FinTech in 2018: A Mid-Year Review

Excitement around technology for financial services is at an all time high, and it’s hard not to be on the bandwagon. Global FinTech investment reached $25.2B in the first half of 2018, exceeding the previous calendar year high of $18.3B in 2016. Excluding Ant Financial’s $14.5B Series C in May, with $11.2B at mid-year, we are still on record pace.

FinTech deals have steadily risen for the entire decade, with the number of deals on track to hit an all-time high in 2018. While the number of deals has been rising by a CAGR of 20%, global investment has grown by a CAGR of 40%, leading to larger deals and higher valuations.

While late stage rounds have helped push funding to record levels, the Series A funding environment is stronger than ever. Series A investment in the first half of 2018 totaled $846M in North America, $260M in Europe, $741M in Asia, and $42M in South America. Global Series A financing is on pace to hit $3.9B in 2018, surpassing the previous high of $2.2B in 2017 by 79%.

Series A deals in the first half of 2018 totaled 82 in North America, 61 in Asia, 35 in Europe, and 5 in South America. Global Series A deals are on pace to hit 376, surpassing the previous high of 287 in 2017.

Comparably slower deal growth pushed the average global Series A round size to $10.3M in 1H 2018, up from $8.8M in 2017, and 2x the average of $5.2M in 2013.

Digging into the Series A deals in North America for the first half of 2018 vs. 2013, and removing rounds less than $2.0M in size:

Assuming 25% dilution, over the last five years the average Series A pre-money has moved from $20M to $33M. Five years ago, a $5.4M investment in the average Series A deal was for 20% ownership, whereas today the same investment represents 12% ownership.

In addition to the impressive pace of venture capital deployed and the increase in valuations, a few notable trends caught my attention at the halfway point.

Rise of the Digital Banks

Simple was founded in 2009, and following its acquisition in 2014, it felt as if there was a slowdown in digital bank innovation. Obviously that is no longer the case, with five investment rounds over $100M in the first half of 2018. All five companies were established between 2013 and 2015, and have discovered ways to move faster with product innovation and customer acquisition.

In 2018, our focus has been on digital banks outside of traditional venture capital hotspots. In May, Propel led the Series A in Neon, a digital bank in Brazil. In most of South America, there is an opportunity to deliver a superior digital experience at a lower cost than incumbent financial institutions. The incumbents often have large market share and ROEs that far exceed the US banks, with less incentive to change the way they have done business for decades.

Big Exits

While there is no data behind the observation, it feels like we will look back on 2018 as an exceptional year for exits. In the first half of 2018, Adyen made arguably the biggest splash with a $1.1B public offering, but not far behind were the exits of PagSeguro in Brazil, GreenSky in the US, and iZettle in Sweden.

Payments

Payments are hot. The exits of iZettle, Adyen, and PagSeguro are examples, along with Square’s performance in the public markets. Square’s stock is up over 100% in 2018, driven by accelerating revenue growth. The stock now trades at $70 compared to the initial offering price of $9 in November 2015.

PagSeguro is often labeled as the Square of Brazil, with a mission is to disrupt and democratize financial services in the country. PagSeguro’s payment volume is up 139% year-over-year. After a successful IPO in January, the company is well capitalized to build an extensive payments ecosystem in LatAm’s biggest market.

Takeaway

While funding is at record levels, it’s hard to see a correction on the horizon when Series A activity has been so robust. Since 2013, the 4.2x increase in global Series A capital has been met with a 2.5x increase in Series A deals. Companies at the Series A stage are well capitalized and positioned to take on larger sums in follow-on rounds. The two biggest risks I see are macro and return on capital, with the latter related to the lower expected returns given the increased valuations and capital in the space. Lastly, although PayPal has been active with acquisitions, there remains a gap for other big acquirers in the space.

Given the current funding environment, the perception of capital availability can be misleading. Entrepreneurs still need an exceptional team and strong traction. So far this year, we have seen a number of Series A capital raises targeting $10M+ move to Seed extensions, due to a disconnect between valuation and the stage of company.

Venture capital interest in the digital banking space is not surprising, however the amount of capital flowing to developed markets is less obvious in my opinion. I remain excited about opportunities where there’s a large, unmet consumer need for basic services like banking, or where there is an effective oligopoly for financial services that leads to blunt underwriting and high interest rates, low consumer satisfaction, and little incentive for innovation.

Lastly, from Adyen helping Netflix and Uber move into new markets, to PagSeguro pushing card acceptance at retailers in São Paulo, these companies are enabling new experiences and allowing merchants to focus on what they do best. The market is rewarding payments companies, with PagSeguro 16x, Adyen 13x, and Square 11x enterprise value / revenue. It’s a good time to be a payments entrepreneur.

Let’s see what the second half of 2018 brings!

At Propel Venture Partners, we invest in companies rethinking and rebuilding financial services. Most of our time is spent at the Seed and Series A stage, with entrepreneurs in North America, South America, and Europe. If you are a founder building a company relevant to financial services, let’s chat! The best way to reach me is by email at [email protected]

Thanks to Ryan and Greg for feedback on the draft.