By Sasha Golubova, Michigan PEVC Associate
With most people owning smartphones, the priorities of personal finances shifted from personalization to convenience. During the 21st century, financial technology (fintech) emerged to meet these changing preferences. By capitalizing on, and uniting, the wide ownership of smartphones and secure algorithms, the industry made financial activities more accessible at the touch of a screen.
Venture capital firms were quick to jump on this opportunity. VC funding for fintech companies increased by 120% in the United States in 2018, according to CB Insights. To be exact, $11,890,000,000 was funnelled by venture capital firms into startups in this industry. The key VC players are 500 Startups, Ribbit Capital, and Bain Capital Ventures. While 500 Startups had the most active fintech investments for the second year in a row, Ribbit is developing the title of the “most active unicorn hunter” as it took part in five fintech unicorn deals of 2018 (CB Insights). That is over 30% of all unicorn-status firms in 2018 [within FinTech]. Yet, in third, Bain Capital Ventures, has also been working hard to establish its footprint in the fast-growing market, doubling the number of fintech deals that they participated in the year prior.
Why was nearly $11.89 billion invested in financial technology in 2018? What exactly tells VC’s that this is a promising field to invest funds in? To put simply, technology innovation is growing at increasing rates across all industries. When it comes to financial services, banks are quick to embrace all secure utilization of technology as it allows them to reach more customers than ever. While individuals used to join local banks, now, the branch location is not a significant factor when choosing a provider of financial services. Because of this, banks and credit unions must compete on factors such as low fees, swift user experience, and reputation/security. Thus, VC’s are eager to fund fintech companies that aim to contribute to the tech battle of financial providers.
While it is fascinating to see how venture capital is helping technology evolve the traditional world of banking, some traditions do not seem to be challenged. The main concern with the speedy jump into fintech is the lack of focus on diversity. Finance and technology are famously known as some of the most male-dominated industries. What makes it worse is Forbes’ recent report that Venture Capital diversity is not only poor, but it is getting worse, with “stubbornly low numbers of women entrepreneurs receiving financing.” So, are VC’s fuelling an entrepreneurial movement that challenges financial exclusion by making banking services widely available or is it upholding the male-dominated customs of the business world.
Looking forward, it is evident that the FinTech industry will continue to evolve at an increasing pace and the demand for this growth will not be trailing behind. It is up to time to see if the vessel for success that venture capital is, will change its ways and use the opportunity to aid diverse entrepreneurs.