Fintech Pulse 2017: capital off to a slow start, but VC and corporate activity still strong
Australia continues its emergence as a global fintech centre, according to our latest quarterly report on fintech investment. Despite global venture capital flows in fintech softening from US$4.2b in Q4’16 to US$3.2b in Q1’17, Australia’s investment landscape remains comparatively robust.
Globally, M&A activity is showing the biggest slowdown, with deal volume nearly halving: down from US$1.8bn in Q4’16 to US$920m in Q1’17. There are some reasons for this: fintech investors seeking greater evidence of market traction and scalability before committing to larger, follow on rounds, as well as fewer mega-deals globally. For example, past data showed large China mega-deals featuring prominently in figures, and the absence of these this quarter, has dragged the global and regional results down.
Despite this, venture capital funding to fintech held relatively steady. It was at US$2.3bn in Q1’17, though this is well below peak highs. While America enjoyed the lion’s share of funding, Europe posted a record result thanks to several US$100m+ megarounds. In contrast Asia, with a lack of megadeals, fell to the back of the pack.
VC funding also fell, from US$690m to US$406. But corporates remained more resilient, with participation in Asia-based fintech deals rising to over 30 percent.
Another encouraging sign for fintech globally, the quarter’s top ten global deals weren’t all in the US. Deals in six different countries were recorded, Canada, India, China, Sweden and the UK, all made the list. Even within the US, fintechs are successfully growing outside Silicon Valley. Companies based in Delaware and Ohio also made the top deals list.
In these numbers we’re also seeing some new trends in fintech investment.
Insurtech and regtech
Insurance technology (insurtech) and regulatory technology (regtech) are flourishing, and these present strong opportunities for Australia thanks to the strength of our regulatory system and targeted funding. Since 2016, regtech has become a hot subsector in nearly every region worldwide, with global VC investment nearly doubling from 2015 to 2016, and is on course to match last year’s figures. Insurtech activity is also on par with 2016 averages, and continues to attract broad interest in a number of geographies.
Corporates want more action
Another highlight this quarter is that corporates are increasingly seeking to augment traditional direct VC fintech investment and are seeking partnerships and alliances with fintechs. This has benefits for startups, who can then gain access to large customer bases more quickly and data that they could not have obtained working independently.
Greater investor scrutiny
First round investors are increasingly looking for evidence of traction and scalability. Performance is becoming more important than potential. Investors that previously financed a wide range of startups are focusing on making them work, rather than making new investments. In Australia, there’s more discernment around segments such as online lending, where competition is increasing.
Investors eyeing future tech
New areas such as artificial intelligence, machine learning and Internet of Things are gaining increasing investor attention. While payments and lending still dominate, investors are looking more widely. AI is expected to be a key area of focus for many investors, as well as smart data and predictive analytics. Blockchain saw a drop in support, but we anticipate that it will recover as the insurance and asset management sectors show increasing interest.
Australia is still emerging as a global fintech player, but competition is also on the rise. Other countries with skilled workforces and potentially lower labour costs are getting in on the action, with fintechs emerging in places such as Poland and Slovakia.
Mature fintechs are also looking to expand in Asia and Australia, such as online personal finance company SoFi, and will compete with local incumbents and startups.
Read the full report: The Pulse of Fintech Q1’17