As the pandemic recedes, it is becoming clear how profoundly Covid has accelerated digitalisation across the global economy. Covid has created an ideal environment for fintech companies to grow exponentially and deliver strategic valuations for their investors.
The digital landscape has been transformed over the course of the last 12 months. It now encompasses great swathes of the mainstream economy that previously resisted digital innovation. The restrictions imposed by national lockdowns have forced consumers to adopt digital payment solutions and online shopping habits across the board. This has caused a surge in demand for the kind of mobile, secure and user-friendly financial services that financial technology companies specialise in.
While the government and society’s response to Covid has undeniably been a catalyst for rapid technological adoption, it has also given rise to an unstable and in some ways unprecedented market picture in the realm of fintech. This presents both risks and opportunities to ambitious business angels who seek exponential returns on their investments (ROI), and a clearly defined exit plan.
The abrupt changes in consumer behaviour brought about by Covid have been mirrored by broader sectoral realignments that tend to happen only once in a generation. Traditionally conservative industries like insurance, banking, healthcare and automotive are all embracing digital technology with unprecedented fervour. They are opening their minds to the potential of digital ecosystems, inter-sectoral synergies and revenue streams that simply wouldn’t have occurred to them or even existed 10 years ago.
Fear is a factor here too. The threat of being disrupted by an agile digital challenger is one reason why many financial service giants are paying strategic premiums to acquire innovative fintech startups. In the first half of 2020, global investment in fintech totalled $25.6 billion according to KPMG.
To an angel investor, there can be few more appetising prospects than a fintech startup in possession of a credible team, a strong USP and a compelling set of validated growth projections. That is partly because fintech straddles two sectors, technology and financial services, that are experiencing sustained growth in the face of the recent global downturn. Despite the setbacks of 2020, the global fintech market is set to grow at a compound growth rate of 20% between now and 2025 according to TechSci Research.
For an investor, fintech startups combine the benefits of a technology company such as scalability and low overheads, with the defensive strengths and relatively low churn rate of a financial services business. The heavy burden of compliance that every financial services business has to deal with, quickly becomes an important protective asset. If a fintech startup has the necessary expertise at board level to navigate the demands of regulators, those high barriers to entry start working in its favour. Potential competitors are deterred by the costly and time-consuming bureaucratic obstacles that are an inevitable feature of finance, and may seek their fortunes elsewhere.
Regardless of Covid, it is fair to say that several arguably over-hyped technologies are now reaching a level of maturity that puts them within reach of fintech startups with innovative ideas about how they might be used to disrupt the marketplace.
Whereas blockchain technologies are still struggling to gain traction in relevant sectors, cryptocurrencies now pose a genuine challenge to the accepted mainstream concept of fiat money backed by central banks. Having preferred to look the other way, the financial establishment is finally sitting up and taking notice. So are fintech startups and their investors. Who can ignore the extraordinary volatility of bitcoin valuations that the markets have witnessed over the past six months?
High valuations and even higher profile failures in the field of fintech are testaments to the risks and challenges that angel investors face when selecting and mentoring fintech startups. Startups like Loot and Lendy went from hot-ticket investments to insolvency in a matter of months.
On one hand, startups can be rightly intimidated by the sheer scale of incumbent financial service companies, and the accompanying regulatory burden that continues to defy even the most ingenious algorithms. On the other hand, innovative branding techniques and social media marketing channels are able to circumvent many of the obstacles that once kept fintech challengers at bay. The ability of fintech to forge connections between seemingly disparate sectors and mine new revenue streams is naturally a huge draw to angel investors in search of an opportunity.
Financial technology is highly integrated with a wide range of industries, many of whom are enjoying growing productivity and high customer satisfaction as a result. For an angel investing in financial technology this has the advantage of guarding against non-systemic risk, so that if one sector of the economy is hard hit in the way that hospitality or travel was in 2020, for example, their fintech investments can still benefit from resilience across other segments.
Many large incumbents are acutely aware of their limitations in digital and are willing to pay strategic premiums to acquire promising startups. Their motives vary from seeking to take advantage of the startup’s expertise and bright ideas, or simply to deny a competitor from doing the same. Either way, competitive tensions of this kind can create a ‘perfect storm’ that a smart angel investor can leverage to accelerate their exit strategy and raise the chances of a high ROI.
Financial markets have been dramatically impacted by the pandemic, creating an unusually fluid situation that has lowered barriers to entry and created a once-in-a-generation opportunity that fintech businesses are well-positioned to exploit. Soaring rates of digital adoption are now a feature of high growth markets in Asia and Africa where a new middle class is emerging with an appetite for cheap and easy financial service solutions of the kind that fintech exists to create. This is why the benefits to an experienced angel of investing in financial technology startups at this stage in the market cycle significantly outweigh the undoubted risks.
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