Venture into the Future: A Deep Dive into Fintech's Booming Venture Capital Scene

inance is fundamental. It is as essential to capitalism as labor. As digital technology has become increasingly central to our daily lives, it is, therefore, natural that it be integrated into the financial system in novel ways with the potential to generate enormous profits for entrepreneurs and the venture capitalists that back them. This integration is known as fintech and it is a driving force in our modern economy. 

Indeed, it was the wealth from the sale of PayPal, one of the earliest and most highly valued fintechs, that laid the basis for Elon Musk becoming one of the wealthiest men in the world. Fintech is big business. It is also a highly diverse business that encompasses everything ranging from digital payments to peer-to-peer lending, decentralized finance, artificial intelligence, blockchain technology and beyond. 

The scale of the fintech market is easy to underestimate since investments are made not just in startups but in established financial institutions seeking to avoid technological disruption by new actors with novel business models. However, a good estimate is that global investment in fintech increased by an astronomical 12,000% from $930 million in 2008 to $121.6 billion in 2020. 

Fintech is also not trendy. It can’t be because finance is so central to everything that we do in a capitalist economy. We must figure out how to best leverage technology in finance but who will successfully do so remains to be seen. What seems to be happening is that venture capitalists are shifting their priorities from unfocussed consumer-oriented ventures towards initiatives like B2B payments. According to Charles Birnbaum of Bessemer Venture Partners:

"We see tremendous opportunity for innovation in the world of B2B payments. The infrastructure groundwork laid by modern developer platforms over the past decade and the upcoming catalysts in the real-time payments world…could spark much faster adoption. We are excited to see how entrepreneurs leverage these tools to enhance our archaic B2B payments ecosystem. Consumer fintech businesses without long-term, durable customer acquisition advantages are overhyped and will continue to struggle to live up to the lofty expectations set by investors over the past several years. We’re expecting to see significant consolidation across the consumer fintech landscape this year."

THE STATE OF FINTECH UNICORNS

Venture capitalists’ interest in the fintech market is undoubtedly due to success in producing the unicorn companies with the $1 billion + valuations that they seek. Heretofore, fintech has generated 312 unicorns but the number of new unicorns is on the decline in the current economic environment.

The Total Number of Fintech Unicorns and the Declining Growth Trend

Aside from the generally poor state of the economy, a critical factor slowing the growth of fintech unicorns is the evolving ability of well-funded incumbent financial players such as JP Morgan Chase, Bank of America, Citibank, and Morgan Stanley to develop their own internal fintech solutions to avoid disruption by startups. 

For example, Morgan Stanley is developing its own customized OpenAI tools to assist its employees in serving clients. To grow to unicorn status, fintechs must be nimble and fully leverage their small size and lack of bureaucracy to more rapidly adapt to market changes than the larger, more powerful incumbents. This is especially true because those incumbents are increasingly developing corporate venture capital units such as Capital One Ventures and Citi Ventures to identify fintech trends and investment/acquisition opportunities.

FINTECH ENTREPRENEURS

Although there has been stagnation at the unicorn end of the spectrum, there are still a great number of strong fintech companies. For example, Mercury is a fintech banking platform that serves other startups by providing them with tools such as cash flow management, payments processing and analytics. Founded in 2017, it has attracted over $150 million in funding from the likes of a16z and Serena Ventures such that it has a valuation of approximately $1.6 billion. 

Opportun, aka Digit, is a personal finance app that helps users to better understand their own unique spending habits and financial constraints so as to more effectively manage their money. It automatically saves the exact amount of money each day that is required to move the user closer to their financial goals. The company was founded in 2013 and its $66 million in funding has come from investors that include General Catalyst. 

One of the most successful European fintechs is London-based Revolut which was founded in 2015 and is has received an astounding $1.7 billion in funding from investors such as Ischyros New York and Da Vinci Capital. Revolut is a comprehensive financial app that enables users to request or send money to others while earning rewards. It also offers the ability to invest and earn interest as well as engage in crypto-trading and the purchase of commodities like gold and silver. 

Finally, Plaid is a financial technology platform that enables myriad applications to securely connect with users’ bank accounts so that they can gain access to a broader array of financial tools. It thereby enables users to interact with their bank accounts, check balances and make payments through different fintech applications. It was founded in 2013 and has attracted approximately $750 million in funding from Google Ventures, Spark Capital, American Express Ventures and New Enterprise Associates amongst others. It has a valuation of $13.4 billion.

Overall, the top 10 most highly valued fintechs in the US are:

FINTECH INVESTORS

Aside from Sequoia and a16z, prominent VC investors in fintech include New York-based FJ Labs whose portfolio includes buy now/pay later startups Klarna and Affirm as well as neobanks Betterment and Revolut. Its median round size is $11 million. Also based in New York but operating at a bigger scale is Tiger Global Management whose median round size is $75 million. 

Its portfolio includes the notorious FTX, Credit Karma, Wealthfront, and Money View. SOSV has made over 2,500 investments including in payments company ClearingPoint, decentralized finance data platform Credmark, and bitcoin options exchange BitMEX. Accel has invested in fintechs such as Flywire, Funding Circle, Venmo, and Monzo. A prominent corporate venture capitalist is Intel Capital which is focused on the foundational infrastructure of the segment including cloud-native infrastructure, data platforms, mobile technology, and automation.

The world of fintech is as vast and diverse and important as the world of money itself. Aside from cleantech, there is likely not a more profoundly significant application milieu for the new generation of emerging information technologies. It is an arena that is both disruptive but also resistant to disruption because of the tremendous market power of financial incumbents. 

However, as the rapid decline in the fortunes of Robinhood and Blend has demonstrated, fundamental changes in interest rates or the general economy can be almost immediately disastrous precisely because fintech is so intimately intertwined with the fate of the capitalist system in each country and globally. Moreover, there are innovations like bitcoin that are over time proving to be frauds as they are stress-tested by demanding market conditions. As Warren Buffet has stated: “A rising tide floats all boats…only when the tide goes out do you discover who’s been swimming naked.”