Signals 2.1 (Q2 2021)

Hi Fintech Friends,

Welcome to the first Signals of the quarter!

For new readers, 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.

Signals is broken down into 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

Have we found the new normal in fintech venture funding? Every quarter, we pass the last fundraising peak with another, higher peak.

Fintechs raised $34.6 billion in Q2.

See the full Q2 fintech fundraise data here.

Let’s put that into perspective. Fintech companies raised $29.4 billion in venture capital across all of 2020. The high-water mark for quarterly funding, until last quarter, had been $11.4 billion in Q2 2019. Then, funding last quarter passed it with $17.7 billion in venture capital going to fintechs. This quarter almost doubled last quarter’s record. If fintech venture capitalists were salespeople (are they not?), there would be a lot of gongs ringing.

Sources: Q1 2021, Q2 2020, Q1 2019, Q2 2019, 2019, 2019, 2018, 2018

I’m not even sure what the right meme is to express this. As another comparison, total US venture capital funding was $31.4 billion across every tech category for the entire year of 2010, and Q2 ‘21 in fintech just passed it.

Quickly replacing Teslas and Maseratis as the San Francisco car of choice.

There are many ways to view this: fintech is currently over-funded and over-hyped (possible). Fintech was historically undervalued and people are just now beginning to realize its potential to replace traditional financial services (also possible). (I believe both are true.) There are many exit options for fintechs, which are now going public, getting acquired, and acquiring other companies. Fintech is now a key part of internet architecture. Whatever your perspective, it’s certainly remarkable how quickly funding accelerated.

The number of rounds in Q2 was also quite astounding. In Q1 of this year, we hit a record 301 total fintech fundraises. This quarter, we passed that by 33% with 402 fundraises. In Q4 ‘20 there were only 210 rounds and 183 in Q3 ‘20. So the number by any metric is quite astounding.

It may seem that the higher dollar value and number of fundraises correspond to the presence of more mega-rounds, as late-stage investors like Tiger Global, Berkshire Hathaway, and SoftBank become more active fintech investors at later stages. However, compare the two images below and you’ll see that total fintech funding increased across the board at every stage up to Series F:

Here is the chart from Q1 of this year:

And the last quarter:

Note the most dramatic quarter-over-quarter changes: Series E rounds doubled in number but almost 5x’ed in dollars. Total Series D funding tripled between Q1 and Q2. Series B rounds more than doubled in dollar volume and almost doubled in count. Venture capitalists showed healthy growth and appetite up and down the funnel in fintech.

Strategics, including big banks, continued to play a role, with Capital One, CommBank, FIS, Goldman Sachs, JP Morgan, Mastercard, MoneyLion, the State Bank of India, Transunion, and Visa all making fintech investments.

Of the 25 categories of companies that fundraised, Investment fintechs retained their position at the top in Q1, as investors chased the next Robinhood. These firms raised $12.9 billion across 49 rounds, but only raised $2.9 billion when you remove the large equity investment made by Block.one into Bullish Global. Still, $2.9 billion would be enough to just about top the second-place investment category, Lending, which also raised $2.9 billion across 65 rounds in Q2. We broke Payments apart this quarter into Consumer Payments (in third place, also at $2.9 billion raised) and Business Payments (in eighth at $1.5 billion).

The average round size across all 402 rounds shot up from $59 million in Q1 to a healthy 86 million over the last quarter. (Q4 2020’s average round size was $28 million, for comparison.) This was top-weighted among the Series G ($125 million average,) F ($300), E ($241), D ($165), and C rounds ($141).

A few investment category trends that emerged over the last quarter:

The decentralized finance and fintech worlds are starting to blend, as every DeFi company rushes towards mass user adoption and every fintech tries to incorporate DeFi. 21 hybrid crypto + defi companies raised $2 billion in Q2, including Goldfinch, Spring Labs, and Blockfi.

Open banking companies are seemingly everywhere. We wrapped open banking startups into infrastructure, the sixth most popular investment category at $1.9 billion, which was largely driven by open banking fundraisers like Plaid, TrueLayer, Belvo, Mono, Okra, and others.

There are still a lot of credit and debit card companies out there getting funded. The 10 companies that raised $384 million between them add up when you combine them with the CFO suite and corporate finance startups like Ramp, Brex, and Tribal building corporate cards.

This list would not be complete without Neobanks and BNPL companies, the 4th and 9th-place categories respectively. Neobanks continue to proliferate globally, with Vivid Money, Starling Bank, Lili, Novo, Zeller, Welcome Tech, Jai Kisan, neon, Alpan, and others combining to raise $2.1 billion. The race is also on to build the next Klarna, but Klarna itself raised $639 million in Q2, alongside 17 other startups that raised $615 million to build their own BNPL tools.