Financing Trends in Early Stage Fin-Tech in the UK – What is exciting investors?

Overview:

There is no doubt that it has thus far been a phenomenal year in terms of private equity and venture capital financing. Not only has the overall value of reported transactions reportedly skyrocketed, but the value of individual transactions at all stages has increased. ?In other words, the wall of money from LPs into investing into the private market has not only increased across the full lifecycle in relation to deal structures but also in relation to the amounts being invested into individual companies.

Given the increasingly diverse ways that private companies can monetize their equity from direct listing to SPACs, even extending to increasingly deep private marketplaces for smaller shareholders, it is not really that surprising that enthusiasm to invest in highly successful firms in their later stages of execution should not be strong.??

For this piece, I have chosen to ignore this phenomenon and the enthusiasm that the media always has around mega rounds, and newly minted billionaire entrepreneurs, and instead look at the very early stages of investing in UK Fintech to see what has been going on in the most speculative part of the investment cycle.

Trends:

Going through crunchbase for 2021, a couple of things are immediately obvious about the early stage fintech investment area:

1)????Investment amounts have in the first half of this year already eclipsed in every stage, the total amounts raised in any of the last 4yrs. The amount invested in fact is nearly 2.5x more in 2021 than in 2019, which had previously been the strongest year in early-stage financing in the UK.

2)????While the number of transactions is still reportedly less than in 2020, the pace of financing of early stage companies points to the very real possibility that we will eventually see 80+ transactions completed in 2021. It should be most focused on seed and pre-seed financing rather than on Series A if the first half is repeated.

3)????Fintech investors in the UK have the greatest risk appetite to apply initial and follow up capital toward companies that are in the seed stage of their evolution.?These companies are successfully raising capital between 1 and 3yrs after company formation and have begun to demonstrate some commercial traction within a market deemed to have a significant addressable market.

4)????As in the broader venture market, investors are looking to put more capital to work than less at an early stage of development. In May and June, we saw for the first time, a few pre-seed deals raise more than ￡1.2ml. This was led by digital debt collector Ophelos (https://www.crowdfundinsider.com/2021/06/176650-debt-recovery-platform-ophelos-raises-2-3-million-from-connect-ventures-fly-ventures/) ￡1.6ml raise led by Connect Ventures, and cross border investment platform, Lightyear’s ￡1.5ml raise led by various executives of WISE and other successful Estonian Fintech entrepreneurs (https://www.uktech.news/featured/ex-transferwise-duo-launch-new-investment-platform-announce-1-5m-funding-backed-by-co-founder-of-skype-20210603).?In the seed financing space, with the deals completed by Perenna, which aims to bring new product innovation to the Mortgage Market (https://www.uktech.news/news/london-fintech-perenna-funding-20210120) and Fintern, an alternative credit/open banking oriented lender raising ￡32ml (https://www.uktech.news/news/open-banking-and-ai-powered-fintern-raises-32m-to-increase-affordable-credit-accessibility-in-the-uk-20210415), we witnessed mega seed funding rounds in the UK for the first time.

What are investors looking for in the earliest stages?

Innovation, I find is often misunderstood. It can be but is often quite different from invention. In fact, in most cases, at least as far as Fintech is concerned, innovation is often not about creating sustainable intellectual property via product design, as it would be for example in manufacturing or pharmaceuticals. Instead, my observation is that in the earliest stages, in terms of innovation, investors are:

1)????Often enthusiastic about new platform designs for financial products that are recombinants. Recombinant concepts are designed to take advantages of changes in underlying technologies and ecosystem access. ?They seek, for example to leverage new forms of connectivity and data such as those provided via Open Banking infrastructure, as well as new types of technologies such as microservices, and machine learning models. An early-stage company might not actually develop any of these solutions themselves but might instead combine them in an innovative digitized process that leads to lower cost, higher accessibility, and an alternative type of decision- making approach (particularly when lending is concerned).

2)????Often interested still in backing fintech solution designs that are focused on large but underserviced segments of the business community. With the increasing disappearance of branch banking to support SMEs, and more individuals running their own micro businesses, there is an increasingly large ecosystem of companies being financed to bring products, and services to the small business and microbusiness segments. ?This part of the market has in terms of volume, very significant scale, but it remains to be seen how develops a dependable and economically viable cost of acquisition model, as well as a sustainable recurrent revenue stream. Given this, it isn’t surprising to see that investors are often the most eager to invest in businesses that are able to bring together a new type of commercial engagement model alongside a delivery model that is able to leverage new digital highways for faster payments, and open banking for data collection and analysis.

3)????Often seeking to support new types of enabling technology platforms. ?When one thinks about the increasing need that public companies need to demonstrate in terms of their “green values” for example, it is not surprising that investors start to push funding not only toward those who can provide the data, but also those who are all about the analytics, reporting framework and monitoring. ?In a similar vein, the enthusiasm to invest in artificial intelligence and machine learning is not only about the development of new types of applications that businesses can adopt and adapt for improved productivity outcomes, and automation, but also about new platforms that make explainable AI and data science much more accessible.?In other words, where the large enterprise might be capable and willing to construct and build customized platforms, as one moves into the larger volume of mid-market firms, enablement, facilitation and simplification are much more relevant for early-stage investors.

4)????Often when it comes to new companies that are looking toward building new types of B2C solutions, one often sees that investors are prepared to back:

a.?????Thematic and In-Vogue ideas, esp. solutions that can combine a number of these such as green initiatives, with something else like addressing the savings or pension gap. Investors are increasingly prepared to invest in platform designs that address the particular ways that different persona make purchasing decisions, as well as use financial products. In an increasing number of cases, there is a underlying belief that consumers are increasingly willing to develop loyalty to new brands that are able to demonstrate sustainability and a healthier planet in their business models, and able to combine that with a business model that delivers service access to a large and growing addressable client base.

b.?????Ideas where there has been past success, but there is still deemed to be market opportunity. This seems particularly true when it comes to targeting specific types of customer persona, i.e. Generation Z clients, Students, or Individuals with a particular set of values and beliefs.?Though none of these segments may be monetized very quickly, they represent, not only a large addressable market, but one where robust loyalties can be established by those early first movers who are fixated on participating in their particular journeys.

Companies of Note

To round off this article, I have prepared an analysis of companies of note in the pre-seed stage that are worth watching.?These companies fit into some of the themes that I have highlighted above.?It is good to see that the pace of investing has continued to grow, and while UK investors appetite is still in the seed and series A stage much weaker than I see in the US, in the pre-seed stage, UK investors have been showing an increasing willingness to help entrepreneurs of all age groups get started. ?It is fair to say that many are still starting their journey out of accelerator programs, esp. for the first-time entrepreneurs, but it is good to see older more business savvy entrepreneurs, many of whom are on their second business building journey attracting attention for their new flavor too.