Fintech has been booming in recent years. Investors of all kinds have flocked towards the industry and new fintech startups have been popping up all over the globe. But a recent Inc. post suggests Silicon Valley’s VCs might be losing interest.
VCs not as big of a player in fintech
Fintech companies had a surge in investment from 2012 to 2015. The increased investment levels were largely driven by VCs, which have continued to be one of the biggest investor groups in the sector. However, the most recent data points to VCs losing interest and reducing their investment levels.
KPMG’s Pulse of Fintech shows that VC funding dropped last years from 2015. While venture capital investment stood at $47 billion in 2015, last year it had gone down to $25 billion. This is also lower than the $29 billion invested in 2014. Furthermore, in the latest Pulse of Fintech for Q1, VC investment stood only at $2.3 billion, which is a historically low figure.
The analysts interviewed by Inc. say the problem might have been the excess capital the VCs were lying on in recent years. VCs had money to spend and so they turned to the fintech sector and spent it – the problem was that the valuations for fintech firms went up to ‘unreasonable’ levels.
In the International Fintech conference held in London, the mood among investors pointed to an unhealthy valuation environment. Andy Stewart, managing partner at Motive Partners, told the Business Insider, “I would call valuations right now frothy in general…tech generally is frothy.”
The real performance of these fintech firms has not always matched the high valuations they’ve received, which is why VCs might be thinking about lowering investment. On the other hand, the dip in investment might actually just be a return to normal.
Legacy firms to ‘take the reins’
The good news for fintech is that it doesn’t seem like investors as a whole are losing interest, even if VC involvement is dipping. The new suitor is already out there in the form of legacy firms or incumbents.
Inc.’s post pointed out to one of the most recent notes Morgan Stanley sent out to its clients which said these firms will “take the reigns” of fintech innovation and investment. The note went on to say, “financials and payments incumbents are likely to be emboldened to step up R&D and take the investment lead”.
Incumbents are starting to take more notice because fintech startups pose a real threat to them. Morgan Stanley told in its note that, “the threat of disruption from fintechs is forcing incumbents to up their investments in technology to gain operating efficiencies and preserve market share”.
In terms of the US, the focus in the next months will also be on the Trump administration. The administration has promised to deregulate the Wall Street, which could mean good news for incumbents but possibly even for other investment firms, such as VCs and private equity firms.
It will be interesting to see whether VC investment will continue it’s downward turn. However, it is certain the fintech sector will continue to boom and be a target for investment and innovation.