Covid-19 may be having an adverse impact on venture capital investment in fintech, but Steve Sloane of Menlo ventures maintains a bullish outlook, forecasting that the sector will drive some of the biggest VC exits in the next five years.
In an op/ed
for Venture Beat, Sloane points to some of the bigger fintech deals of recent times, such as Visa's take-over of Plaid and Intuit's $7 billion splurge on Credit Karma.
"While the category has heated up quickly, the sheer size of the fintech opportunity suggests that these exits are just the tip of the iceberg," he says. "In 2019, US fintech businesses raised $17.6 billion while revenue for the top four US banks alone hit $461 billion! By that measure, fintech is not yet overinvested."
Sloane dissects the markets being addressed by fintech upstarts, from capital markets to payments, and acknowledges that it is not easy to disrupt incumbents.
"A combination of regulatory hurdles, entrenched behavior, low risk-tolerance, and the benefits of larger balance sheets have kept upstarts at bay for decades.
"However, as venture capital supports the ecosystem, modern technology creeps into the sector (cloud, APIs), connectivity and data exchanges improve, and consumers grow tired of incumbents, the tide continues to shift."
This shift and the challenge to the status quo by fintech upstarts will have lasting effects, he forecasts.
"Even when incumbents acquire their biggest disruptors, such as Visa’s acquisition of Plaid, innovations pioneered by those startups become integrated into the system and help move the industry forward. And it also leaves room for the next challenger to stake their claim.
"While I don’t expect a wholesale disruption of the ecosystem anytime soon, if VC-backed disruptors can bite off even a fraction of the value now owned by legacy business, returns would easily eclipse all other sectors of venture capital."
A new report released by KMPG today suggests that UK fintech startups would need to raise £825m to achieve 18 months of funding runway for every firm to see out the pandemic.
The report - which estimates a ten-year time horizon for profitable exits - finds that investors are indeed taking a longer-term view, whist fintechs refocus on resilience rather than scale in the wake of the pandemic.
The sector, estimated to be valued at $48.5bn, is still providing attractive investor returns on paper, states KPMG, particularly for early stage investors. The report shows that the median internal rate of return (IRR) on paper for first round investors, is 71%. Paytech, particularly, is thriving with a median IRR of 98%, exemplifying the rising demand for fintechs offering payments processing and open banking.
Anton Ruddenklau, global co-head, KPMG Fintech said: “Covid-19 is sharpening the minds of the entire fintech ecosystem when thinking about what makes a thriving and sustainable sector. For the fintech firms that are truly transformative with their business models, the path to profitability at scale is still likely to be 10 years plus, and for these firms to remain competitive they will need to be systemically important. Nonetheless, patient capital must be found, and now more than ever institutional investors need investment data to support their participation.”