fintech_white

Capital Pilot Sector Report:

Fintech

Financial Technology (Fintech for short) is certainly having a moment. This is especially true in London, the financial services capital of the world. With Brexit on the horizon, and an economy heavily reliant on financial services (representing 6.5% of the overall economic output), UK fintech startups are critical to maintaining relevance in this category.

Fortunately, the UK has some notable startups and scaleups (Monzo, Transferwise, Revolut) to point to as evidence to its ability to maintain relevance and leadership in this space.

puzzle-pieces

Introduction to UK Financial Technology

It is pretty simple really - fintech is where financial services meets emerging technologies. Often financial technology is really about new business models, value chains and ways of engaging users for companies born in a fully digital age.

Some examples include:

Peer to Peer

Perhaps one of the first innovations in financial services was the peer to peer model. Transatlantic startups like Funding Circle and Lending Club let people make loans directly to people or businesses without a bank being in the middle. Transferwise (the preeminent UK fintech startup) also fits into this category. By routing international payments to the recipient of an equivalent transfer going in the opposite direction, users avoid currency conversion and sending across borders.

Mobile first

Particularly annoying about legacy banking is the awful user experience - which is a problem banks born in the digital age are well placed to solve. Monzo and Revolut (a UK fintech unicorn as of this year) have a mobile first experience - there are no branches - meaning all the functions of the bank can be done via your phone. It’s great until you get the odd cheque and don’t know where to cash it...

Decentralisation/blockchain

A major issue in financial services (and most relationships) is trust - a problem Visa and Mastercard exist to solve. Blockchain and distributed ledger technology aims to disrupt (sorry) this space. Contracts between two parties are decentralised, distributed via a ledger stored on computers around the world (a process which consumes more energy than country of Ireland). There is a lot of bullshit here (read: initial coin offerings) but also lots of opportunity for a new financial system and beyond.

Equity Crowdfunding

Stemming from the success of platforms like Kickstarter, equity crowdfunding platforms allow lots of people to take small ownership stakes in startups. Seedrs and Crowdcube are the key UK players (and also serve as platforms for other fintech firms to fundraise). We remain sceptical on whether this form of funding fulfils its promises of the wisdom of the crowd finding the best opportunities - or if instead it is a platform that makes raising money off your existing customers, or friends and family easier.

Read Equity Crowdfunding: A Primer

Payments

Stripe is the dominant player in this space, with Braintree/PayPal in the mix as well. Stripe was the first to make it dead simple for internet businesses to take payments online. The future may lie in blockchain/distributed ledger technology to reduce transaction costs.

Artificial intelligence/machine learning

Less a category than a enabling technology, AI/ML is helping shape the future of financial technology and services - along with just about everything else in our daily lives. Whether it is using deep learning to make better predictions about economic trends, or chatbots solving basic customer service issues and helping with financial advice. AI and ML can serve as a critical technology-driver of nearly all fintech startups.

Legacy Improvements

It wasn’t like banks and financial services firms didn’t use technology before - we are all familiar with clunky legacy systems for managing our accounts online. There are lots of fintech firms aiming to partner with big banks to provide upgrades and improvements to legacy services - whether it be mobile banking to payments.

search

Marketplace at a Glance

UK Financial Technology Market between 2013 and 2017

£bn
raised in
rounds by
startups from
different funds

Biggest Rounds and Fundraisers

The most funds raised by a fintech startup between 2013 and 2017
Largest fintech rounds by amount raised between 2013 and 2017
Largest fintech rounds by valuation between 2013 and 2017
stairs

Stages, Round Size and Valuations

Seed

£k
average round at a
£m
valuation

Venture

£m
average round at a
£m
valuation

Growth

£m
average round at a
£m
valuation

Average round size and valuation between 2013 and 2017

Round Size to Valuation by Stage

Seed Stage
Venture Stage
Growth Stage
Total amount raised by fintech startups between 2013 and 2017

Round Size and Valuation by Stage

Seed Stage
Venture Stage
Growth Stage

Key Investors in Financial Technology

Top fintech investors by number of rounds between 2013 and 2017
Top fintech investors by amount invested between 2013 and 2017

Top Fintech Investors by Stage

Seed Stage

Number of rounds
Amount invested

Venture Stage

Number of rounds
Amount invested

Growth Stage

Number of rounds
Amount invested

Accelerators

%
of financial technology startups studied entered an accelerator

When They Attended

Seed

%
attended

Venture

%

Growth

%

Top Accelerators Attended

Top fintech accelerators for companies that raised between 2013 and 2017

How Attendance Impacts Valuations

Seed

£m
average valuation for those that attended an accelerator
£m
average valuation for those who didn't

Venture

£m
average valuation for those that attended an accelerator
£m
average valuation for those who didn't

Growth

£m
average valuation for those that attended an accelerator
£m
average valuation for those who didn't
research

What to Watch For

Here are the ten trends to look out for, according to CBInsights:

Data and Stages

We use Beauhurst data to generate these reports. They also produce a lot of interesting research on UK venture capital that is worth checking out.

To produce these reports, we use their definition of startup stages:

Seed

A youngish company with a small team, low valuation and funding received (low for its sector), uncertain product-market fit or just getting started with the process of getting regulatory approval. Funding likely to come from grant-awarding bodies, equity crowdfunding and business angels.

What a company might look like:

  • A one-year-old software company with three employees, product in private beta, £50k in funding and £200k pre-money valuation.
  • A three-year-old pharmaceuticals company in pre-clinical trials with £2m in funding and £4m pre-money valuation.

Venture

A company that has been around for a few years, has either got significant traction, technology or regulatory approval progression and funding received and valuation both in the millions. Funding likely to come from venture capital firms.

What a company might look like:

  • A hardware company with a first product out and some revenue.
  • A restaurant chain that expanded from one branch to five.

Growth

A company that has been around for 5+ years, has multiple offices or branches (often across the world), has either got substantial revenues, some profit, highly valuable technology or secured regulatory approval significant traction, technology or regulatory approval progression, funding received and valuation both in the millions. Funding likely to come from venture capital firms, corporates, asset management firms, mezzanine lenders.

What a company might look like:

  • A materials technology with lots of patents that counted multiple governments and defense companies as clients on multi-year contracts.
  • A manufacturing company with factories in 5 countries, millions in revenue and some profit.
research

Further Research