Hi Fintech Friends,
This is the Q2 edition of Signals.
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Best,
Nik
Q2 in Review
(1) What concepts are getting funded?
Despite a reported slowdown in fintech financings and M&A activity (#) in Q2 2020, it appears there is still a very healthy venture market for fintech investment. I am skeptical of the idea that there is an imminent slowdown in venture activity looming, after watching firms raise, in some cases, record-setting rainy day funds over the past couple years in anticipation of a market correction.
Though I wasn’t tallying this activity last year, CB Insights pegged Q2 2019 fintech investment at $8.3 billion (others at $10.9 billion and $11.4 billion). The data from This Week in Fintech peg Q2 2020 fintech financing at $8.2 billion into private fintech companies (spanning the three months from April through June) -- slightly under par with Q2 2019.
The data in aggregate don’t tell you much other than that the bottom hasn’t dropped out of the market, with 200 separate investments announced in the last quarter.
So where are investors placing their bets? Payments startups continue to draw the lion’s share of funding ($), skewed by outlier mega-rounds; they lead for the second quarter in a row, with $2 billion raised overall. Neobanks are, for the second consecutive quarter, the next most well-financed category, with $1.2 billion raised. Investing apps followed with $755 million raised and fintech marketplaces with $683 million.
Payments is an overbroad product category. The 24 payments companies raised $2 billion in Q2 span a variety of use cases. Stripe’s $600 million Series G extension in April and the $400 million Warburg Pincus PIPE into WEX accounted for half of that figure. But they were not alone in raising large sums: Toss ($200mm), Trustly ($150mm), Checkout.com ($150mm), AvidXChange ($128mm), and Paytm ($100mm) each raised over $100 million.
The competition to participate in online checkout and B2B payments appears to be intensifying. There are many overlapping drivers:
Stripe’s $36 billion valuation is pulling new competitors into the fray (Checkout.com in the UK is similarly valued at $5 billion). Finix and Fast are the closest comparables in early stages, but many companies want to eat at a piece of Stripe’s business, whether one-click checkout or payment processing.
More small businesses are moving online, accelerated by retail closures during the recent pandemic, and leading merchants to broaden their accepted forms of payment.
Legacy B2B payments companies continue to come under fire for a variety of reasons. Merchant acquiring processors are slow to innovate and painful for banks to work with. POS and online checkout platforms like Square and Paypal get accused of withholding merchant funds for months at a time.
Progressively global supply chains, workforces, and customer bases require nimble, inexpensive cross-border payments solutions that settle quickly -- a market that should get more competitive as Tipalti, Adyen, Stripe, Rapyd, and CurrencyCloud all focus on B2B.
This mirrors a similar race to own peer-to-peer payments in emerging markets. Wave Money, which raised $74mm in Q2, is available through in-person agents in 89% of Myanmar. Paidy ($48mm in Q2) targets similar ubiquity in Japan, Juspay ($22mm in Q2) in India, and Ziina ($850k) in the MENA.
More businesses are looking to arbitrage the US’s slow ACH overnight payment clearance, such as Sila ($8mm in Q2), while India looks into a second Reliance Jio-sponsored UPI and Brazil launches Pix.
The payments tally doesn’t even include the 6 Cross Border / FX companies that raised $239 million in Q2, led by Airwallex’s $160mm Series D for a multi-currency platform.
I remain generally skeptical that neobank LTVs will merit their per-user valuations, but investors do not appear to share my skepticism. 22 neobanks raised $1.2 billion in Q2, led by Varo ($241mm Series D), Australian SMB bank Judo Bank ($230mm), Aspiration ($135mm Series C), Stash ($112mm Series F), and N26 ($100mm Series D extension).
Some neobank valuations are showing signs of strain. Monzo halved its valuation in its latest ~$76mm fundraise. German SolarisBank raised at a $360mm post-money. And Starling is re-applying for RBS bailout funding. With that said, there continue to be interesting new challengers (and some me-too players) in the space, such as indó, Muniy, Lili, ANNA, Memo Bank, and Tonik Financial.
Investment platforms rounded out the billion dollar category, with 16 investments across 15 companies (Clim8 raised twice). Again, the size of the category is skewed by Robinhood as the outlier, which raised a $280 million Series F in May. The return of volatility to retail investing markets, Morgan Stanley’s acquisition of E*Trade, Empower Retirement’s acquisition of Personal Capital and Robinhood’s valuation have led a lot of investors to look for cheaper opportunities in the market.
iCapital raised $146mm and Pagaya raised $102mm. Trade Republic in Germany, Freetrade in the UK, and MEMX -- which looks to create a new exchange to challenge Nasdaq and NYSE in the US -- all bolstered their financing in Q2.
As the number of companies looking to launch native fintech products grows — along with the set of potential acquirers — I would expect to see more more banking-as-a-service and infrastructure companies getting funded over the next half year. This explains all the activity we’re seeing in the payments space, where potential acquirers ranging from e-commerce (Shopify, Ebay) to processors (TSYS, FIS), to networks (Visa, Mastercard), to banks (JP Morgan, Santander) continue to invest in businesses reconstructing critical pieces of financial architecture.
