market is large. There are a lot of different approaches to it.”
Patel also is paying attention to credit scoring and credit history. The firm’s closest investment is Even Responsible Finance, a lending product.
Financial services are a big focus at Homebrew, with as many as eight investments under its belt, he said. Financial services touch just about every person on the planet, but access is limited, prices are high and transparency is poor.
At Propel Venture Partners, which spun out of the Spanish bank BBVA early this year, insurance also is a focus.
“We’re looking closely,” said Partner Thomas Whiteaker. “It’s such a massive market.”
The focus includes both homeowner and business lines, especially for small businesses, and favors products that are mostly customer facing. “We think opportunities are there for a better user experience,” he said.
Whiteaker also sees opportunities for companies eager to make use of underwriting data that didn’t exist 10 years ago, such as the logs from a water sensor or a Nest thermostat.
Propel at the same time is looking at crowdfunding, particularly equity crowdfunding sites that might handle Reg A offerings. “There’s room for multiple players, but very few are set up for Reg A+ the right way,” Whiteaker said.
Insurance is an area of focus for Menlo Ventures, as well. Already the firm has investments in Signifyd.
“We’re spending time looking at small business insurance,” and also at life insurance, where opportunities exist for streamlining the buying process, said Tyler Sosin, a principal at Menlo. “There are a lot of inefficiencies in the insurance market today.”
Menlo also is examining data-driven apps, where an analysis might make use of machine learning to automate money management decisions for consumers. Such an app might automatically shift a user out of a credit card account with high interest, or determine when to pay off a loan. The firm has so far not invested, but Sosin thinks big companies could be built. One player in the space is Digit.
At Bain Capital Ventures, Managing Director Matt Harris said he is scouting for emerging technologies geared to corporate CFOs, specifically with a focus on commercial payments and SaaS application software. CFOs historically have relied on ERP software, accounting systems and spreadsheets, but a plethora of new tools are emerging to help them manage risk and aid the CEO.
“This is where I’m spending most of my time now,” he said.
Another investor eyeing the insurance space is Chris Gottschalk, a principal at Blumberg Capital. Blumberg has made one bet with CoverHound and is looking for different models.
An example might be companies taking advantage of the real-time analysis of data from new sources to re-write actuarial tables. One source of data might be the information a bank has on long-time customers, but never uses. This could lead to a more efficient pricing of risk.
“We’re doing our homework broadly in the space and certainly looking to find companies,” Gottschalk said.
Another area of focus is code re-writes of core banking applications that rethink the user experience.
“We still think it is really early innings,” he said. “We think there is quite a long way to go.”
Photo illustration of opportunity sign courtesy of ©iStock.com/Alexander Perl