After a Massive Year, Fintech Leads the Pace of Change in VC

To say that last year was a busy one for fintech investors (and founders) is an understatement. The activity in our industry was unprecedented. Fintech companies raised $132 billion in 2021 and accounted for 21 percent of all venture dollars. Compared to 2020, the fintech sector grew by 169 percent.

At Anthemis too, we were busy, completing 90 transactions and ending the year with a celebration of our latest milestone — reaching $1.2 billion in AUM and raising $700 million in new capital.

Over 2021, we saw late stage investors getting into earlier stage deals and witnessed the rise of SPACs and multiple fintech IPOs. We heard more about our industry’s values in terms of diversity and saw first-hand which investors turned talk into action. Amidst all of this, we had a front-row seat to the transformation and opportunities created by embedded finance.

Now, as the dust settles and we have had a moment to reflect on what the year’s activity means for the fintech landscape, the next question, of course, is what can we expect in 2022? Some people may wonder whether we’re in another tech bubble (at Anthemis, we think not) and if the fintech industry can sustain its current pace. Here’s what we’re excited about in 2022:

Female founders will continue to receive a record amount of investment. 2021 numbers show that the fintech industry has increased its investment in women founders for the first time. By the end of the third quarter of 2021, female fintech founders in the US had raised more than $6 billion in venture capital. That’s a record by more than threefold, according to the All In report by Pitchbook. While this still represents a fraction of the total money invested, we’ve made a dent in the system. That’s the first step towards real change and parts of the industry are starting to get it. Anthemis’ work with its Female Innovators Lab in partnership with Barclays (FIL) provides a good example. Working with our partners, FIL founders are going from ideation to Series A in 12 months. The Lab is supporting founders on the basics of venture backable businesses — from hiring to operations to branding and marketing — so that they can thrive in the long term. We want to see female founders secure funding not just in the early stages, where most of the capital currently flows, but also in growth stages, to really drive systemic change. We need to keep the pressure on in 2022 as well as continue to hold each other accountable.

Embedded finance will become commonplace. The trend we’ve predicted for over a decade, and who’s name we coined in 2019, got a lot of attention and capital in 2021, with a three-times increase in investment in the category. Historically, payments and banking have led the way but, in 2022, I think we’ll see “x-as-a-service” emerge for every component of financial services. Anthemis portfolio companies such as Power, Atomic and Qover offer variations on this theme (credit, investment and insurance-as-a-service, respectively), and some of the more mature BaaS companies have also expanded into adjacent services. With so many financial services capabilities readily “embeddable” in other apps, I also think we’ll see a move towards more contextual finance, with more creative application and personalization of products and services. Reducing friction was the first step but, looking ahead, expect consumers to be increasingly offered hyper-contextualized and valuable financial products and experiences.

Community and authenticity will matter more than ever. With so much more choice in where and how to engage with financial services companies, we see distinct opportunities for community-based companies to continue to emerge. A more humanized, community-based experience will drive better engagement, connect customers and create deep trust while enabling these companies to provide services beyond what one-size-fits financial supermarkets have been able to accomplish. In short, who you bank or invest with will matter. At Anthemis, we’re already seeing this take hold in our portfolio companies like Daylight, which serves the LGBTQ+ community, and First Boulevard, which serves the Black American community. These brands deliver honest, authentic service offerings to meet the needs of historically underserved markets, and their stories are resonating.

Availability of capital and valuation aren’t the only things that will matter. With some of the biggest names in private equity and alternatives diving headfirst into early stage VC, pumping up valuations and pace, VCs have had to take stock of how to stay competitive. After going head-to-head successfully with some of these new entrants in 2021, the Anthemis team is confident that the company’s ability to offer hands-on domain expertise and operational support in key areas like recruitment, culture, product, technology and business development will continue to win us deals and accelerate our companies. Our most recent annual survey of portfolio company CEOs bore this out: 79 percent of our founders say that Anthemis is either their company’s most strategic value-add investor or in their top two.

Attracting and retaining talent will be as important as the ability to attract capital. The surge of digital transformation has increased the competition for roles across all organizations, with 69 percent of companies reporting talent shortages last year. That was the highest number in a decade. Additionally, we’ve seen unprecedented inflation in salaries in the last six months. This year, more capital — specifically “talent capital” — will be deployed to help companies attract and retain talent to scale organizations and remain competitive. Moreover, investors will be looking for companies to showcase solid plans for supporting their teams.

M&A activity will continue to be abundant. There has been a number of high profile M&A transactions in 2021. Whether it’s a large fintech player like Klarna looking to actively expand its product offerings and coverage with the acquisition of six separate companies or global incumbents players strategically entering new markets — like JPMorgan Chase acquiring Nutmeg — the trend seems to be here to stay. We expect Europe, in particular, to be the greatest contributor to M&A activity. For example, Mastercard and Visa recently entered the fray with two of the most significant acquisitions. The former acquired open-banking startup Tink for €1.8 billion and the latter acquired cross-border payments (and Anthemis portfolio company) CurrencyCloud for £700 million. We also predict a rise in smaller-scale M&A as the abundance of debt and equity gives rise to rollups and inorganic opportunities across the sector. While this won’t be for everyone, we expect that savvy smaller fintechs who can stretch their corporate development muscle and are good at integrating teams will start to see the value here.

SPAC and IPO activity will likely continue. 2021 was a record-breaking year for IPOs, with companies raising more than $315 billion in the public markets. More than half of this was from SPACs, including our recently sponsored, women-led SPAC, Anthemis Digital Acquisitions I Corp (Nasdaq ADALU). Fintech alone saw 37 companies go to IPO. And this is only the beginning. While it’s likely that we will see fewer B2C companies accessing the public market this year, the growth of the fintech category generally has provided a strong appetite for companies in the sector. Expect to see more B2B fintechs go public. And the flexibility provided through the SPAC vehicle makes it an obvious choice for solid companies looking to grow. SPAC sponsors with credible reputations and experience who are looking for true partnerships will lead the way over celebrity and out-of-touch teams.

Regulators and lawmakers will advance regulation. The explosion of business models and technologies has gone beyond the capabilities of existing regulatory regimes. We recognize that this is a part of the financial services disruption. I may be overly optimistic, but I think we’ll start to see some regulatory breakthroughs and clarity on important themes in 2022, and that some of the issues that put regulators on the back foot in 2021 — such as stablecoins, BNPL and DAOs — will receive more regulatory clarity through rule-writing in 2022.

With all that has happened to bring the fintech sector front and center in 2021, it would be easy to be daunted by the pace and momentum in the market. But, at Anthemis, we are doubling down on our thesis for the reinvention of the financial system and we are proudly accepting the responsibility that comes with being an early and leading voice in the evolution of our industry. As 2022 begins, we look forward to stewarding our financial, human and intellectual capital and resources in the service of this exciting, robust and resilient world to come.

For more insights, view our end-of-year recap webinar or, to get in touch with us, send an email to ecosystemteam@anthemis.com.