The UK fintech boom: why now is the time to scale-up your fintech business
Earlier this year, reports revealed that record levels of fintech investment had been seen in the UK since February 2018, reaching an all-time high of £2.6bn. The fintech sector itself is still relatively young, but as this industry matures, the trends and patterns in investment are inevitably set to change as companies look to scale up their businesses.
by Jonathan Dawson, Senior Manager, haysmacintyre
Supply and demand
Typically, investment in a particular industry is driven by the attitudes of those investing. When institutional, venture capitalist, high net worth and private equity investors see value in a sector, we then tend to see a trend towards increased investment in these industries, at all levels.
However, these increased levels of investment in the UK fintech sector over the past 12 months are likely to have been driven by the investees rather than the investors. The appetite from investors to secure equity in high growth and high potential technology businesses has been present for years. What we’re seeing now is more businesses with a viable product and a ‘go to market strategy’.
This is piquing the interest of mature investors, who have perhaps taken small stakes in these growth companies at an early stage, but are now willing to invest more significantly as we see companies like Monzo raising £85m in their Series E fundraise. As the 13th member of the UK’s ‘Unicorn Club’, they join the likes of Revolut, Transferwise and Funding Circle, in a list dominated by fintech companies.
As the fintech sector matures, we’re seeing businesses reach a level in their lifecycle where their value is more apparent. Within the sector, we have seen a track record of businesses publicly listing and others selling to financial institutions at multiples of more than 20 times their revenue. Significantly, we’ve seen companies turn ideas into reality, which as a result is attracting more conservative investors to the party.
Everyone wants a slice of the fintech pie
Crowdfunding has become a common method of fundraising over the last five years, and there is little doubt that this will continue to be the case in the future, continuing to allow individuals to invest in unlisted companies. Continued developments in investment interest are to be expected in 2019, with some crowdfunded companies providing a profitable exit opportunity to original investors by going through an initial public offering or other exit events.
Most fintech companies have been referred to as ‘start-ups’ with the focus being on the product, scaling application and network, as opposed to profits. There are now more sufficiently developed companies with investors and management teams focused on profits, which will likely lead to further successful exit events in 2019.
The value is in the network
In late 2018 when Monzo raised on a valuation of five hundred times revenue, it was clear that the business wasn’t being valued on its revenue, or indeed on the £33m loss it suffered in the prior year. There are many different techniques used when valuing a company, and in the last few years we’ve seen some of the more traditional methods being replaced by modern techniques, such as the ‘network effect’. Fintech companies are rarely only valued on revenues, profits or assets alone: investors are far more interested in the size of the network that the ‘solution’ is available to.
The ‘network effect’ is likely to become more important in the coming years as we see rapid developments in cryptoassets, augmented reality and artificial intelligence. Investors are aware of the power of these technologies, even if they are yet to understand the applications.
Over the last five years, the UK fintech industry has broken countless records. The sector is now valued at over £20 billion in annual revenues, and in the first six months of 2018 raised investment of £13 billion, accounting for over half of Europe’s total investment in the sector.
Many of these companies that raised money in 2018 didn’t exist five years ago, which is driving a premium on companies in the sector: investors know that the start-ups of today could be the record-breaking statistic of the future.
With Brexit looming it’s difficult to predict investment trends in 2019, although a quiet start to the year is to be expected as we ride through the initial uncertainty. Whilst Theresa May battles it out in Westminster, fintech companies in the financial centre of London are far from slowing down, with innovations in technology and the growth of feasible products continuing to be developed in the sector.
Fintech as an ecosystem
There doesn’t seem to be a universal definition of ‘fintech’, although it’s widely accepted as any products, services or solutions within the financial services sector, that aim to be more efficient, user-friendly, automated or transparent through the use of technology. What was perhaps once seen as a sub-sector of tech, fintech is now being widely accepted as a sector in its own right, encompassing many other sub-sectors.
We’ve seen dramatic growth in the use of ‘regtech’ which is often considered a sub-set of fintech. First defined by the FCA in 2015, this sub-set saw huge developments in 2018, with rapid improvements being made in the processes surrounding KYC, anti-money laundering, compliance and risk mitigation. Financial institutions are adopting these products and services in the hope that they can stay one step ahead of the regulators. Regtech is still considered to be in its infancy but recent studies suggest regtech will make up more than 30% of all regulatory spend by 2020. In a world where the annual compliance spend by financial institutions is estimated to be £200bn, regtech could play a huge part in the growth of fintech in 2019.
Regtech is only a small part of the fintech ecosystem. Robo-advisors, mobile banking, smart lending and blockchain are other sub-sectors that are anticipated to make significant progress in 2019. All of these areas are rapidly improving their technologies and are starting to introduce applications and solutions to the market.
Despite the UK’s future uncertainties, the fintech sector is booming. Whilst it is still a relatively new industry, continued technological developments will maintain peaked interest from investors, be this from crowdfunding or mature investment. Fintech start-ups that are looking to progress to the next stage should consider their ‘go to market strategy’, as well as the feasibility and potential network of their product, in order to appeal to more mature investment.