The UK’s fintech industry is booming, but is VC funding just going to the big few or are there opportunities for the brave, innovative and new?
Someone with a lot of experience helping fintechs secure funding is Aman Behzad, the founder and managing partner of fintech-focused corporate finance advisory firm, Royal Park Partners. Aman is a corporate finance professional having worked in the space for over 15 years, starting his banking career and interest in fintech at Citigroup.
Here he outlines some of his concerns with regards to the lack of depth of the VC funding market In the UK with most funding pouring into a handful of well-established or well-backed names
The fintech industry has continued to grow at pace despite the pandemic. This is especially true for later-stage fintech businesses offering digital solutions that help consumers manage the effects of the pandemic. We’ve seen companies such as Klarna double their valuations as consumers look for more flexible and affordable payment options to see them through. Klarna, as an established fintech category leader, will never struggle to raise capital, newer start-ups however aren’t getting the same opportunities to secure funding.
The pandemic has driven investors to become even more cautious, shunning Seed, Series A and even Series B investments in favour of later-stage companies. More mature businesses on the continent are also attracting UK investor capital that would otherwise have gone to supporting earlier stage UK businesses. It’s worth noting that the businesses that do manage to successfully secure streams of funding are typically those that manage to find backing early on from high-profile investors. Businesses that do not, face a much more perilous journey to scaling.
It is well-known that early-stage fintech businesses in Europe don’t have much room for error. The VC industry in Europe is generally more risk-averse than in the US, so signs that a company’s fortunes may be wavering are that much more detrimental to the ability to raise further funding. By and large, US-based businesses are able to perform multiple pivots that enable them to find the right product-market fit or leadership configuration before investors start losing their appetite. This continuous process of ‘creative reconfiguration’ introduces newer ideas that grow into the fintech category leaders of tomorrow. This kind of leeway can only be supported by very deep VC funding markets.
London still attracts the largest proportion of VC funding in Europe and it is imperative that we build on our successes in nurturing fintech businesses and work to grow our dominance globally – the most significant ingredients to this are maintaining a favourable regulatory environment and deep pockets of VC funding. The current environment provides a vast array of opportunities that our indigenous fintech businesses can capitalise on. In years to come however, London could start falling behind other major cities if we fail to aggressively grow our pool of venture capital funding.
Government policy and regulation will play a major role. The UK government has many initiatives in place to support early-stage fintechs as well as consultation groups looking to create a more favourable environment. More investment is needed in these types of initiatives to support the big fintechs of tomorrow.
It should also be noted that successful exits of fintech businesses once at scale creates its own fly-wheel effect: investors see the potential that UK-based companies have at achieving great scale, they then have more confidence in investing. Once a sale takes place, the entrepreneurs and funds that Invested, go on to recycle their capital and re-seed the market. Multibillion-dollar fintech exits in the US have driven the creation and funding of thousands of fintech businesses. For example, the sale of PayPal to eBay almost two decades ago created significant sums of money for the founders and early employees to spin out with and create new business ventures.
The UK remains a major fintech hub on the global stage; this is likely to continue at least in the short term. But to protect the long-term growth of Britain’s fintech industry we must not get complacent and ensure that we remain actively engaged in supporting our founders and start-ups through providing access to more capital through more VC funds.