No Summer Doldrums for FinTech Investors

Elevated political tensions (and by that, we mean war) in the Gaza Strip and Ukraine were enough to produce a temporary bump in volatility, and a minor bump in the road for stock prices this summer. But fresh new all-time highs and a plummeting VIX in August have left the bears crying ‘wolf’ again. Trading volumes painted an even more placid picture, as NYSE stocks volumes just barely inched above last August’s 5-year low of 3 billion shares per day.

But this was definitely not the case for private companies in the financial technology arena. At least 30 FinTech companies raised close to $150 million in equity-like financing this August. FinTech is a broadly used term — an audible utterance in public may be cause for cringing, or donning some ridiculous, oversized headphones – as with ‘disrupt’ or ‘pivot’. Whatever you want to call companies that focus on innovative financial solutions, they are garnering lots of assets and attention. It’s not the S&P Financials Sector, nor is it all Bitcoin. There is a tremendous amount of breadth in the space, and little of the interest rate exposure characteristic of public market ‘financials’. It’s possible to build a diversified portfolio of companies without ever leaving the category. Companies that closed successful rounds in August represented at least 9 distinct sub-industries: Lending, Personal Finance, Financial Infrastructure, Investment Platforms, Payments, Exchanges, Financial Analytics & Research, Financial Security, and yes – Bitcoin (Crypto Currency).

 

Payments Day in the Sun

There are clearly some areas of over-investment within the FinTech space, which is not to say that new companies in those same areas can’t perform well. But it does mean that a lot of money will be lost on bad bets. Various industries have taken their turn on top of the funding ladder – Peer-to-Peer Lending, Crypto Currency, and Real Estate Funding have all experienced periods of heightened investor flows over the last year. Most recently, companies in the broad Payments space have been the big winners. Here’s a partial list of eight such companies, receiving over $32 million in funding this past August:

 

Transactis          digital bills                     $11 million     $36.7 to-date

SumUp               point-of-sale                  $13 million     $33 to-date

PayRange          vending machines         $2.8 million    $3.2 to-date

Two Tap             checkout, wallet            $2.7 million    $2.7 to-date

Settle                  restaurants                    $1.5 million    $1.5 to-date

Wonder               gift cards                       $1.4 million    $1.4 to-date

Cash Sentinel     vehicle payments         $0.7 million     $0.650 to-date

Omise                 platform (Bangkok)       $0.3 million     $0.3 to-date

 

Providers Over Platforms

Betting on Payment platforms themselves may be a long-shot at this point. Apple has recently filed a patent for an “omni-wallet” capable of processing payments using credit, debit, coupons, and potentially Bitcoin, via the cloud, QR codes and NFC– all while providing super high transfer speeds and new encryption technology. Apple has a gigantic lead in the digital payments space in terms of number of active customer cards on file, and pulls enough weight across consumer purchasing channels to finally make the digital wallet a reality in the US. Google will likely be able to ride that momentum and give a re-birth to its digital wallet, while Amazon and other behemoths may succeed as well. But the list of survivors will be a short one. Financing the companies that build technologies for those platforms could be extremely lucrative; buying companies with competing platforms, narrow channels or non-essential technologies — not so much.

That’s likely to be the theme in FinTech going forward – the breadth of good investments will be in companies providing critical infrastructure solutions for established markets, rather than into companies attempting to create new marketplaces themselves. Take Bitcoin for instance: at least 10 more companies received funding in August. Are there going to be challengers that succeed in overtaking Coinbase? Possibly. That’s going to be very hard to gauge, particularly at the seed or A-stage.  But, companies that provide services, like clearing solutions that enble Crypto currency exchanges, vaults and wallets comply with the global banking regulations they have attempted to circumvent — that is interesting.  Companies such as Calgary-based Vogogo, which closed an $8.5 million raise this month, provides risk management, compliance, fraud mitigation and other services to companies transacting in the Crypto space.

The same holds true for peer-to-peer lenders, or any competitive, non-traditional financing platforms. Rather than trying to pick the potential usurpers to Prosper and other first-movers, better to focus on companies providing key back office platforms and services. After all, the business itself is here to stay, and the legion of upstarts in this space could certainly use some help building the integrated solutions that major banks have taken decades to develop. Cloud Lending, which raised $550,000 in August ($800,000 total), provides just such a platform for new-era lenders and other non-bank financial institutions.

 

FinTech Business Models Over Social Media Hype

The FinTech space has abundant opportunities in a variety if different sub-industries. Big Banks are getting it – as Barclays and now Wells Fargo and others have pushed into the Accelerator business. The idea is not so much to find the next multi-billion dollar winners that drive outdated VC  business models, but to outsource mammoth IT budgets with poor completion rates.  This new brand of Accelerator may not be for entrepreneurs that want to build mammoth companies, but for those aimed at selling back to the institutions they’ve serviced (and perhaps worked for) in the eight-to-nine figure range. Micro VCs specializing in FinTech, sub-sets of that market market, or a number of non-financial verticals to which they bring a high degree of specialized knowledge, may produce higher hit rates and better returns to investors, even while forgoing some of the huge winners that VC giants stubbornly pursue. While $10 billion valuations for sexting apps with no revenue may scare some investors away from the early stage market entirely, this attitude overlooks a myriad of significant return opportunities for innovative companies servicing financial institutions and markets, with understandable business models and plausible early stage valuations.  Go big or go home – maybe not. Go smart or go broke, maybe.

 

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Acknowledgements:  Crunchbase, accenture, “The Boom in Global FinTech Investment”

http://www.accenture.com/Microsites/fsinsights/capital-markets-uk/Documents/Accenture-Global-Boom-in-Fintech-Investment.pdf