A View from our CEO: VC investment in UK FinTech has its best year on record
By Charlotte Crosswell, CEO, Innovate Finance
A report produced by Innovate Finance reveals that venture capital (VC) investment into UK FinTech startups reached record highs, with $1.8 billion of capital invested in 224 deals, a 153% increase year-on-year. This is welcome news following a decrease in 2016, which saw investment drop to a little over $700 million. Looking at global investment, the UK ranked second after the US, both in terms of capital invested and number of deals, with two UK companies each raising over $200 million - TransferWise and OakNorth - placing them in the top 20 global deals.
What has spurred this record investment in UK FinTech firms? It is the result of a combination of the UK’s leading position in FinTech globally; an exceptionally strong ecosystem of incumbent institutions and startups; a maturing industry attracting larger, later-stage investment rounds; and a skilled talent base with deep expertise in both financial services and technology.
The UK’s progressive regulatory environment has also been a driver of the capital inflows. 2017 was a seminal year, with the industry preparing for numerous new regulations including PSD2 and Open Banking, MiFID II and GDPR. This has created an environment that encourages competition and innovation across incumbents and startups. The FCA continues to lead the way as a forward looking regulator, with the world’s first regulatory sandbox now in its third cohort.
While the Brexit vote - and concerns about the challenges it might present for the UK FinTech industry - didn’t impact investment in 2017, we should not be complacent. The political uncertainty around the Brexit negotiations could adversely affect the FinTech industry, including our ability to access talent and long-term capital, and could bring about a divergence of regulatory regimes across Europe.
Notably, 54% of the 2017 investment into UK FinTech came from overseas VC firms. This is consistent with previous years and shows that UK FinTech continues to attract non-domiciled investment.
In regards to FinTech investment trends, challenger banks and money transfer & FX firms came out on top in terms of 2017 VC investment (24% and 21% respectively), largely due to companies within these sectors being more mature and therefore attracting larger rounds. We are also seeing significant activity and innovation in sectors such as RegTech and InsurTech.
As the FinTech industry matures, we expect an increased level of exits, largely driven by large financial institutions as they move from partnering and CVC investment, to acquisition as FinTechs begin to reach scale. We expect some consolidation within industry, with complementary startups merging. 2018 could also be the year we finally see more FinTech IPOs, with rumoured public exits from Ayden and potentially Funding Circle. It will be interesting to see how this year unfolds and we have a strong starting point.
*Based on data compiled and validated by Innovate Finance using PitchBook.