Off the back of a vibrant Fintech Week in London last week, SyndicateRoom’s CTO and co-founder, Tom Britton explores what those contemplating an investment in the space should consider
The former boss of Barclays Antony Jenkins has warned banks that they need to embrace fintech solutions or face their own Kodak moment as they become displaced and made redundant by new disruptive services. He’s betting on fintech being a massive hit.
It’s easy to understand why. KPMG reports that the first three months of 2017 saw $3,2bn invested into fintech business across 260 deals.
But for those thinking about investing in this sector, what should they be considering?
Is London still the best place for investing in fintech?
Torben Due, who invested online in fintech startup Squirrel, on our platform earlier this year, is based in Denmark. He is convinced that currently London is the financial capital of Europe and has the best talent and know-how and so diversifies his early-stage investments over to Britain’s capital. He adds:
“The Enterprise Investment Scheme also helps to incentivise local investors to invest in early-stage businesses.”
Francesca Durante has a more sceptical view after a fintech startup she was involved had to revise its business model and expansion plans following the Brexit vote. The uncertainty around passporting was deemed too great and undermined the scalability of the business. Francesca warns that fintech investors should be aware that Brexit could delay EU expansion plans.
“Frankfurt, Dublin and the Nordics could also easily become fintech hubs. It could take 12-15 months to obtain a banking licence in Norway. That could be a big pull for fast-moving entrepreneurs. But as it stands, London still has the best talent and best ideas.”
Big numbers and big ambitions
Fintech is attractive because of its scale and the big numbers involved. According to industry body CityUK, financial services account for 12% of the UK’s GDP.
With big numbers come big ambitions, and the key to meaningful scale is sufficient finance. Underfunding can really kill a business. Francesca adds, “You’re up against giants if you want to disrupt the banks. And while bootstrapping works in many industries, in fintech you’ll need serious funding to realise your ambition.” Investors should beware business plans that assume limited funding to get to scale and register as a threat to colossal banks.
One area of fintech that can require serious cash is compliance. “Many fintechs lure investors with business models that skirt outside of regulations,” comments Francesca, “but it will catch up and you will need to be authorised to operate or apply for a banking licence.” Those businesses will be stopped in their tracks or, in a best-case scenario, will need much more cash to comply and continue growing.
One example of an industry that is currently growing largely unregulated is cryptocurrency. Keen to profit from the dizzying growth of bitcoin and ethereum, and directed by ubiquitous online ads, investors are buying and selling digital currencies on trading platforms.
“I’m worried that some people will get burnt,” says Francesca. “My impression is that a number of investors entering this market don’t fully appreciate what they’re buying into. They think they’re buying Bitcoin when they’re buying a different currency in an ICO (initial coin offering). I think it’s only a matter of time before regulators require full disclosure or limit who can use these platforms.”
All this brings home the importance of investing in what you understand. But a little knowledge can be a dangerous thing. As Torben warns, “Just because you work in finance or have some knowledge on the subject, it doesn’t mean you understand fintech.”
It’s a wonderfully broad sector spanning equity crowdfunding, peer-to-peer (P2P), digital currencies, blockchain, regulation technology (regtech), insurance technology (insuretech) and more jargon terms than most people can begin to grasp. “Before investing in a fintech startup, investors need have some way to apply judgement to the business idea,” concludes Torben. One way to achieve that is to check who you’d be investing alongside. Do any of your co-investors have deep sector knowledge?
It was fantastic to see Fintech Week celebrate the growth of this extraordinary sector, and rightly so. For private investors looking to make investments in this space, it’s worth learning from peers. But to make money from it and back businesses that will make big banks have their kodak moment, you’ll need to be able to identify the hits from the hype.
Tom Britton, SyndicateRoom’s CTO and co-founder