Insight Bite

Fintech funding in Britain is headed for a record year. Over $1 billion (£760 million) has already been poured into companies looking to disrupt in the financial space, according to new numbers from London and Partners, collected by PitchBook. This is more than double the figure from last year to date.

“The money coming into London from venture capitalists is a major positive that builds on a trend going back several years. Brexit doesn’t appear to have had quite as negative an impact on fundraising as many have feared,” says Richard Baker, managing partner at Acuity Advisors, the trusted technology M&A advisor.

In the past year and a half since the Brexit vote, the industry has feared potential ramifications for fintech growth, which has become the breakout star of the UK tech scene. London has been lauded as the hotbed of fintech innovation – this is a fast-growing startup area where Silicon Valley for once is not the centre. London has the necessary proximity to a world-class financial industry to be the global fintech leader, especially when you add its other significant resources: access to early-stage startup capital, a friendly regulatory environment, access to talent from all over Europe, and the fact that London is arguably a very attractive city to live in.

London has been lauded as the hotbed of fintech innovation – this is a fast-growing startup area where Silicon Valley for once is not the centre.

Fintech investment is on a surge across the rest of Europe too. As VC investment has already reached $1.8 billion in the first three quarters; according to KPMG Enterprise’s latest Venture Pulse Survey, we could surpass the $2 billion mark for the first time this year. Britain is however the driver for Europe’s fintech high, representing half of the investment sum and several of the headline deals, such as Deliveroo raising $385 million, Prodigy Finance raising $240 million, Revolut raising $66 million, and Receipt Bank raising $50 million. And all these new stats only include venture capital investments, skipping over direct investment deals such as alternative lender Neyber getting $133 million from Goldman Sachs, and 10x Future Technologies receiving $46 million from Ping An.

The fintech space has yet to see much major M&A, however observers raised eyebrows last month (October) when JPMorgan acquired WePay. Terms were not disclosed, but WePay was valued at $220 million two years ago and reports has it the deal value topped this amount. This makes WePay JPMorgan’s first major fintech acquisition, as the banking giant looks to compete with innovative competitors such as PayPal, Stripe, and Square.

The JPMorgan-WePay deal shows that large companies are starting to pay big numbers for strong fintech companies to safeguard their positions. In London, Zoopla has made a few notable acquisitions lately, including buying financial comparison website Money.co.uk for an initial £80 million in September. But, says Baker, the big deals are not really happening in London fintech in any major way – yet.

“The UK is raising the money to develop the stars of the future, but the significant exits aren’t there yet. When you think of fintech unicorns, they’re all still busy deploying that capital and building scale,” Richard Baker

So when will the time for fintech M&A come?

The British tech startup scene has soared ahead in the past decade, but it is still relatively young. This is now starting to change, as the major participants have stuck around long enough to have had an exit or two and can have another go, this time with more funds available and the added experience to take things further. But while the UK and European landscape for startup funding remains friendly to early stage companies, the US remains the better place to raise larger amounts when companies have outgrown their first few investment rounds.

For a growing UK fintech company, this has been the classic dilemma for a management team and its non-executive leadership: do you stay in Britain, or do you head across the pond to access the big funds? There’s still a way to go before Europe can truly compete with the US in terms of making funds available for startups to truly grow at their utmost potential, but the fact that Britain is now reaching new highs in VC investment is a very promising sign that this dynamic is changing. The boards eyeing up an exit will be encouraged by the positive movements in M&A, as major financials are keen for innovative technologies that have been proven to work. But those looking for a big exit may want to wait a few more years:

“The exit horizon of UK startups is to a certain degree driven by their maturity, as well as when the bigger guys think they need to be buying relative to their competitors. That can be very early in the cycle, or it can be quite late,” says Baker. “It’s in the mindset of a European acquirer to pay a more conservative number for a later stage business.”.

While the financial sector remains relatively conservative, the JPMorgan deal suggests major banks might be ready to start deploying money on M&A.

Innovative fintech startups, unencumbered by legacy systems, are quickly gaining ground with cross-border payments, peer-to-peer lending, robo-investing, and even current accounts. For established banks, developing new payment systems that can compete with runaway successes like PayPal is costly, and few have been particularly successful at doing this purely in-house.

As banks look to go shopping to catch up, London’s leadership position in fintech means it should be able to overcome the bias of major American buyers (who might be more inclined to spend cash at an earlier stage) to look outside their borders for an acquisition target. “London fintech bucks that trend as it’s seen as a leader. It’s one of the few spaces in the past few years where we’ve seen American VCs wanting to deploy capital, as that’s where the expertise is, not the Valley,” says Baker.

The big M&A deals are a still a few years out in London, but the rise in capital deployment is a very positive signal that great things are waiting up ahead. “The amount of capital deployed in London shows the city is seen as an area of excellence,” says Baker. Looking to the exit horizon in two to three years’ time, the looming uncertainty of Brexit should have been resolved by then, and with that any lingering hesitancy amongst buyers should be removed.

“There will be winners in the London fintech scene with the amount of capital being brought in. We expect the big banks will be waiting to buy those winners, and it’s London that will have the superstars of the fintech industry,”            Richard Baker