Signals 4.1 (Q4 2020)

Hi Fintech Friends,

Welcome to the first Signals of the new year.

For new subscribers, Signals is the subscriber-only feature where we consolidate the fintech events of the last quarter in order to better understand the trendlines, not just the headlines.

Fintech is subject to the same fads and herd thinking as tech writ-large, as expressed pithily in the tweet below, from Stuart Sopp of Current.

But in a sea of homogenous product offerings -- in 2018 it was adding a high-APY savings account, in 2019 it was launching a card, in 2020 it was spinning up a community-centric neobank, etc. -- investors can pinpoint the bleeding edge technologies that will have a huge impact on the future of finance. These pinpoints are the signals in the noise.

Signals is broken down into (newly) 4 sections:

If you believe that fintech is only 1% finished, understanding these trends is critical to developing a perspective on where the other 99% will come from.

Best,

Nik

The number of fundraises saw a sharp uptick in Q4 of last year - up 13% from 186 rounds in Q3 ‘20 to 211 funding events in Q4 - in a quarter normally marked by dead periods during the holidays.

Yet the round sizes sharply declined due to fewer mega-rounds. The only rounds to break $200 million in Q4 ‘20 were Creditas ($255), Better ($200), and Stc Pay ($200), compared to 15 rounds over that ticket size in Q3’ 20, at an average size of $331 million.

As such, fintechs in Q4 raised ‘only’ $5.9 billion, compared to $8.5 billion the prior quarter and $9.4 billion in Q4 of 2019.

Sources: 2019, 2019, 2018, 2018

What was the round composition? Fundraises in Q4 skewed much more heavily towards early stage rounds than prior quarters, perhaps pointing to the deluge of new entrepreneurs and companies entering fintech, as well as to the entry of recent new fintech funds set up to back early-stage concepts. Of named rounds, there were 2 Pre-Seeds, 33 Seeds, 27 Series As (with a few A extensions and A1s), 12 Series Bs, 10 Series Cs, 4 Series Ds, 2 Series Es, and 1 Series F. (As, Bs, and Cs were evenly distributed in Q3.)

Anecdotally, Q4 ‘20 also saw much higher participation from strategic investors than prior quarters. There were 18 strategic rounds to fintechs in Q4, both off corporate balance sheets and from corporate venture arms, with Stripe (3), Citi (3), and Visa (2) well-represented. This highlights the increasing appetite and willingness of financial services providers to hedge their own R&D by investing into what could be the next generation of service providers.

Of the 31 categories that raised, Payments startups ($942 million raised, 29 rounds) and Neobanks ($710, 23) once again commanded the highest share of funding. The third highest share last quarter went to a new consolidated category of Banking Services Providers ($681, 21) which I found particularly interesting (more below).

Of the 211 rounds, the average round size was $28 million, which was heavily top-weighted by payments ($33 million average), neobanks ($31), and banking service providers ($32). Startups also began to stretch the bounds of what could credibly be called a ‘seed’ round, with italian neobank Aidexa raising a €45 million seed, Tomo Networks raising a $40 million seed, and Uni raising an $18.5 million seed. But maybe this is the new normal that investors can expect.

So let’s dive into the most interesting data: industry composition. Which types of concepts are commandeering more funding, especially at early stages, and what does this tell us about where the next wave of innovation is coming from in fintech?

First, though it’s not reflected in Q4’s fundraises, we’ve been seeing an explosion in climate-focused fintech as well - expect this to be a common theme that plays out over the next year. Expect to see more early-stagestartups focused on tackling climate-related issues with fintech (and legacy firmsmaking their owncommitments). The big question will be: can these firms make money? Is there a sustainable edge to enabling investment in climate-focused financial technologies now? (Silicon Valley is no stranger to getting burned by cleantech.) For more details, see New Energy Nexus’ report on Climate Fintech.

This is a new category we’re tracking, meant to highlight the catch-all of software services specifically being built to be sold into the financial services industry (whether legacy banks, legacy software companies like Fiserv and FIS, or fintechs selling to fintechs). BSPs are differentiated from banking-as-a-service (BaaS) companies in that they are not embedding banking functionality into other platforms but rather selling back-end banking tools.

BSPs that fundraised in Q4 include Addepar (wealth management portfolio software), Pico (trading infrastructure and network connectivity), Payrix (payments infrastructure), Silent Eight (financial crime-fighting), Lightico (digital document collection), Acin (risk management), and Secureframe (SOC II and ISO compliance).

There are even themes within BSP that experienced competitive fundraising in Q4:

There were 23 neobank rounds overall in Q4, and while we won’t go into each of them, it was interesting to see the continued internationalization of the neobank business model: Aidexa (Italy), Lunar (Denmark), albo and Klar (Mexico), Neo Financial (Canada), Vivid Money (pan-European), Kuda (Nigeria), insha (Germany) and Umba (Kenya) all raised in Q4!

Unlike neobanks or payments companies, these are startups whose primary product is a digital wallet for customer funds. These wallets can then layer on additional services that enable customers to do more with their funds - a playbook we’re seeing from Venmo in the US. Wallets that raised in Q4 include Saudi Arabia’s Stc Pay ($200 million), Indonesia’s interbank wallet LinkAja ($100),and France’s Lydia ($86). The goal of many digital wallets is to eventually replicate national winner-take-all superapp ecosystems like WeChat’s in China.

Whereas lending startups are normally grouped together in these fundraise reports, we broke out mortgage startups in particular last quarter because they’ve become overrepresented once again in fintech fundraises relative to other lenders. Five mortgage or home ownership-focused startups raised in Q4: Better ($200 million), Home First ($95), LendingHome ($75), Tomo Networks ($40), and Clikalia (undisclosed - Spain’s Opendoor). In a heated late-cycle housing market, it will be interesting to see if these types of fintech startups continue to command high funding.

Interestingly, two fintechs focused specifically on enabling philanthropy raised in Q4: Amicus.io ($8.7 million) for donor-advised funds, and Charityvest ($2.3).