Decline in Global VC Fintech Investment Continues in Q3-2016

Image Credit: Giles Douglas, Flickr

This week a new “Pulse of Fintech” report, the quarterly analysis of global venture capitalist trends in the fintech sector, was published by KPMG and CB Insights. In a previous blogpost I already took a closer look at the largest global VC fintech deals in Q2-2016, based on “Pulse of Fintech” report, that was published in August 2016.

In the present blogpost I will compare the figures of the new Q3-2016 report with Q2-2016. In my comparison I focus on the graphic with the top 30 deals to VC-backed fintech companies that you can find on p. 14 of the Q3 report (see below).

schermafdruk-2016-11-21-23-06-59The top 30 of VC backed deals account for 60% of overall fintech investments

The top 30 deals in Q3 totaled over $1,75 billion in funding, being approx. 72% of the total of VC funding ($2,4 billion). In total 178 deals were closed. When we exclude the top 30 deals, the average deal size is less than $ 5 million. The average deal size of the top 30 deals is approx. $ 60 million.

The overall fintech investments (VC backed and private fundraising) totaled $2,9 billion. So the $1,75 billion of top 30 deals accounts for 60% of overall fintech investments.

Drop in mega rounds continues in Q3

In Q3-2016 there were only 5 deals that exceed $50 million in funding. This illustrates the serious drop in mega rounds that already started in Q2 and has continued in Q3. The decline appears in both US and Asia. As far as Europe is concerned: it  has not seen a registered $50+ million  round to a VC-backed fintech company at all this year.

Sharp decline in lending tech activity (online lending)

The decline in lending tech activity in Q3 was foreseeable.  At the beginning of 2016 Chinese investments in online lending companies dominated the fintech sector: the top 5 of megadeals consisted of Chinese online lending platforms, getting $2,7 billion of funding. However, online lending in China is troubling with collapses and fraud since then. This resulted in stricter rules by the Chinese government for online lending companies that are causing challenges for companies to comply. As a consequence private equity and venture capital deals are causing challenges too.

Despite these challenges it is still an online lender from China, Qufenqi that ranks first in the top 30 with a deal volume of $449 million. Second is Chinese U51.com, also known as 51Xinyongka,  a credit card and online financial services mobile app with $310 million being raised. Number three on the list of top deals is also a Chinese online lending company: Firstp22 raised $70 million in Q3-2016.

Global investment in payment tech stabilizes 

In Q4-2015 there was a sharp decline in investments in payment tech when compared to Q3-2015. This continued in the first half year of 2016. However, in Q3-2016 there was a recovery due to investments in Asia.

“It is interesting to watch global fintech trends and observe the ‘wave’ of investor interest move across the world. Payments were very hot in the US and then Europe in 2015. In 2016, we are seeing significant investment in payments in Asia”, says Anna Scally (KPMG Ireland). 

Despite the raise of payment tech in Asia, the list of the top deals in payment tech in 2016 is still headed by two US based companies, Affirm ($100 million) and Stone Eagle ($67 million). Both deals were realized in the first half of 2016. One97, based in India, ranks third with $60 million raised in Q3.

Fall back from insurtech investments

Q1-2016 saw some megadeals with US based insurtech companies. However, these investments can not be separated from the overhaul of the health care sector by the Affordable Care Act, known as Obamacare. Oscar Health, the insurance company that raised $400 million in Q1, announced in August that it will reevaluate its approach to Obamacare after suffering significant losses. No new megadeals saw the light since Q1. Metromile and Cyence (both based in the US) were the top insurtech deals in Q3, with $50 respectively $40 million being raised.

Fall back from VC backed investments in blockchain as well

In Q3 Ripple raised the largest funding ($55 million) as a blockchain company. The second largest investment in Q3 amounted $10,5 million (Coinbase). Brave Software ranks third with $4,5 million.  (In the first half year the top three existed of $55+ million round deals with blockchain companies, namely: Circle, Digital Asset Holdings and Blockstream.)

VC-specific funding isn’t expected to exceed 2015’s peak investment levels

However total funding to fintech companies is on track to exceed 2015 totals, mostly because the Q2-16 overall fintech funding was buoyed by a $4.5B investment to Alipay owner Ant Financial.

schermafdruk-2016-11-22-00-56-56

The rise of Big Tech

Despite the decline in VC specific fintech funding, there is still a lot going on in the fintech ecosystem. However it seems that the real fintech threat isn’t from startups. There is a much bigger challenge looming for financial institutions from the well-established tech giants like Amazon, Google, Apple and Alibaba. Last not but least, banks & financial institutions like Mastercard en Visa are making progress themselves too with all sort of projects. A good example is the R3 consortium were more than 70 large international banks collaborate on blockchain technology.