Since Q2-2015 KPMG, together with CB Insights, publishes a quarterly analysis of global venture capitalist trends in the fintech sector, titled “The Pulse of Fintech”. The most recent analysis was published in August 2016.
NB: The blogpost below is based on the report published in August (I wrote a new blogpost as follow up, based on the report published in November 2016)
The analyses are very interesting because the data give us a (rough) indication if and in what pace fintech startups are challenging or maybe even disrupting the banks and other large financial institutions. That fintech will disrupt the banks is the prevailing narrative, but perhaps the wish is the father to the thought. Another prevailing narrative is that some major failures and frauds will stop the enthusiasm for fintech very soon. No matter what story is yours, it is always good to now to what extent the trends in real life are aligned with your story.
Focus on VC backed funding of fintech companies
There are many angles to look at the fintech investments. KPMG focuses of VC backed funding of fintech companies. This means that the megadeal of Ant Financial, an affiliate of e-commerce giant Alibaba is not included in their analysis. In April 2016 Ant Financial closed the world’s largest private fundraising round for an Internet company at $4,5 billion, giving it a roughly $60 billion valuation (source: wsj.com). This example of a megadeal shows how risky it is to rely on absolute volumes in fintech funding to get a clear indication about where things are heading.
The top 30 deals cover more than 60% of global VC back fintech funding
According to the Pulse of Fintech Q2 report $7,4 billion is deployed across 416 deals to VC-backed fintech companies in the first half year of 2016. In 2015 $14,5 billion was funded. The year 2016 seems therefore in pace with 2015. For this blog I I have a closer look at the top 30 of largest VC fintech deals in 2016 (to date) to see in what way 2016 differs from 2015. The graphic below is a screen print from p. 13 of the Q2-2016 The Pulse of Fintech report of KPMG.
The top 30 deals add up to $4,4 billion, being 62% of the total volume of $7,4 billion. The average size of the top 30 deals is $153 million. $3,0 billion is realized by the remain 386 deals, with an average deal size less than $ 10 million.
Lack of megadeals in North America, Asia closed some megadeals in Q1-2016
In 2015 North America is first in terms of number of deals done and in 2016 so far it still ranks first. However, in terms of volume, North America faces Asia on the first position in 2016. This shift in position is caused by a decline in fintech funding, and especially the lack of fintech megadeals, in North America.
Asia on the other hand, had a couple of fintech megadeals in China closed in Q1-2016, but Q2 was not that successful in terms of volume. On the surface, Asia seems to have the same level of funding activity in 2016 when compared with 2015.
Europe and the rest of the world hardly count, neither in numbers nor in volumes. Within Europe we see a shift from deals done in the UK to deals done in Germany (interesting trend, for another blog!).
Perhaps far more interesting than numbers and volumes is the type of companies that are invested in. 2016 shows less variation than 2015 with regard to the type of companies, especially at the top of the list.
Decline in payment tech investment activity
There is a decline of funding of payment companies. This trend was already visible in the Q4-2015 that saw a sharp decline when compared to Q3.
In 2015 there were 5 investments in payment companies, ranging from $100 to $680 million, adding up to a total amount of $ 1.480 million invested. In 2016 there are only three payment tech funding deals so far, with a total amount of only $ 166 million. It is tenable to also add up the volume of funding of Affirm, that raised $100 million in VC. Affirm is fintech company that operates by allowing users to take out loans at check-out at select online stores. In this way it is a loan provider and offers an alternative payment method to credit cards.
Asia dominates lending tech investment activity, but for how long?
The top 7 is dominated by Asian investments in online lending companies (5 out of 7, with a total amount of $ 2.774 million). In fact all, but only one, of the Asian deals listed in the top 30 are investments in online lending and these were all deals with companies in China. And, as said before, the megadeals in China were done in Q1-2015
A lot has changed since the beginning of 2015. Only recently has the China government enacted stricter rules for online lending companies and companies are struggling to comply. Furthermore, online lending sector in China is troubling with collapses and frauds. As a result private equity and venture capital deals are causing challenges. Ni Zhengdong, head of Zero2IPO – a research group:
“Chinese venture capital and private equity investors made investments too quickly in the past three years and the startups they invested in used up their money and failed to finish the next round of financing.” (Source: CrowdfundInsider)
The rise of insurtech
The insurance sector finally seems to catch up with its banking and financial services counterparts. The rise of insurtech has been anticipated, because many believe that the insurance sector is ripe for serious change. But investments are still very modest. There are only three insurtech deals listed in the top 30, all US based.
Oscar, a health care insurance company based in New York, is the largest one with $400 million. The health care sector is the US is recently overhauled by the Affordable Care Act, known as Obamacare. The law creates marketplaces, with websites akin to online travel and shopping sites, where individuals can compare prices as they shop for coverage. In this new market Oscar is marketing itself with the slogan “Health Insurance that works like the rest of the internet”.
Bloomberg reported that Oscar will reevaluate its approach to Obamacare after suffering significant losses and will pull out of two markets next year (Dallas and New Jersey).
“The individual market isn’t working as intended and there are weaknesses in the way it’s been set up,” Mario Schlosser, CEO of Oscar said in an interview. “We want to focus on the markets we understand well, we want to focus on the markets where we have our own model in place.”
Clover Health, also NY based, is listed 7 in the top 30 with a funding of $160 million. Very recently (September 2016) it raised another $100 million. Cover Health is targeting a very specific demographic, namely senior citizens. Clovers Health’s selling point is the data-driven technology that powers it. (Source: Techcrunch)
The last of the three largest Insurtech deals is Bright Health, based in Minneapolis. In April the company raised $80 million in funding from investors. It hasn’t registered a single client yet but is ready to launch in Colorado. Two of the largest traditional health insurance Companies are leaving the Colorado market in 2017, an opportunity for Bright Health. (Source: Denver Post).
Blockchain investments are gaining momentum
Three blockchain companies are listed in the top 30, ranked 12, 13 and 15. The companies are Circle Internet Financial, Digital Assets Holding and Blockstream. Their fundings add up to a $175 million in total. In 2015 it was 21 Inc that dominated blockchain investments by raising $111 million on its own.)
It is interesting to know Circle Internet Financial raised already $50 million in 2015 with the support of Goldman Sachs. Tom Jessop, managing director at Goldman Sachs’ Principal Strategic Investments Group, said the bank recognizes the need to invest in companies that “have the promise to transform global markets through technical innovation.” (source: Coindesk)
This kind of thinking is not exceptional. Many financial institutions are investing in fintech themselves or seek other ways to get connected to fintech companies. A lot of collaboration between corporates and startups, e.g. in the form of pilots, takes place in the fintech ecosystem. This gives doubts to the prevailing narrative that startups are to disrupt the financial industry. Maybe it is more about collaboration than we think.
Continue reading? I wrote a new blogpost as follow up, based on the report published in November 2016.