CEO, Fintech Circle, Fintech Investor & Bestselling Co-Editor of The FINTECH Book Series published by WILEY
With the global economy predicted to fall, valuations in fintech companies will be hit hard, too. This will provide investors unique opportunities to invest into those fintech firms at attractive valuations, which will shape the future of financial services.
Fintech investments so far this year:
The impact of COVID-19 and the speed of its disruption in financial services is unprecedented.
I expect this to be worse than the Global Financial Crisis eleven years ago, as we have seen a global physical disruption to our lives almost simultaneously globally.
As a result, it is not a surprise that fintech investments in Q1 2020 severely decreased globally.
The CB Insights State of Fintech Report showed that “Q1’20 was one of the worst quarters in two years for VC (venture capital) backed fintech: The economic shocks stemming from the outbreak of the coronavirus have decreased investor appetite for fintech.
“Q1’20 VC-backed fintech activity dropped to the worst Q1 since 2016 for fintech deals and the worst Q1 for funding since 2017.”
No doubt that the investment figures for Q2 2020 will be even worse.
How investing strategies have changed:
Most investors have stopped investing in new deals and instead have focused on helping their existing portfolio companies survive the expected depression. There will be a decline in fintech valuations across all stages.
Exit strategies will change. Investors will look to accept down rounds to agree new investments in portfolio companies or to consider how portfolio companies could be merged to save costs and strengthen the business long-term.
The financial services sector requires innovation to survive. As lots of innovation is provided by fintech companies to large financial institutions, the destiny of both is inter-connected.
We are moving into an environment where cash is king and the investors who can deploy it over the near future will be able to find very attractive deals.
We should remind ourselves that some of the best tech companies such as Dropbox (2007), WhatsApp (2009), UBER (2009), Square (2009) and Instagram (2010) have been founded during the last financial crisis and I have no doubt that we will see many future “unicorns” (companies which will be valued at $1 billion or more) be founded over the next one to three years.
What is innovation and why is it so important?
We defined innovation as “addressing specific customer needs and business challenges in novel ways to increase the value delivered to both.”
When we talk about addressing customer needs, we are not just talking about functionality. We are talking about emotional and social needs, such as feeling confident a new solution will work, keeping up with peers or feeling valued as a customer.
How financial service organisations can enhance the effectiveness of innovation:
• Create a standard framework for innovation across their organisation.
• Consider collaboration models to encourage closer partnerships with third parties.
• Experiment: constantly question what you need to prove to justify continuing to invest.
In summary, the financial services sector requires innovation to survive. As lots of innovation is provided by fintech companies to large financial institutions, the destiny of both is inter-connected.
The financial services sector cannot modernise quickly enough without the fintech’s sector technology and business model advantage.
Therefore, investors in fintech have got the key privilege to further fund these B2B fintech companies, which will help financial institutions to remain competitive long-term and invest in those B2C unicorns, which will ultimately compete against existing financial players.