7 Key Themes Surrounding Investments in Fintech
Original post on Convergex.com.
Financial services will dramatically evolve over the next ten years as millennials age and use more banking services compared to the last fifty, enabled by advancements in technology. No doubt traditional banks remain entrenched and there’s a plethora of regulatory hurtles standing in the way of this industry and new entrants. Numerous startups, however, have created more efficient, cost effective, and tech savvy versions of the verticals currently on offer. We tracked the “smart money” – Google Ventures, Andreessen Horowitz, Accel Partners, Index Ventures, Sequoia Capital and Kleiner Perkins Caufield & Byers, for example – and identified seven key themessurrounding their investments in Fintech with some examples of each, included below. (All data was derived from CrunchBase).
- Money Transfer: Two dominant players include TransferWise and WorldRemit. The former – founded in London during 2010 – is “a peer-to-peer money transfer service allowing foreign students and businesses to transact money globally”. This firm has raised $90.4 million in 5 rounds thus far, most recently in a $58 million in Series C funding round in January 2015. Investors include Andreessen Horowitz, Richard Branson, Index Ventures, and IA Ventures, etc. Likewise, WorldRemit, headquartered in London and founded in 2010, is an “online money transfer business enabling migrants and expats to send money using a variety of payment options”. This startup received $147.7 million in seven rounds from three investors: Accel Partners, Technology Crossover Ventures, and Project A Ventures. It most recently garnered $100 million in Series B funding in February of this year.
- Mobile Payments: Stripe is the success story in this space: “a set of unified APIs and tools that instantly enable businesses to accept and manage online payments.” The company has two acquisitions under its belt and partnerships with Apple Pay, Alibaba, Facebook, and Twitter. It has raised $190 million in 7 rounds – the latest taken place last month – from 18 investors including American Express, Kleiner Perkins Caufield & Byers, Sequoia Capital, Founders Fund, and Visa. Boku (founded in 2009) is another heavy hitter in mobile online payments and based in San Francisco. This startup has completed 4 acquisitions and earned $73 million in 5 rounds from 10 investors: New Enterprise Associates, Andreessen Horowitz, Benchmark, Index Ventures, for example.
Lastly, another opportunity in this arena presents itself across the Atlantic: Azimo is a “payment processing company providing internet and mobile based inter-country consumer money transfer services”. Headquartered in London and founded in 2012, the company most recently secured $20 million in Series B funding this past June, contributing to a total of $21.6 million from 4 rounds and eleven investors: Greycroft Partners, Frog Capital, Anthemis Group, and TA Ventures, for example.
- Peer to Peer Lending: Public market investors know Lending Club and OnDeck, both of which IPO’ed in December 2014. But there are other opportunities in the pipeline attracting big VC players. For example, Index Ventures, Accel Partners, DST Global and BlackRock among others have invested an aggregate $273.2 million in Funding Circle (founded in 2009, London): “an online marketplace allowing individuals to lend money directly to small and medium-sized businesses in the UK”. Earnest (2013, San Francisco), “a merit based lender” received $32 million in two rounds – most recently $17 million in Series A funding in January 2015 – from Maveron, Andreessen Horowitz, and Atlas Venture, etc.
Lastly, Prosper (2006, San Francisco) – another peer to peer lending marketplace already acquired a company and received a whopping $354.9 million in 12 rounds from 26 investors.These investors include venture capital funds like Accel Partners, Benchmark, Dag Ventures, Sequoia Capital and financial services companies, such as BlackRock, Credit Suisse, BBVA Ventures, Neuberger Berman Group, SunTrust Bank, and USAA. This startup’s most recent funding round occurred in April of this year.
- Personal Finance: Startups under this category range from helping people save money to accessing credit scores more cheaply. Expensify, founded in 2008 based in San Francisco, offers “an online expense management service for customers worldwide”. VC funds, including Redpoint Ventures, SV Angel, and OpenView Venture Partners have invested $27.2 million thus far, including $17 million in July 2015. Credit Karma (founded in 2007, San Francisco) provides “free access to credit reports and scores, personalized financial recommendations and educational resources”. This firm just raised $175 million in Series D funding in June, adding to its grand total of $368 million in 6 rounds from 12 investors: Tiger Global Management, Google Capital, Ribbit Capital, and 500 Startups, for example.
- Cryptocurrency: There are a slew of fintech startups involved in cryptocurrency, or bitcoin in particular, but we’ll just highlight a couple. Payment processor for Bitcoin, BitPay (founded in 2011, Atlanta) raised $32.5 million in 3 rounds and 16 investors thus far, including Index Ventures, Founders Fund, and Richard Branson. Another example, Coinbase (2012, San Francisco), enables “any consumer to create a Bitcoin wallet and start buying/selling Bitcoin instantly by connecting their bank account”. This startup has completed two acquisitions and raised $106.7 million in total from 4 rounds and 21 investors; it received $75 million during its most recent round in January 2015. Investors include Andreessen Horowitz, BBVA Ventures, Ribbit Capital, and Y Combinator.
- Trading & Robo Advisers: The advent of automated financial advisers is nothing new, but still serves as a notable example of startups encroaching on an industry by scooping up business at the low-end – straight out of Harvard Professor Clayton Christensen’s “Innovator’s Dilemma”. Wealthfront, for example, received $129.5 million in 5 rounds from 33 investors since it was founded in 2011 (headquartered in Palo Alto). Some investors include Index Ventures, DAG Ventures, Spark Capital, and Greylock Partners. Another interesting take on disrupting this space is the startup Robinhood: “a commission-free, mobile-first stock brokerage.” This online brokerage recently raised $50 million in Series B funding in May 2015, adding to a total of $66 million from 3 rounds and 20 investors since it was founded in 2013 (Palo Alto). Investors span from VC funds like New Enterprise Associates, Google Ventures, Andreessen Horowitz, and Index Ventures to celebrities, such as Snoop Dogg, Jared Leto, and Nasir Jones.
- Student Loans: Huge amounts of money are flowing into startups addressing arguably the largest headwind for millennials: student loans. Sofi (founded in April 2011, San Francisco) has already originated +$2 billion in loans that “help early-stage professionals get ahead including student loan refinancing, low down-payment mortgages, mortgage refinancing, and personal loans.” This firm amassed $766.2 million in 10 rounds from 17 investors, including $200 million in Series D funding this past January. Investors include: Third Point Ventures, Institutional Venture Funds, Discovery Capital, Peter Thiel, and Baseline Ventures. A similar startup, Upstart (2012, Palo Alto), just took in $35 million in Series C Funding last month, adding to a total of $53.2 million from investors including Third Point Ventures, Google Ventures, Kleiner Perkins Caufield & Byers, Mark Cuban, and New Enterprise Associates.
So how are banks responding? Some are partnering or investing in their own fintech startups. For example, Goldman Sachs and JP Morgan are working with online broker Motif Investing. Others, including Barclays, UBS, Citi, Santander, Wells Fargo, Deutsche Bank, and BBVA Compass either support or have launched their own “accelerator programs”, or innovation labs in tech hubs around the world to improve their technological capabilities. How can fintech startups and banks really get along? One such synergy is the partnership between OnDeck and BBVA Compass, in which the subsidiary of Banco Bilbao Vizcaya Argentaria earns a referral fee by sending small-business customers who don’t fit their loan requirements to the online lender.
JPMorgan Chase CEO Jamie Dimon understands the crossroads that banks face. He addressed the challenge of competing with startups in areas, such as lending and payments, given their efficiency in his latest annual letter to shareholders. His takeaway: partner where it makes sense and learn from competitors to develop their own strategies. Either way, in Mr. Dimon’s own words to Wall Street: “Silicon Valley is coming”.
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