How the UK fintech sector is set to fare this year
Jon Dawson, haysmacintyre: fintech will maintain peaked interest from investors
Recent reports suggest that investment in UK fintech reached record levels of £2.6 billion since February 2018. So what can we expect in 2019? Can this fast growth industry maintain these peaks in investment, or will investment trends change as the sector matures and more start-ups look to scale up their businesses?
First, we need to look further into investment levels. Typically, investment is driven by the attitudes of those investing. When institutional, venture capitalist, high-net-worth and private equity investors see value in a sector, we then tend to see a trend towards increased investment in these industries, at all levels. However, like the technology itself, investment in fintech is disrupting the norm. The record levels of investment into the UK fintech sector over the past 12 months were most likely driven by the investees as opposed to the investors. Whilst investor appetite to secure equity in high potential technology business has been present for years, we are now starting to see more companies with a viable product and a “go to market” strategy.
This is starting to attract interest from mature investors, who may have previously taken small stakes in these companies at an earlier stage, but are now looking to invest more as fintech companies start to dominate the UK’s ‘Unicorn Club’, such as Monzo, who recently raised £85m in their Series E fundraise.
As this sector continues to mature, fintech businesses are reaching a level in their lifecycle where their value is increasingly apparent. We have therefore seen a number of businesses within the sector publicly listing, and others selling to financial institutions at remarkable multiples of their revenue or adjusted profits. We’ve seen these companies turn ideas into reality, which as a result entices more traditionally conservative investors.
Fintech is also attracting new types of investment. Over the past five years, crowdfunding has become a popular method of fundraising, allowing individuals to invest in unlisted companies. We would expect to see this trend continue in 2019 and expect to start to see crowdfunded companies providing a profitable exit opportunity to original investors in the form of initial public offerings or other exit events.
For the most part, fintech companies have been referred to as “start-ups”, with a focus on the product, scaling application and the network, as opposed to the company’s profits. Now however, more companies are sufficiently developed, with investors and management teams focused on profits, which will likely lead to further successful organic growth or exit events in 2019.
Many of the scale-up businesses that raised money in 2018 didn’t exist five years ago, which is driving a premium on companies in the sector: investors know that the start-ups of today could be the record-breaking statistic of the future.
Valuation methods also have an impact on investment levels. When valuing a company, a variety of different techniques can be used, and over recent years we’ve seen modern techniques replace some of the more traditional methods, such as the “network effect”. Fintech companies are rarely valued on revenues, profits or assets alone, and investors are increasingly interested in the size of the network that the product is available to. For example, when Monzo raised funds on a valuation of five hundred times revenue late last year, it was clear that the business wasn’t being valued on its revenue, or indeed on the £33 million loss it had suffered the year before.
As we see continued innovations in cryptoassets, augmented reality (AR) and artificial intelligence (AI), the “network effect” is likely to become ever more important. Investors are well aware of these technologies’ potential and power, even if they are yet to understand the wider applications. Investors are therefore valuing businesses based on the size of their network, or potential network, and applying a monetary value to each possible customer within the ecosystem.
As Brexit looms over the UK, investment trends are difficult to predict for 2019 and as we see further delays to the deadline just this week, with so much uncertainty, a quiet start to the year is likely. However, whilst the UK Government continues to debate the logistics of a deal, fintech companies are continuing to develop innovative technology and the growth of feasible products.
As it continues to develop, fintech is now being widely accepted as a sector in its own right, encompassing many other sub-sectors of its own, including blockchain, robo-advisors, insurtech and regtech. First defined by the FCA in 2015, regtech saw rapid improvements last year, particularly in the processes surrounding know your customer (KYC), anti-money laundering (AML), compliance and risk mitigation. Some studies suggest that regtech will make up over a third of all regulatory spend by 2020 and will therefore play a significant role in fintech’s growth throughout 2019.
We are also likely to see further progress in sub-sectors such as robo-advisors, mobile banking, smart lending and blockchain, with further rapid improvements in their technologies, and new applications and solutions entering the market.
Whilst Brexit uncertainties may be casting a cloud of concern over the UK’s future, the fintech sector continues to boom. We can expect to see further scaling up of start-ups this year and ongoing technological developments, which will maintain peaked interest from investors.
By Jonathan Dawson, senior manager, haysmacintyre
