Last year was a record year for European investments in FinTech. The sector saw $34 billion invested and London secured more venture capital funding than any other EU city.
With an average of $8.5bn VC being invested in UK-FinTech per annum, capital raising is an area of deep consideration for many of our clients.
Against this backdrop, Deloitte Private recently hosted a breakfast seminar for CFOs, Heads of Finance, FDs and similar from a variety of FinTech firms to explore deal considerations pre- and during a fundraising process. I was delighted to open and close the session, discussing current FinTech investment landscape, deal trends both globally and across Europe, and finished with a look into the future of FinTech M&A.
FinTech investment trends
2018 global FinTech investment saw a substantial increase on the previous year, with deal value more than doubling to a total of $55bn, or $112bn including M&A. In addition, we are beginning to see rising levels of consolidation in mature segments such as payments, as evidenced by FIS’s $43bn acquisition of Worldpay (2019), as well as increased challenger bank fundraising activity – UK-based challengers Revolut and Monzo and German digital bank N26 all raised record amounts last year.
While European fundraising volumes are expected to continue to grow, deal dynamics are now starting to turn a corner. An example of this is the shift in the FinTech investor pool away from US VCs towards European home-grown funds as local markets respond to the high returns being generated by FinTech investments.
We have also seen a material increase in financial institutions using their own balance sheets to invest directly into high-growth businesses as they see investment in FinTech as a must-have in order to compete in the marketplace of the future. In fact, corporate venture vehicles now account for one third of the total investment in FinTechs by value.
Also, FinTech businesses are beginning to attract investment from private equity as they are seen as key disruptors to the financial services industry, demonstrating high growth and achieving scale in 2-3 years (as opposed to 2 to 3 decades previously).
As a result over the past 12-24 months we have seen fierce competition for the FinTech stars and prized assets, which is creating highly aggressive valuations.
Common pitfalls in a fundraising process
Although there are several well-publicised successful fundraises, it is important to be aware that many processes do not complete. Failed processes are not necessarily always due to the quality of the businesses looking to raise finance, but are often the result of poor planning and execution of transactions.
The most common pitfalls include a lack of preparation (particularly in respect of financial forecasts and accounting records), not allowing a sufficient time frame for the raise and lack of substantiation of the business plan. Firms need to prepare a specific set of financials that both put the business in the best light and also show traction for the future. Another key item for FinTechs to consider is the importance of the timing of the process in respect of the financial performance of the business. Firms need to “keep the good news coming” in order to keep hold of their investment.
See our previous post for a more detailed breakdown of the common pitfalls (and how to overcome them) in fundraising for FinTechs and high growth firms.
Predictions: The future of FinTech M&A
2018 has seen unprecedented level of investor interest in the sector, and 2019 promises to be another significant year for FinTech.
First, we expect to see consolidation in the more mature segments of FinTech such as payments and banking. Having said that, some of the mega deals, such as Worldpay and FIS, may also to lead to some rationalisation of the group and product structures, which may result in some non-core disposals, as we are already seeing in respect of the payments divisions of some banks.
We may well also soon see the fallout of overpriced deals as the risk of some growth-phase businesses not performing against expectations, and therefore not justifying the excessive multiples paid, intensifies.
A further wave of partnerships is expected as FinTechs themselves look to enhance their product proposition and offer more services through collaboration with other FinTech partners – i.e. a move away from unbundling back to bundling.
We also anticipate some consolidation among European challenger banks and stronger interest from incumbent retail banks in their propositions.
Finally, we expect to see continued interest from financial investors, in particular private equity, looking to invest at earlier stages of growth, to avoid paying higher multiples at later stages (which are becoming more competitive) and to participate in the growth story.
In conclusion, there plenty of reasons to be excited about being a FinTech in this developing and disruptive market, and there are also plenty of motives to continue investing in this high-growth sector.
If you would like to find out more about how to successfully raise funds for your FinTech, please do not hesitate to reach out to me.
Catch highlights from the breakfast seminar in the video below.
Deloitte Private hosts a regular series of events for CFOs and Financial Directors of FinTech businesses. To learn more, or register your interest for future events, please visit Deloitte.co.uk/FinTechCFO
We expect to see continued interest from financial investors, in particular private equity, looking to invest at earlier stages of growth, to avoid paying higher multiples at later stages (which are becoming more competitive) and to participate in the growth story.