FinTech sector sees venture capital pull back from angel/seed rounds

28 February 2017 Consultancy.uk

FinTechs have seen total investment coming their way from an array of sources decrease significantly, falling from from $47 billion in 2015 to $25 billion last year. Venture capitalists have continued to invest in the segment however, up from $12.7 billion in 2015 to $13.6 billion in 2016, even while deal volumes decreased as they pulled back from funding angel/seed rounds. Corporates continue to expand their venturing footprint, as they seek to secure partnerships and technologies in a fast moving market.

Fintech continues to make headlines, as the propositions of disruption to one of the world’s largest industries, financial services, means potential shifts in billions of revenue. To better understand the current environment around funding for FinTechs, KPMG has released its latest ‘The Pulse of FinTech’ report, which explores key funding sources into the startup scene from a range of actors.

Total global investment in fintech companies

The research shows that the market has steeply contracted in terms of attracting funding, falling from $47 billion in 2015 to $25 billion last year. The industry still managed to beat the value of 2013, when $12 billion was invested, but saw poorer performance than 2013. The reasons for the low performance, according to the study, relate to continued uncertainty across the political arena, two key investment regions, Brexit in Europe and the US Presidential election outcome in the US. The slowdown in the Chinese economy, creates additional uncertainties, while currency fluctuations and improved rates mean that money is flowing towards more safe and stable investments.

While deal value is down significantly, deal volume has remained relatively robust, at levels similar to 2014; in total there were 1,076 deals last year, down from 1,255 the year previous.

Global venture investment in FinTech companies

While total investment into the FinTech sector faltered last year, venture capitalists have remained relatively keen on betting on companies during 2016, as total investment activity increased slightly on the previous year, up from $12.7 billion to $13.6 billion.

In terms of venture capital activity, investors, following a robust Q2 in which a total of $6 billion was invested across various funding rounds, became considerably more cautious in the latter quarters, as investment fell to around $2 billion. The research shows that it is particularly the angel/seed phase that has suffered a drop in activity, with the number of deals falling and tapering off from a global peak in Q1 2016. Early VC, following a dip in Q3, picked up again in Q4 of last year, while Later VC investment has remained relatively steady in terms of deals closed.

The motivation, according to the firm’s analysis, is that investors doubled down on their already made investments in the segment.

Global venture activity in FinTech with corporate venture participation

The corporate venturing space too saw increased activity, as more and more incumbent financial services institutions court innovative startups as a means of accessing disruptive, enabling or streamling offerings. The funding trend continues to be positive, with around $8.5 billion invested by corporates in 2016, up from 4.9 billion the year previous – although a large chunk of activity in 2016 resulted from the $4.9 billion Ant Financial series B deal. However, as a % of total deals, corporates have increased their share, from 14% in 2015 to 17% last year.

The continued investment from the segment reflects that many corporates still believe that fostering startups is a key to garnering future partnerships or access to technologies, while for startups – many of which struggle in the areas of compliance and market entry, are offered both.

Venture investment in FinTech companies with corporate VC participation

In terms of regions with the largest investment venture investment in FinTech companies with corporate VC participation, the Asia-Pacific region has significantly increased its share of total value a, around $6 billion in 2016, while the Americas and the US have been seen value invested shrink. Europe has seen activity value increase slightly on the 2015.

In terms of the number of deals however, the picture is considerably more stable – only Europe saw deal numbers increase by more than double that of the previous year. The Asia-Pacific, in contract to deal value, saw deal volumes fall by nearly half, while the US and Americas has had relatively static deal activity.

Venture investment in bitcoin and blockchain related companies

Blockchain technology has seen considerable hype in recent years, offering a new, more secure and efficient means of handling transactions, particularly between different institutions in considerably different regulatory environments. The technology continues to be developed, with a successful proposition – that is implemented – potentially disrupting how money is transferred or how payments are made (particularly for corporates).

Investment in the segment has continued unabated since 2014, last year hitting close to $545 million in investment, in 132 deals. The year was slightly higher in deal value, although slightly lower in deal volume than the year previous. The slowdown in deal volume reflects a decrease in angel/seed funding as investors demand that proof of concepts up front.

News