H1 2020 UK FinTech Investment: Positivity in the pandemic despite drop in fundraising
By Innovate Finance
Written by Rolf Merchant, Senior Manager, Innovate Finance
It will come as no surprise given the dramatic economic slowdown that UK FinTech Venture Capital investment has taken a hit in recent months. The number of deals and total capital raised in the first half of the year were clearly down compared to the same period in 2019.
However, the investors and FinTechs we spoke to were upbeat despite the challenging business environment, highlighting the opportunities for investors and the avenues for growth for many FinTech companies. Moreover, investment in H1 2020 was actually up on the previous six months.
Many smaller startups are on short runways and will need capital injections before the year is up - as shown in our June survey. The reduction in smaller deals at seed level reflects the lack of capital deployed to these early-stage startups since COVID-19 struck.
When we looked at the Q1 data at the end of April, we were in the depths of the public health crisis caused by Coronavirus. How big the impact would be on business was a huge unknown. Now, in July, the scale of the economic impact of the pandemic is now becoming clearer by the day.
Virtually every part of the UK economy has been impacted. Business investment has dropped across the board - FinTech has been no exception.
This is borne out in the data. In H1 2020, $1.84 billion was invested into 167 FinTech companies in the UK.
This compares to $3 billion invested into 263 startups in the first half of 2019, representing a 39% drop in capital invested.
The figure for the first six months of 2020 is actually up on H2 2019, when funding totalled $1.5 bn into 214 FinTechs.
Drilling down a bit further, we see that four “mega deals” over $100 million drove much of the investment activity in the first half of this year. Investments into Revolut, Checkout.com, Starling Bank and Onfido represent 47% of the total capital raised.
There were another eight deals ranging between $20 to $100 million, representing a quarter of investment. At the smaller end, there were 35 deals in the $5 - $20 million bracket, totalling $376 million or 20% of overall capital investment. A further 87 deals, worth less than $5 million each, make up the rest.
To gain some insight to those on the front line of UK FinTech investment, we spoke to investors in the sector, and some of the companies that closed deals in this period.
The view of the investors we talked to is best characterised as one of cautious optimism.
Jay Wilson, Investment Manager at Albion VC considered the macroeconomic landscape: “We are still to fully understand the economic impact of COVID-19, but short of a long and deep recession which governments are trying everything to avoid, funding will likely continue to flow.”
Global interest in FinTech remains high according to Kevin Chong from Outward VC. His discussions with big-ticket investors showed that “appetite and investment capacity for fintech has not been diminished by COVID-19.”
“Anecdotally it very much feels we are back to firing on all cylinders,” added Jay Wilson, “deal activity is happening at all stages of the funnel.”
How are FinTech businesses faring?
Moving to the “new normal” and shifting away from the office was straightforward enough for FinTech businesses.
Modulr Finance, which raised £18.9m in May, had no trouble shifting its operations. CFO Chris Brooks said “the transition to remote working was seamless as you’d expect from a digital FinTech.” Martyn James, Managing Director of ETFS Capital agreed, adding that “these are small, highly innovative, fast moving tech-driven firms that pivoted to home working and virtual teams pretty seamlessly. In some cases it’s how they operated already.”
Some are seeing opportunities in the shifts to life and work that Coronavirus has brought. Alex Cardona, COO of Codat, which raised $10m in June, thought some FinTechs have thrived despite the impact of the pandemic. “Consumers and businesses alike turn to more digitized processes,” said Alex, “creating an environment in which agile digital financial service providers have increasingly been seen as the optimal solution.”
Husayn Kassai, CEO and co-founder of Onfido, which completed a mega round of $100m in April, agreed that FinTech is better positioned than many sectors to weather the storm because of digitisation. “Even before COVID-19 struck, developed economies were becoming less dependent upon physical branches and cash,” said Husayn. “The rise of UK neo-banks and P2P payment apps suggests that parts of society were already moving from the physical to the more accessible, secure and innovative digital payments,” he added.
The digitisation of business processes is a particular benefit to Modulr. Chris Brooks said the lockdown “served as a wakeup call” to many businesses who continue to use unwieldy IT systems or manual payments. He added that future-proofing business models has become a “top priority” and as a result Modulr is seeing “more businesses turn to payments innovation to generate new revenue streams.”
Growth and expansion
The newly funded FinTechs we spoke to have exciting plans for deploying the capital they have received.
Onfido’s CEO Husayn Kassai says they plan to invest in its machine learning capabilities “to get even better at detecting fraudsters and onboard customers faster… all our customers will benefit from this updated and enhanced AI model.”
Modulr plans to develop its service offering - European payment capabilities in particular - to enable the company to expand further into new markets. Meanwhile, Codat will use its funding for US expansion and for increasing its headcount to 100.
Pandemic or not, these FinTechs are seeing plenty of avenues for growth.
For Codat, more data is key to more growth. “We are building an ecosystem of connected data sets,” said Alex Cadona. “For us, growth means expanding the number of data sources that we integrate with, be that accounting software packages, or adding additional commerce and banking data sources.”
The fundamental of very few new players in the B2B payments sector is helping Modulr. CFO Chris Brooks said the opportunity is “to go deeper into existing industries which have previously been underserved by established players.”
Husayn Kassai sees the acceleration of digitisation opening up more opportunities: “As we set the new standard for digital access, we’re seeing the application being used in multiple places, from financial services, online healthcare and trust marketplaces, to self-check-ins at airports, car rentals and eVoting.”
More opportunities ahead
Looking further ahead, the investors we spoke to saw multiple avenues for growth and were broadly positive about the prospects for UK FinTech moving into 2021 and beyond.
“The global economy has had a massive shock and changes have happened that won't be undone quickly, if ever,” said Martyn James from ETFS Capital. “The challenge now is who can now adapt quickest and capitalise on this 'new normal'. We think UK Fintechs may prove to have an advantage due to their ability to pivot and move quickly.”
Kevin Chong from Outward VC suggests that growth stage funding will be skewed towards founders who are able to “back up the sustainability of their business models and technological advantage using comprehensive market research and data points”. Kevin warned that those “prioritising market share growth over long term business models will have a hard time”
Gareth Jefferies from Northzone said that he is finding lots of interesting companies who are using Open Banking. “I have seen many great products and use cases such as neo-banks partnering with data and payment API providers, startups who offer great advice to consumers in personal financial management, and many others” he said.
The speed of digital transformation has caught the eye of Jay Wilson from Albion VC. The trend is aiding enterprise-focused FinTechs. “We’ve seen sales cycles shorten highlighting this trend,” he said.
To finish on a positive note and to underline the enduring strength of UK FinTech, the last word goes to Kevin Chong: “In this part of the cycle, London remains the world’s pre-eminent fintech hub because of the quality of its fintech founders, a proven track record in building global fintechs and its deep pool of fintech investors.”
Data Source: PitchBook as of 17 July 2020. Data has not been reviewed or approved by PitchBook analysts.