A look back:
Q1 2020 was the worst quarter for fintech deals since 2016 and the worst for funding since 2017. Funding had a recovery in Q2 but deal activity continued to drop - although we saw improvements on a month-by-month basis.Unsurprisingly in the wake of COVID 19 we saw investors in the first half of the year choosing to safeguard their current portfolio and favouring mega-round funding into more established fintechs, causing a fall in investments by one third. This took a particular hit on smaller start-ups, with over half of all funding into fintech in H1 being invested into only five companies. A stark difference to 2019, in which fintech companies made up 4 of the 10 largest deals into SMEs in the UK and was second only as a vertical to SaaS in both number of deals and deal value, which has increased by 21% on the previous year.
Not the most upbeat of first paragraphs, I’ll grant you, but it must be noted that we saw dramatic and consistent improvements across the first 6 months of the year. KPMG noted that fintech investments in H1 also ‘put a spotlight on long-term trends, including the growing importance of APIs and open data’ as well as continuing to blur the ‘lines between fintech, big tech and platform providers.’
Q3 in case studies:
As we come to the close of Q3, we’ve seen some interesting notable investments into the fintech sector with some clear patterns mirroring forecasts from H1.
There has been a growing trend in investment into digital lenders specialising in SMEs, centring around the Coronavirus Business Interruption Loan Scheme, included MarketFinance which secured a £50m investment from Viola Credit to support SME businesses in the UK by lending under the CBILS initiative. Alongside Allica Bank taking on £26m of investment with a focus on filling ‘the fast-emerging SME business funding gap’ due to lockdown. In a similar vein, Iwoca secured £100m in investment in order to help them ‘deliver CBILS loans to SMEs.’
We’ve also seen that payments has, as predicted, continued to be a hot sector for fintech investment in the UK with PPRO Group closing a £38.2m fundraising with Sprints Capital, Citi Ventures and HPE Growth. Form3, a cloud technology provider of payments-as-a-service, also completed its Series C raising funds of £25.1m with investors 83North, Draper Esprit, Lloyds and Nationwide. Another payments business receiving funding this quarter was cloud-based global payroll services provider, CloudPay who secured £26.8m Series D round with Runway Growth Capital, Rho Ventures and Pinnacle Investment Partners.
KPMG also predicted in H1 that in H2 we would see a growing focus on digital trends, which does seem to be the case with Q3 seeing a notable investment into the digital mortgage disruptor, Habito. Augmentum Fintech, SBI Group, mojo.capital alongside some existing investors injected £35m into the fintech.
As suggested, regtech has also ‘grown on investors' radar as corporates look to better manage risk’ with Evolution Equity Partners, Dawn Capital, AlbionVC, British Patient Capital and Accenture Ventures investing £50.8m into the financial crime fighting platform, Quantexa. We also saw Ontario Teachers’, Balderton and Index pump £38.8m into ComplyAdvantage, an AI platform for detecting and preventing financial crime, in its Series C. Finally, another example of regtech investment is CloudMargin receiving £11.7m from Citi, Deutsche Bank and Deutsche Börse in Series B.
We also saw a substantial investment into Chip, a wealthtech savings app, which secured £10.7m by the early closure of its Crowdcube campaign. This was following their previous crowdfunding campaign in April, which at the time was the largest equity crowdfund closed in the UK since the start of lockdown. Chip uses AI to assess its customers’ banking activity to determine how much they can save each month and put it away automatically. The concept is similar to other fintech products on the market but in principle is cleaner, more automated and nuanced.
There was a continued interest in APIs and cloud hosting, with Draper Esprit, Lloyds Banking Group, IQ Capital, Backed and Playfair Capital investing £32.6m into Thought Machine continuing from their existing funds raised in their Series B in March. TrueLayer, a fintech that develops APIs that connect apps and websites to banking infrastructure, also raised £19.3m with Tencent, Temasek, Northzone and Anthemis.
KPMG also predicted for Q3 2020 that the increased use of digital financial services models would spur investments in ancillary areas, such as fraud prevention - we saw that this was the case with investors such as Draper Esprit, Amadeus Capital Partners, BlackFin Tech and Passion Capital investing £15.9m into Ravelin, a fraud prevention software.
Where is the money coming from?
We noted at least 55 different investors putting money into the fintech sector in Q3 alongside a number of undisclosed investors, including the unknown contributors to Iwoca’s £100m fundraise.
Of the declared investors, there were several who made multiple investments over this period. Here I’m going to be assessing them by the number of deals made over Q3. Coming in top was the government’s Future Fund, which provides government loans of up to £5m to UK-based businesses (with at least an equal match in funding from private investors). Second was Crowdcube, the British investment crowdfunding platform. In joint third was British Patient Capital, Runway Growth Capital, Rho Ventures, Pinnacle Investment Management, Draper Esprit and Citi Ventures.
Fintech unicorn update:
The UK has been a hotspot for fintech unicorns since 2015, with 2018 being a remarkable year seeing Revolut, Monzo, Atom Bank and Greensill all gaining unicorn status. Unfortunately 2020 is yet to yield any more UK-based £1bn fintechs[OD1] , however it has been predicted that 17 more UK-based companies will achieve unicorn status by 2021, including fintechs Starling and GoCardless.
It’s also worth noting that Q3 has been an extraordinary period for fintechs globally reaching unicorn status, with a 400% increase in companies achieving the accolade from Q2 to Q3.
One to watch:
Exizent gained £3.6m in funding. Exizent work within the death tech space in fintech, which is an increasingly attractive prospect for investors due to it being one of the few remaining key parts of human life that has had little to no tech disruption. I’m extremely excited to see how Exizent along with other death tech fintechs continue to revolutionise the bereavement process, making what can be one of the most painful periods of people’s lives a little easier.