An Innovate Finance report recently suggested that venture capital investments into the UK FinTech sector have dropped by a third over the past year, potentially making way for a new type of investor in town.
FinTech has typically attracted the most investment and limelight compared to other areas of digital innovation. Yet the funding landscape has changed dramatically over the last few years and the suggestion that venture capital (VC) funding levels are dropping comes as we start to see other forms of funding gaining traction.
Certainly in the deals I've seen recently, corporate venture capital in particular has been a popular option. Corporate venture capital (CVC) is investment by a corporate fund into startups to achieve a competitive advantage or financial return. Established banks lead the way in creating CVCs, high performing examples including Santander InnoVentures, Citigroup – Citi Ventures and Goldman Sachs.
Research from Sirris suggests that CVC accounted for almost 300 investment deals worth $4 billion in 2016 – and that FinTech saw the most of these investments, totalling 42 deals worth $499 million from 48 corporates.
A key benefit of having a CVC of a financial services firm as an investor for a FinTech start-up is the knowledge it has from operating in the sector. One of the single biggest challenges for a FinTech start-up is navigating the regulatory environment it is trying to disrupt. CVCs, in comparison to institutional venture capital funds, can offer these start-ups experience and connections from operating in globally regulated markets. Furthermore, a CVC can open up its customer and supplier networks to start-ups which, for those looking to improve the banking customer experience, could significantly aid them in scaling their business.
These and many other benefits are the reason why CVC funding for FinTech businesses has been referred to as the new “smart” money. We must, however, remember the wealth of benefits and experience the institutional venture capital funds bring to FinTech start-ups. They know how to nurture innovation and scale a start-up into a global business whilst simultaneously achieving the best return.
Despite the reports that venture capital investment in FinTech has declined, innovation is still continuing as we see the rise of RegTech businesses. CVC investment activity is increasing in the UK and Europe and if that results in CVCs of financial service firms co-investing more with general institutional venture capital funds that’s great news for the future of FinTech start-ups.
In today's multifaceted funding environment, these aren't the only options on the table. Accelerators like Level 39 – Europe's largest technology accelerator for finance, retail, cyber-security and future cities technology companies – help take start-ups to a new level by offering physical office space to grow, expert mentors and plenty of networking events.
Crowdfunding platforms like Crowdcube offer young businesses the opportunity to not only raise funds but also test the concepts of their new idea directly with interested consumers, helping them develop their products in the meantime.
The young businesses on the Digital Innovators Power List have gone down various routes to secure funding for their next stages of growth, and we certainly expect the FinTech sector to continue its general upwards trajectory as start-ups get more savvy about the range of funding options at their feet.
Come to the next event in the Digital Innovators Series: Who's Funding Digital Innovation in 2017? on 14th March.