Innovate Finance | Rolf Merchant | Jul 27, 2020
It will come as no surprise given the dramatic economic slowdown that UK FinTech Venture Capital investment has taken a hit in recent months. The number of deals and total capital raised in the first half of the year were clearly down compared to the same period in 2019.
However, the investors and FinTechs we spoke to were upbeat despite the challenging business environment, highlighting the opportunities for investors and the avenues for growth for many FinTech companies. Moreover, investment in H1 2020 was actually up on the previous six months.
Many smaller startups are on short runways and will need capital injections before the year is up – as shown in our June survey. The reduction in smaller deals at seed level reflects the lack of capital deployed to these early-stage startups since COVID-19 struck.
When we looked at the Q1 data at the end of April, we were in the depths of the public health crisis caused by Coronavirus. How big the impact would be on business was a huge unknown. Now, in July, the scale of the economic impact of the pandemic is now becoming clearer by the day.
Virtually every part of the UK economy has been impacted. Business investment has dropped across the board – FinTech has been no exception.
This is borne out in the data. In H1 2020, $1.84 billion was invested into 167 FinTech companies in the UK.
This compares to $3 billion invested into 263 startups in the first half of 2019, representing a 39% drop in capital invested.
The figure for the first six months of 2020 is actually up on H2 2019, when funding totalled $1.5 bn into 214 FinTechs.
Drilling down a bit further, we see that four “mega deals” over $100 million drove much of the investment activity in the first half of this year. Investments into Revolut, Checkout.com, Starling Bank and Onfido represent 47% of the total capital raised.
There were another eight deals ranging between $20 to $100 million, representing a quarter of investment. At the smaller end, there were 35 deals in the $5 – $20 million bracket, totalling $376 million or 20% of overall capital investment. A further 87 deals, worth less than $5 million each, make up the rest.
To gain some insight to those on the front line of UK FinTech investment, we spoke to investors in the sector, and some of the companies that closed deals in this period.
The view of the investors we talked to is best characterised as one of cautious optimism.
Jay Wilson, Investment Manager at Albion VC considered the macroeconomic landscape: “We are still to fully understand the economic impact of COVID-19, but short of a long and deep recession which governments are trying everything to avoid, funding will likely continue to flow.”
Global interest in FinTech remains high according to Kevin Chong from Outward VC. His discussions with big-ticket investors showed that “appetite and investment capacity for fintech has not been diminished by COVID-19.”
“Anecdotally it very much feels we are back to firing on all cylinders,” added Jay Wilson, “deal activity is happening at all stages of the funnel.”
Moving to the “new normal” and shifting away from the office was straightforward enough for FinTech businesses.
Modulr Finance, which raised £18.9m in May, had no trouble shifting its operations. CFO Chris Brooks said “the transition to remote working was seamless as you’d expect from a digital FinTech.” Martyn James, Managing Director of ETFS Capital agreed, adding that “these are small, highly innovative, fast moving tech-driven firms that pivoted to home working and virtual teams pretty seamlessly. In some cases it’s how they operated already.”
Some are seeing opportunities in the shifts to life and work that Coronavirus has brought. Alex Cardona, COO of Codat, which raised $10m in June, thought some FinTechs have thrived despite the impact of the pandemic. “Consumers and businesses alike turn to more digitized processes,” said Alex, “creating an environment in which agile digital financial service providers have increasingly been seen as the optimal solution.”