LONDON — More than $US8 billion has been invested in European fintech companies since 2010, and recent years have seen funding rounds climb into the tens of millions while big corporates have grown increasingly interested in the sector.
But the rapid accumulation of capital investment could pose problems in the next few years, when investors start looking to sell. According to a new report by Innovate Finance and Magister Advisors on the state of European fintech, “the pressure to look for exits will inevitably intensify over the next five years.”
The report found that deal sizes have been on an upward trajectory since 2012, with a particular increase in the number of $US20 million+ funding rounds. In 2017 so far, $US2 billion-worth of capital has already been invested across 43 deals — an indicator, according to the report, that the fintech sector is maturing.
Corporate investors have taken a particular interest in larger rounds, and in 2017, 44% of the $US20 million+ rounds involved at least one corporate or CVC.
Here’s that chart:
Unlike in more traditional sectors, valuations are increasingly based ahead of fintech companies’ performances, with investors buying into potential growth rather than historic or current results.
However, according to Founder of Magister Advisors Victor Basta, “these companies need time to grow into their valuations” before they can be sold. Since the natural venture capital fund “clock” in this sector is about eight or nine years, there may come a time in five years or so when there is “more supply than is comfortable,” he says.
It is also worth noting, he says, that many fintech and insurtech companies take longer to build than other startups, in part because they interact with large banks and institutions that generally move very slowly. Some investors may start feeling the pressure to sell in the next five years, particularly if they have not have factored in this longer time required to produce a good return on an investment.
Although the growing interest in fintechs from big corporate investors can a great boost to capital, startups may be concerned about investors’ level of influence, and seek to avoid tailoring products and services too heavily to their preferences. However, building a strong relationship with a major corporate investor can be a good exit strategy for fintech CEOs, if they plan to sell rather than continue to grow the business themselves.
The report also found that bigger fintech companies have begun acquiring smaller companies, and diversified to move beyond payments: PayPal acquired both Xoom (which deals with remittances) and Braintree (which handles merchant payments), while Square acquired Main Line Delivery, Caviar and Fastbite in order to enter the meal delivery market.
At the same time, fintech companies like Zopa have sought banking licenses in order to grow, rather than build whole new products.
Meanwhile, global financial institutions are committing both cash and other resources to the fintech sector, with Barclays opening an innovation centre in London and BNP Parabis co-founding an accelerator for fintech and insurtech. According to the report, more than half of the top 100 global banks have now partnered with at least one fintech company.
The range of investors in European fintech has also been diversifying: the report found that some of the most active corporate investors in European fintech, such as Tengelmann, Intel Capital and Salesforce.com, have core businesses outside of financial services. Players in the European fintech space have also diversified to include Asian investors.
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