SECTOR SPOTLIGHT: VC Funding in FinTech Bounces Back
SECTOR SPOTLIGHT is a monthly series on FinTechtris that explores a specific sector within the expansive FinTech space by defining its history, frameworks, business model, leading companies, and outlook.
The venture capital industry is making a comeback at the end of 2020, recovering some of what was lost since March when the pandemic hit the industry. Fearful investors from Q1 to most of Q3 held back on making bets in companies at various stages. As a result, deal volume trended down 24% from 2019.
Despite the economic effects of COVID-19 being unknown, VCs are taking out their checkbooks again to invest in FinTech. Funding in 2020 of financial services companies back to pre-COVID levels can listed as follows:
Seasoned fintech unicorns receive additional funding through megadeals of over $100M;
More early stage, seed-funded firms receiving a Series A round at the end of the year;
Payment companies of all sizes being prioritized by investors;
Let’s breakdown these 3 trends and what this means in the new year for global investment in FinTech.
industry giants get bigger
It’s well-known over the last 8 years that FinTech as an industry continues to grow rapidly year-over-year. The bulk of this growth comes from top companies that are heavyweights in their sectors, and continue to increase in valuation every 12-18 months. These well-funded firms have continued access to capital in late stage megarounds from investors looking for yield on their stockpiles of cash.
High revenue growth and user acquisition from unicorns (such as Robinhood and Chime) makes the investment choice quite simple for VCs. This past 3rd Qtr. produced 25 megadeals (of $100M+) for 60% of the total funding in FinTech — the most since 2018.
From a quarterly comparison perspective, these larger rounds increased over 20% and the number of all other deals decreased by about 15% from Q2. For those electing to stay private longer, the rich get richer when it comes to receiving venture funding. At an industry level, these late-stage rounds in the US accounted for over half of all venture dollars — about $20B in total.
SERIES ‘A’ starts to rebound
For global investors in search of the next unicorn, Series A should be a competitive field to gain early access to the industry giants of the future. With seed stage companies seeking their next round of funding, the excitement hasn’t been there for most of 2020. For early stage FinTech, this is a mandatory step towards long-term viability.
Investing pre-Series A is easier due to the smaller dollars and larger availability of deals, which can also yield the highest returns. This aligns with the greater risk of uncertainty or information scarcity (i.e. investors have only a business plan and team background to review) and lack of execution/traction. Due diligence studies and decisions come faster with less data.
The opposite is true in evaluating firms looking for Series funding. Investors have concrete intel of early success by evaluating revenue and user growth, team operations, and a company’s organizational structure. Oftentimes, a key board member is also a stakeholder, which brings more substance to young startups and their ability to execute in the long-run.
Series A carries a key milestone of fundraising from institutional investors. This larger amount of capital (about a 3x multiplier of previous funding) from a seasoned firm gives solid credibility and support to the fintech — helpful to onboard top talent, gain customers, and raise later stage rounds. This is the most critical round in a company’s early lifecycle as a lack of funding can destroy growing startups (even those with product market fit). Series A is a key connector between definitive innovation and scaled commercialization.
The impact of COVID-19 has made VC funding more of a buyer’s market with more equity needed for the same dollars. As we close out 2020, investors are back to reviewing standard deal volume and variety at a similar rate as in Q1. Many recent investments are in teams with no previous relationship between the founder and VC. Showing that they’re open for business again and writing checks comfortably instills confidence as startups head into 2021.
PAYMENTS sector growth
The starting point for FinTech over 15 years ago was the payments sector. Startups directly involved in processing (such as Stripe) or facilitating payments (such as Plaid with bank account aggregation) experienced tremendous growth and became the unicorns we see today. In this new decade, VC investment in the sector remains strong — growing from $2.4B (Q2) to $4B (Q3), from CB Insights. This increase in capital is spread out against companies of all sizes and stages, not just the industry giants.
PayPal is a great indicator of future sector growth. In their Q3 report, the company showed the revenue impact of fintech over the last year:
Processed $247B (38% increase from the 2019) and 4B payment transactions (up 30%);
PayPal raised its full-year growth estimates for 2020 from 26% - 29% to 30%;
Venmo payment volume grew at 61% in Q3 to $44B, an improvement in pace from 52% in Q2;
Upcoming products such as the Venmo card and newly available access to buy-and-hold cryptocurrency are additional boosts to future activity from PayPal. Square is expected to show a similar growth trend, especially with its small and medium sized business users. The success of these established firms has investors looking early stage to jump into the next hot payments startup.
VC OUTLOOK in the next decade
As investors and VC firms assess their strategy for a post-COVID economy, Q1 of 2021 will be a clear indicator for the industry. Will dollars continue to flow towards late stage companies and established sectors (such as payments)? When will the Series A market completely rebound for seed stage startups?
The next emerging sector that takes off next year is cards. As platforms offer diversified programs and options customized to user groups, investors will start making early bets in companies. Credit builder programs, business spend cards, and even gamer cards are set to launch to replace traditional debit and credit cards with minimal rewards or cash back. This is further enhanced by consumers not using cash, and card infrastructure providers (like Marqeta) being able to facilitate new card programs in months (not years).
