2017 Fintech investment lanscape in Canada

The global fintech industry is exhibiting strong growth momentum, and global Fintech Venture Capital financing has hit a new record in 2017, with $16.5bn invested in 1,128 deals. North America accounted for 47% of this total investment¹.

Canada is experiencing a similar trend with 2017 VC fintech investment breaking new records. Specifically, there was US $456M invested in 37 fintech deals², representing 17% of the total VC investment in Canada, a 300% increase from 2012 (CAGR of 16.7% over the period).

The FIRE sector (finance, insurance, real estate, rental and leasing) has historically been a strategically important sector for Canada, representing 20%³ of our GDP. As Fintech investors, we believe this sector could be at risk of disruption from abroad. Global companies are adopting technologies that allow them to expand across borders and to overcome barriers of entry into new markets. Of course there remains significant hurdles such as regulations, language and cultural differences for foreign financial institutions (FI) to overcome in order to successfully enter Canada but, overall these barriers, aided by new technologies, are coming down!

At Impression Ventures, it is our mission to promote and support canadian innovations in Fintech. Canadian financial services companies, lead by our banks, are revered as global leaders. We believe that in order to maintain this global leadership, Canadian FIs must encourage and adopt Canadian Fintech innovations in order to facilitate their expansion and dominance to other geographies. Afterall, a great offence is the best defense.

Fortunately, we continue to see very strong Canadian Fintech deal-flow and are generally very optimistic about the state of Canadian innovation within financial services. The facts speak for themselves! In 2017 alone, we’ve reviewed over 150 Fintech startups, a level that is consistent with the trend described in the opening paragraph of this article. Furthermore, we’ve reviewed over 500 fintech startups since the inception of Impression Ventures.

Due to this strong deal-flow and our bias towards building a concentrated portfolio we’ve made 3 very promising investments in 2017: Finaeo (life insurance), Symend (credit recovery), and Goose Insurance (travel insurance). All three of these portfolio companies were founded in 2016 or 2017.

We believe our deal flow will remain healthy and in fact may even accelerate due to the following two trends:

• First, there is a growing desire by VC firms to fund later stage investments in maturing Fintech firms. Not so for us. We are Fintech seed investors and as such, are often the first institutional investors that a fintech startup contacts. As more VCs migrate to later stage financing rounds, we are staying put! We believe that aside from providing capital, our experience and network of advisors can help guide our companies through the challenges they face early on.
• Second, despite rising interest in Fintech investments globally, there remains only a limited number of dedicated VCs in the space in North America. In fact, we estimate that there are only 4 in Canada and 45 in North America. It’s interesting to note that of the over 900 active VC funds in the US, only approximately 40 declare themselves as Fintech-Only funds.

As a result of the trends above and given similar patterns in the US, we have observed an uptick in our US deal flow. We keep a close eye on the fintech startup activity in the US and, prior to making any investment, perform an in depth analysis of the North American landscape. Given our return expectations, it is necessary for us to invest in businesses that will not only be competitive in the Canadian market but, also be able to scale into the US market and beyond.

Our database now includes almost a thousand opportunities many of which that we mentor, monitor, and update regularly. We often revisit opportunities within our database as new information becomes available and as the companies progress, pivot or evolve from their original premise. We actively monitor segments of the financial services industry where we believe technology should and will play a significant role in the future. Below are a few examples:

Capital Markets: While there has been substantial innovation capital invested in the space, there remains several areas within CM that have been refractory to new technologies. Specifically, we believe there is room for tech enabled disruption in the fixed income markets as well as in the Investment Banking space.

Insurance: in almost all areas of the insurance sector significant friction still exists between the manufacturers of insurance products and their consumers. This friction is typically in the form of middle men that are slow to or simply refuse to adopt new technologies that can meaningfully reduce costs and improve the experience for the final customer.

Regtech: Financial institutions regulatory burden and compliance costs continue to rise. Thus far, FIs have dealt with this burden by adding human capital to their businesses and this has created an imbalance between revenue generating and non-revenue generating headcounts. Technology such as ML and AI can play an important role in offsetting these costs by automating some of the regulatory and surveillance tasks.

We also believe there are a tremendous number of opportunities still to come from regulatory changes. In fact, Europe with its implementation of PSD2 and open banking earlier this year is leading the way. These new regulations, inspired by the belief that every consumer is the sole owner of his/hers financial information, are likely to empower completely new ways of banking. In fact, this concept often reminds us of the freedom telecom consumer obtained through number portability. This rule alone allowed consumer to change telecom providers without the hassle of losing their original phone number.

Regulatory changes matter. Consider that in the UK alone since 2012 there have been over 25 new banking licenses granted to so called “Challenger Banks” a fancy term for a new breed of tech enabled financial institutions. Compare this to the handful of licenses granted in the previous 50 years. As a result, Europe, lead by the UK, has indeed experienced the highest global Fintech investment growth last year, both in terms of amount invested, +121% between 2016 and 2017, and in terms of deals, going from 137 in 2016 to 190 in 2017⁴.

Soon enough, Canada and the US will follow these regulatory innovations which will unlock additional innovation potential. We expect that the financial services industry is on the cusp of a considerable transformation in the coming years.

We remain hugely optimistic in terms of our direction and that of the FinTech industry in North America, and we feel that Canada offers us a fantastic base given its large number of experienced financial and technology professionals, a thriving FinTech community and the emergence of government sponsored initiatives to attract talents.

Impression Ventures’team

¹ CB Insights, Fintech trends to watch in 2018, ² PwC Canada / CB Insights, 2017 MoneyTree Canada report, ³ http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gdps04a-eng.htm,⁴ CB Insights, Fintech trends to watch in 2018