Investment in FinTech startups and scaleups has boomed in 2015, hitting new heights of $19 billion. The VC-backed investment in the sector too hit new heights, at $13.8 billion. FinTech with a focus on bitcoin and blockchain technologies pulled in nearly $0.5 billion, although researchers at KPGM raise a cautionary note on the need for regulatory maturity, as well as wider integration barrier for the technology.
The burgeoning FinTech industry has been making headlines in its potential to create offerings that disrupt traditional financial markets. Consulting firms, as well as corporates, have been actively interested in the market in recent years – seeking to create partnerships with startups, or develop hubs and accelerators through which startups in the sector may be supported. In a new analysis of the FinTech startup market, KPMG and CB Insights explore the funding side of the market – focused on venture capital (VC) backed investment, as well as changing trends in the type of FinTech startups provided with seed and scale funding. The report, titled ‘The Pulse of Fintech, 2015 in Review: Global Analysis of Fintech Venture Funding’, is based on the consultancy’s analysis of FinTech market dynamics from information gathered by CB Insights.
FinTech VC investment
The research highlights that the FinTech sector is relatively new to the marketplace, and has, in a relatively short time, exploded in popularity among venture capitalists and investors alike. Development started relatively slow; in 2011 there were 298 venture capital backed deals with $2.1 billion in total investments. 2012 and 2013 showed an uptick in VC investment, although growth was slow, at $2.4 billion and $2.8 billion respectively. In 2014 however, interest was stoked for FinTech – as total VC-backed investment jumped to $6.7 billion while total investment in the sector hit $12.2 billion; deal volume in 2014 hit 587 deals for VC-backed investments and 933 for all deals. 2015 saw a further 104% growth in VC-backed FinTech investment, as total deal value hit $13.8 billion while deal volume increased to 653.
VC-backed investment in the FinTech sector saw massive increase in Q2 and Q3 of 2015 at $4.9 billion and $4.7 billion respectively, following a relatively strong performance in Q4 2014 and Q1 2015 at $2.4 billion and $2.5 billion respectively. However, global VC-backed funding dropped considerably at the end of 2015, on the back of investors taking a more critical look at their portfolios as well as the long term value of additions – focusing only on companies that have their operations under control, reasonable burn rates, and strong plans for early stage profitability. A similar trend appears to have affected the FinTech market, with Q4 2015 booking only $1.7 billion in funding, even while the volume of support remained high at 154 investments compared to the 165 in the high investment value Q3.
While FinTech startups are a global phenomenon, they are often bundled around hubs that provide a solid ecosystem, designed to support the growth of FinTech startups. In the UK, the FinTech sector is particularly London based; in Ireland, particularly Dublin serves as a hub; in the US there are major ecosystems in Silicon Valley and New York; which the Asia-Pacific regions has hubs in Singapore, China and Australia.
In terms of deal count and deal value, the regions vary considerably – although deal count has remained relatively stable over the past year. In North America for instance, deal count hit 103 in Q2 2015 before subsiding to 89 in Q4. In Europe the highest point was reached in Q3 2015, before falling to 31 – while in Asia Q3 2015 saw 36 deals before subsiding to 31 the following quarter.
In terms of deal value, the US trended upwards from $1.6 billion in Q4 2014 to hit $2.7 billion in Q3 2015, before plummeting to $0.9 billion as investors were rattled by the potential overvaluation of startups. In Asia, deal value jumped from $0.4 billion in Q1 2015 to $2.2 billion in Q2, tapering back to $0.4 billion in Q4 2015. Activity in Europe has remained relatively stable at below $0.5 billion.
Bitcoin & blockchain FinTech
Bitcoin and blockchain technologies have recently been heralded as a potential disrupter within the financial services industry, owing to its potential to massively reduce costs while improving oversight, transparency and transfer speed. The trend has caught the eye of corporates across the globe, with banks scrambling to pilot the technologies, while of late several consulting firms, namely Accenture, PwC and EY, have been quick to set up dedicated practices, partnerships and hubs to support development within the sector.
The KPMG research finds that VC-backed interest in the sector too has grown considerably over the past three years – up from $80 million invested across 26 investments in 2013, to 74 investments with a total of $474 million in value by 2015.
The type of investments from VC players has become more diverse, as Bitcoin & Blockchain startups have matured to hit new funding round milestones. In 2011 and 2012, the majority of funding was seed/angel, with 2013 seeing the first series A, at 15%, and series B, at 4%, funding. 2014 saw a considerably larger chunk of funding provided to series B ready startups, at 26%, while 2015 saw the first companies emerge into series C investment territory.
According to KPMG’s analysis of the market, caution, much like across all startups, needs to be reflected in the market surrounding the potential of bitcoin and blockchain technology. Barriers, particularly in terms of regulatory conditions, scalability and the integration of the technology within institutions are often still tied to legacy systems.
Ian Pollari, Global Co-Leader of Fintech at KPMG International and Partner at KPMG in Australia, says that: “Blockchain is a notable example of an emerging technology that offers enormous potential to the financial services industry, however this needs to be balanced with the reality that substantial barriers must be overcome in order for this potential to be realised...”