Could London’s status as the world’s leading hub for FinTech innovation and investment be under threat? Perhaps the more pertinent question is; does it matter?
It would seem to be the inescapable conclusion to be drawn from the latest set of FinTech funding figures released by CB Insights, in conjunction with KPMG, covering the second quarter of 2016. In terms of cold, hard numbers, in a two horse race, Germany leads the UK by $183m to $102m.
European VC investment into FinTech during Q2 2016 rose as a whole, from $303m in Q1 to $369m, but it was largely Germany, rather than the UK, that was responsible for the uptick.
The overall number of deals was down by 1 quarter on quarter, from 44 to 43, implying that average deal sizes have grown, although the share of seed deals actually increased to 37% of all deals, having dropped to 32% in Q1 16.
Series A deal share rose for the fourth consecutive quarter to account for just over one fifth of all deals.
The median early-stage deal size crept past $3m for the first time since Q2 ’15 when an unusually high number of Series A deals took place, pushing average deal size beyond $4m. The figure stood at $2.5m for Q1 ’16.
Overall median deal sizes increased to $5.6m from $4.5m in Q1, but this is still some way off the highs of Q2 and Q3 ’15 when the figure stood at more than $9m.
And the biggest deals of all, excepting Transferwise’s $23m Series D round raise in May, led by Baillie Gifford, and challenger bank Tandem’s $32m Series B, were to be found in Germany.
Finanzcheck, a consumer loans marketplace, raised $46m; N26, a German challenger bank and rival to Tandem, plus London-based challenger banks Mondo, Atom and Starling, stole a march with a $40m raise; AEVI, a cashless payments provider, raised $34m and iOS point-of-sale software provider Orderbird grabbed $23m.
The only other significant funding won by FinTech firms across the rest of Europe were French firm Lendix ($14m Series B) and Turkey based invest.com, who raised a $20m Series A.
In total, 14 FinTech deals were completed by German firms, 8 of which occurred in Berlin ($93.8m) and 2 in Munich ($7.8m) for a total of $186m, whilst in the UK, London bagged 11 of 13 deals ($93m raised) and in total raised $102m, some 80% less than in Germany.
So is London losing its grip on FinTech innovation – and to what extent is Brexit to blame?
“Without any doubt, there are uncertainties around Brexit, but with uncertainty comes opportunity”, says Patrick Imbach, head of KPMG Tech Growth for KPMG in the UK.
Amid the furore surrounding Brexit, the referendum result that seemingly nobody (or at least very few) within London’s tech and entrepreneurial community wanted, it is hard to tell what the impact of the UK’s decision to leave the EU has been; in the immediate aftermath of the vote it everybody seemed to know somebody who had had a VC deal scuppered thanks to the political and economic uncertainty surrounding the decision.
“Free from EU rules, it is in the UK’s power to establish its own regulatory framework designed to support and encourage the growth of FinTech companies and further cement London’s role as a global Fintech hub”, Imbach continues in a quote featured in the CB Insights / KPMG report.
This is certainly true; indeed, rumour has it that some UK FinTech firms had become frustrated by the amount of red tape and bureaucracy insisted upon by Brussels, particularly when it came to trading with countries outside of the EU, and were growing impatient for change.
Many influential voices within London’s tech scene have already begun to put Brexit behind them, encouraging businesses, and especially FinTech firms, to look to Asia, India, and Australia to make up for any trade deficit with Europe created by Brexit.
But there can be no doubt that, for the finance industry as a whole in the UK, the prospect of no longer being able to “passport” financial services into other EU countries and having to strike complex legal and technical deals with individual countries, is potentially an extremely damaging one indeed.
“Market access and the ability to passport services across the EU are hugely important for FinTechs, regardless of their origin or stage of development. Post-Brexit, maintaining a pro-business approach in Europe is critical and these issues will likely feature strongly in discussions between the EU and UK”, commented Anna Scally, Head of Technology Media and Telecommunications and FinTech Leader for KPMG in Ireland, also in the report.
What on the face of it looks like entirely healthy competition between 2 countries, the UK and Germany, and 2 cities, London and Berlin, for the right to call themselves the FinTech hub of Europe (in terms of investments, both lag Silicon Valley by a small matter of billions of dollars-worth of investment), takes on slightly more sinister overtones when we consider the worst implications of a badly managed Brexit – the potential wholesale collapse of London’s financial services industry.
But before we begin to panic, the initial signs post Brexit, both for FinTech in the UK, and the overall health of the UK economy, have been more encouraging than the doomsayers have predicted.
Several UK FinTech firms have raised funding in July; WeSwap raised £6.5m, Revolut raised £7.75m, and World Remit raised a gargantuan $45m.
As ever, and as we like to point out often here at the “HT”, quarterly reports have the potential to be misleading or give people the jitters unnecessarily – one big deal can skew an entire set of results. Last quarter’s Finanzcheck could be this quarter’s WorldRemit, edging London noses in front once again.
Speculating about trends is a dangerous game to play – whilst short to medium term trends tell us much, immediate and long term trends possibly tell us far more. VC investment is not systemic, but completed, or otherwise, on a deal by deal basis, and often turns a blind eye to politics.
It seems like we may be forever waiting for the next set of results, while deals of varying sizes happen all around us.