Fintech investment steady, focused on quality over quantity (2024)

Venture capital investment into the FinTech space continued tentatively into the third quarter, with investors increasingly weary of Angel / Seed investment, but more likely to offer high deal values to companies they see as offering strong fundamentals. Overall investment from VC, PE and M&A into the FinTech segment came in at $8.2 billion in Q3, a strong result relative to the year previous.

Financial technology firms are increasingly creating headaches for traditional firms, with a recent report highlighting their ability to nimbly target high-value areas of traditional firms’ revenue models. The rapid rise of Bitcoin, meanwhile, has the potential to create disruptive dynamics, as new players quickly rise on the back of funds pouring into the system.

However, while the destiny of bitcoin et al, is all but certain, current trends have seen investors, from venture capital (VC) to private equity (PE) and strategic M&A, take an interest in the segment. In a bid to map performance within the segment,KPMG takes a quarterly pulse of the market.

The latest figures (Q3 2017), highlight continued concern in the wider start-up investment scene continuing to hold. However, values were relatively robust on the start of the year, and on the same period last year, coming in at $8.2 billion. The number of closed deals declined slightly, on the same period last year to around 270, although, overall, deal activity is the lowest seen since Q4 2013.

The continued nascent status of many of the technologies, and their relatively disruptive potential, has resulted in continued activity in the space. Ian Pollari, Global Co-Leader of Fintech, KPMG International, remarked, “Fintech continues to rapidly evolve on a global level with an increasing diversity of funding participation and sources, geographic spread and areas of interest. We are seeing the emergence of FinTech leaders in specific jurisdictions looking to scale their platforms internationally, while technology giants move into adjacencies. This is a trend that is expected to continue and will represent a growing concern for incumbent financial institutions, forcing many to take bolder steps in response.”

In the VC space, volumes were hit in the latest round. The Angel / Seed round was particularly hard hit, dropping from around 100 to around 60, while both early and late VC activity too saw declines, although not nearly as steeply. While volumes were down, the research did note that respondents remain key to back their portfolio with their cheque books, invested capital climbed to around $3.3 billion, from the $3 billion mark in the previous quarter. Value, overall, has climbed in recent quarters from the dip in Q4 last year.

The fall in deal volume, coupled with the rise in deal value, is part of an international cross-market trend. Throughout the year, investment in European businesses has seen steadily increasing value, with decreasing quantity, as investors rated quality over quantity amid turbulent economic conditions.

The analysis notes that venture funding provided increased for each of the categories, with the Angel / Seed stage up $0.4 million to $1.4 million, the Early VC phase up from $5.1 million to $5.5 million, while the late stage has remained stable at a median $16 million.

Exits have shown a stronger relative performance to last year, although the figures were buoyed by large deals – such as the $850 million acquisition of Intacct by Sage Group in the most recent quarter. Exit activity continues to favour strategic acquisitions, although IPOs have ticked up, as valuations and market expectations creep closer. Deal value hovered around the $1.5 billion mark, a significant fall on 2014 and 2015, when figures were almost double.

One area that has garnered significant attention in recent weeks is bitcoin and alternative currencies. Speculative forces pushed the value of coins to record heights, while various initial coin offerings (ICOs) saw around $500 million be shelled out to own – what, remains unclear. Investment in start-ups was down slightly, the drop in venture funding from close to $400 million in 75 deals in 2016, to year-to-date for the first three quarters, $171 million in 52 deals.

Interest among various players in the potential of Blockchain technologies remains strong. Considerable risks remain, with bitcoin exchanges becoming vast hubs for wealth transfer, while cross boarder payments may be significantly boosted in ease from the technology. Financial institutions remain active in the space, with various consortia working on use cases and commercialisation.