FinTech has been variously described as the saviour of London’s startup scene, the industry that will finally put paid to the hegemony of the traditional high street and investment banking industries, and a bubble that is in serious danger of falling under the wheels of its own overhyped bandwagon.
The facts are that after London was hit hardest by the global banking crisis, losing its place as the world’s leading financial hub to New York City for the first time last year, the capital has increasingly turned towards FinTech to showcase the fact that it is still fighting hard to maintain an edge over its rivals as the most innovative, efficient and lucrative destination for financial services.
In reality, Silicon Valley still leads the way; 32% of all FinTech financing takes place there, whereas the whole of Europe accounts for just 15%, but the landscape is shifting. Over the past 5 years The UK and Ireland’s share of the pie has grown by 51% and last year London FinTech firms received more than £342m in funding, a threefold increase on 2013 and over half of all Europe wide investment.
Compared to the US, London’s regulatory laws, which were revamped as recently as 2000 whilst the American system has remained largely untampered with since the 1930’s, allow for greater flexibility and increased innovation and disruption, perfect conditions under which FinTech firms can flourish. The money keeps rolling in: Santander launched a £63m investment fund last year, Travelex have £25m to spend, whilst recent startups Nutmeg, Transferwise and Currency Cloud have all recently netted multi million dollar funding rounds. Still, these figures are dwarfed by the activities of major banks, and series B and C rounds are a rarity in London, but common in the Valley. So the question remains, how much more disruptive can the London FinTech scene get?
Who better to debate these issues than a panel comprising of serial FinTech entrepreneur, founder of Ixaris, a £300m turnover compliance and payments SaaS business and CEO of Kwanji, William Lorenz, James Tuckett, a first time founder of InvestUp, a one stop shop for Crowdfunding, Damien Lane of Episode 1, investors into software companies, and Nic Brisbourne, managing partner at Forward Partners, a specialist investment firm providing seed capital for early stage businesses?
The panel was intelligently curated and the evening put together by Dreamstake founders Paul Dowling and Marina Atarova. Dreamstake is a leading platform for startups that uses a scoring algorithm to determine investment readiness, whilst running an academy and events aimed at helping founders learn from industry veterans and investors and promote themselves. Dreamstake also runs the HoxTech Angels evenings on the third Monday of each month, showcasing hot new startups to Angel investors looking to invest as part of a syndicate.
As well as the panellists, several startups set up stalls at Google Campus to give live demos of their products, listen to feedback and discuss funding requirements. tibdit, the micropayments “tibbing” service powered by Bitcoin, wikibudgets, a financial infographic service that can visually map complex budget spending patterns, and Winebourse.com, an alternative exchange platform for the wine trade, are all examples of companies that are on The FinTech radar, and clearly differentiated with the potential to scale rapidly.
Lets look at some of what the panellists had to say during what was an entertaining and at times controversial and emotionally charged debate. Potted highlights here only, I’m afraid, for a fuller and more immersive experience we highly recommend attending a Dreamstake workshop or Academy event!
Paul kicked things off by asking panellists to try to separate FinTech myth from the reality. The FinTech markets are hot, but is the current upward investment trajectory sustainable in the long term?
Nic: it all depends which aspects of FinTech you are talking about; software that is chiefly designed and developed for use by investment bank back offices, for example, is nothing new. These kinds of firm were also active at the turn of the century, but to build the systems requires a deep and longstanding understanding of how the banking industry operates, insight that many modern FinTech founders do not possess. At Forward Partners, Nic’s focus has shifted towards B2C businesses; currency exchange and mobile payments, for example, where disruption of traditional retail banking operations is rife.
Damien: the sector is incredibly busy right now, but, as with any other startup ecosystem, only a few companies stand a realistic chance of “scaling up”. Episode 1 have looked at 5 or so investment opportunities in the past few weeks and noted the depth of competition in almost every space they have looked at closely. Another obstacle to success are the lengthy sales cycles associated with dealing with very large financial institutions. Firms selling into these kind of enterprises are looking at 18 month cycles and this makes it very hard to bridge any funding gaps, and very easy to slip off the funding runway.
Will: at Kwanji we have recently released a taster to re-engage with investors and clients: the sector moves so quickly we felt we had to! There is a great deal of hype around FinTech, a lot of it unjustified; we’re stepping back and re-evaluating. Ultimately to win investment in such a crowded, albeit innovative space, you have to be demonstrating serious revenue traction. You also need to be speaking with investors who understand what you are trying to do, rather than looking for a quick win while the market is hot.
James: FinTech is not over-hyped, there is a revolution going on! There are plenty of opportunities, and what we may be about to see is valuations that go way beyond the £4-5m mark. Ironically, it is the American investors who really get it, and seem to be capable of making big calls quite speedily. There is more focus than ever on the industry, and yet it is getting harder to succeed.
Nic: dominant financial services providers currently have horrible digital infrastructure, it is hard to say how terrible and out of date they are without swearing! IT Projects at major banks swallow huge sums of money, more than £1m per day in some cases. That’s why you have so much hype around FinTech, but it is getting tougher to find a way in.
James: banks are stifled, from global service providers, to retail, to commercial, FinTech startups are nibbling away at their profits and services and it’s having a tangible effect.
Paul (to Will): what differences have you noticed running a FinTech startup the second time around?
Will: it’s starting from scratch all over again, but one aspect that remains the same, it’s often not what you know, it’s who you know. There is so much noise in today’s environment, and there a lot more highly valued FinTech companies today than there were a few years back.
Nic: one of the most crucial things you must do if you are speaking with an investor is you must paint a very clear and persuasive picture of where the world is heading, and you must show how your business is going to take advantage of that and be the winner in its particular sector.
James: our platform has been live for just over 2 months. Winning investment is about understanding that to an extent you are in a beauty parade; you need to be in the press and you need to be being talked about. It’s a wonderful meritocracy!
(On accelerators): it’s a tough decision. It can work very well for a young team. We had a very good experience and we learnt a lot, but we also had the impression that others did not benefit in the same way that we did. It’s a judgment call for every company.
Nic: what an accelerator can help you to do is to build very valued relationships quickly.
Paul: corporate sponsored accelerators go against the grain of good startup practise in some ways. For a start-up purist, you don’t want to be giving a large chunk of your equity to a major corporate before you have even begun. Equally, the temptation to do so and the synergies are obvious. (To Damien): what is your stance on FinTech investing, do you feel reluctant to invest at this time or is your firm proactively looking to get deals done?
Damien: what we are waiting on is finding a team that has what we would term “an unfair advantage”, either in terms of staff, business model or market opportunity. We’re not interested in a business that is turning over 2 or 3k each month and thinks that’s a compelling argument for investment. It’s the entrepreneurs responsibility to persuade us that we can make 30x our investment!
What you have currently is a situation where there is a bucketload of ex-lawyers, accountants, and investment bankers who have literally millions to spend on growing companies and have a clear empathy with FinTech because of their career backgrounds. It’s hard to compete with that, and especially hard when they are rushing into deals on a wing and a prayer rather than because their due diligence suggests it would be a good idea. We are valuation sensitive rather than valuation agnostic and happy to wait for the right opportunity.
Paul: without putting you all on the spot, can you predict what the next major FinTech trends will be?
Nic: it’s likely to continue to be around the unbundling of banking services: reducing transaction costs on credit cards; mobile payments and international payments will be hot for years to come, for example. Also the insurance sector is an interesting area which to date has been largely untouched. We may well see developments in that area as well as the pricing of risk.
Will: I take a slightly contrary view to Nic regarding international remittances, is it really a trend or a blip on the backside of a bank?
James: I’m looking through a Crowdfunding lens of course and I see only good things here, however I agree with Nic in that the disruption of insurance services will be big, and you can expect other traditional industries, pension funds etc. to follow suit. The likes of Nutmeg have shown what is possible when providing a digital alternative to what was once a face to face industry.
Fewer retail investors are interested in working with brokers than ever before. The same is happening around Crowdfunding, we are seeing the democratisation of investing habits. A word of warning, however, crowdfunders often invest for emotional reasons, and the FCA may find it increasingly challenging to have to deal with disgruntled investors who have lost money. Many, who probably knew exactly what they were doing when they invested, will claim they invested without being fully aware of the risks. That will be a major headache for the FCA.
Nic: the regulator will be forced to step in sooner or later particularly when there are so many issues at stake.
Will: Crowdfunding is not just about the money of course, it’s as much to do with the exposure you can achieve.
Paul: do you think we will see the emergence of Bitcoin related services in a big way in the near future?
Nic: we’ll do 10 or 12 investments perhaps in the next 2 years, and a couple of them will probably be to do with Bitcoin or the block chain.
Damien: in the next 18 months, it’s very unlikely for us. We need to be sufficiently confident in Bitcoin and its associated services and that is not the case yet.
Will: The Blockchain as things stand, it’s just a transmission mechanism at the moment. It’s hard to be genuinely excited about its potential.
(Question from audience) is there any stigma attached to those looking to raise Series A who used Crowdfunding for their seed funding, and what advice do you have when dealing with investors?
Nic / Damien: no stigma attached to Crowdfunding as far as we are concerned.
James: talk to investors as if you, and they, are normal people! You’d be amazed at how much simpler things become.
Will: seize the moment! As a company, you rarely get more enthusiastic as time goes on, so harness that early optimism and put it to good use!
We hope that has given you a taster of what was a fascinating evening with a good crowd and, a rare sight at events these days, some liquid refreshment! For more details on Dreamstake visit the website, and to register for Hox Tech Angels please follow this link.