fintech roundtable

The Banker brings together fintech investors and start-up hub facilitators to comment on record levels of investment, scale-up strategies, the desire for unicorns and the need for diversity in the sector. 

Total global fintech funding (across mergers and acquisitions, private equity and venture capital) reached $210bn in 2021, with fintech investment in the UK reaching £27.5bn, according to data from KPMG. Are the numbers cause for optimism or should we be wary of a pandemic bubble? The Banker polled several leaders of fintech hubs and seasoned investors to gain their insights into the record numbers for funding and predictions for the future. 

Panel 

  • Thomas Bussey, investment director, strategic innovation investments, HSBC Bank
  • Janine Hirt, CEO, Innovate Finance
  • Sarah Williams-Gardener, CEO, FinTech Wales
  • Sophie Winwood, investment principal, Anthemis Group
  • Nasir Zubairi, CEO, Luxembourg House of Financial Technology (LHoFT)

Q: Is this a call for optimism or should we be wary of a ‘pandemic bubble’?

Thomas Bussey: It is well known that there is a lot of capital out there at the moment. That is driven by asset allocators seeking returns in the low interest rate environment we have lived in for the past decade, and so allocating more capital to private equity and/or venture capital (VC). As interest rates begin to rise, we may therefore start to see a little less capital out there for these types of investments, but that won’t happen overnight. So I remain bullish for the short to medium term. Although I would be surprised if we are still seeing 50 times annual recurring revenue multiples in 12 months’ time, those businesses with sound foundations should and will get funded.

Nasir Zubairi: Change is a law of life. Financial services have much to do to align with change, but it is good to see the evolution is accelerating. It is positive to see funding into new financial services ventures continuing to increase, be it that the low interest rate environment is helping to incentivise capital into alternative investments. The long-term trend is strong, but there may be some volatility around investment numbers year-on-year. I believe some extra-large late-stage funding rounds have contributed to the impressive numbers: C6, Revolut, N26 and Klarna, for example.

Financial services have much to do to align with change, but it is good to see the evolution is accelerating

Nasir Zubairi

Sophie Winwood: I think we should all continue to be excited about what is to come for fintechs. While the large amounts of capital in the market has led to increased round sizes and valuations over the past few years, innovation in fintech continues to create real value for the global economy. And while traditional areas like payments remain a significant driver of fintech activity, the sector is broadening with areas like embedded finance, banking infrastructure and cryptocurrency attracting large amounts of investment. Soon everything will be a fintech.

Janine Hirt: Fintechs are providing solutions and technologies that have changed the way society engages with financial services. The widespread adoption rate we’ve seen in the UK — which now stands at more than 76% — is not a short-term blip, but rather the new norm in financial services. However, it is critical that we continue to ensure fintechs have the conditions they need to thrive.

The sector is delivering on all the biggest global trends — including business productivity, consumer behaviours, financial wellness and inclusion, climate change solutions and cyber security — and this isn’t going to stop anytime soon.

When it comes to investment, UK fintech has continued to secure record levels of funding over the past few years, and total investment into British fintechs jumped more than 217% to $11.6bn in 2021. Investor appetite is only going to increase as fintechs continue to innovate and we’ll continue to see the sector going from strength to strength.

Sarah Williams-Gardener: We have built our foundry accelerator over the past six months. We are midway through our second foundry cohort of eight early stage fintech start-ups, having graduated nine last summer.

We have seen the emergence of green finance solutions from the likes of alumni Sero, not only retrofitting homes with heat pumps but also providing green energy pricing engines. We saw Zing, a great new embedded insurance solution, come to market and form powerful partnerships. We also saw the emergence of car subscription solutions from both WagonEx and Voltric.

The 2021 cohort collectively raised more than £9m in investment, created more than 20 jobs and signed corporate deals with the programme partners. 

Our second foundry cohort will be pitching live from the Principality Stadium on March 30; with a selected 30 to 40 investors in the room with the event being streamed live across the globe. If the pandemic has shown us anything, it is that the world can effectively connect virtually this provides greater opportunities for investors to get early sight of these fabulous start-ups.

Q: Many hubs seek to create optimal environments for start-ups — but scale-ups have different needs. What needs to be provided to ensure emerging companies last longer than the starting gate?

Ms Winwood: The main challenge we hear from our start-ups is around talent — what is the best way to attract, retain and reward the best talent as you are scaling quickly? This is especially true in tech talent, where demand is high and supply is low and expensive. As talent markets are becoming increasingly global due to Covid-19 normalising the remote work model, there are many ways hubs can support investment for retraining of professionals, including more focus on tech education at schools, visa schemes to attract global talent and investment in infrastructure to simplify onboarding and employment of overseas talent.

Mr Zubairi: Talent is the key to scale, but access to talent is a growing problem for all countries in Europe. The problem could become more acute, on the tech side, with the current situation in Ukraine creating a supply constraint from the east of Europe. In Luxembourg, a country that has long relied on foreign talent to drive the economy, we are involved in a number of initiatives to re-skill the existing and skill the emerging workforce — the Digital Learning Hub and the Luxembourg Tech School for example — and continue to ensure that the country remains attractive to foreign talent. 

Ms Hirt: The Kalifa Review set out a helpful roadmap across five key areas — policy and regulation, investment, skills, national connectivity and international — to ensure the UK remained one of the best places in the world to start, scale and grow fintechs. 

Of these areas, perhaps the two most critical to supporting the growth of start-ups to reach scale-up level and beyond is ensuring access to talent and to capital. In the UK, this means making it easy for fintechs to hire great employees both from the domestic talent pool and from abroad, and it means addressing the growth capital gap. The scale-up visa which is set to launch in April is good progress on the talent front.

We have also seen strong progress from government and the regulators in overhauling the listings regime here in the UK, which will cement our attractiveness as a fintech hub. However, there is more to be done in terms of driving greater institutional investment into the sector, including shifting the mindset of investors to take a longer-term view and focus on the growth opportunities here in Britain.

Mr Bussey: We are already starting to see an improvement here, with around 130 ‘unicorns’ [companies valued at $1bn plus] in Europe — roughly triple the number three years ago. The employees behind those companies are the unicorn-builders of the future, often achieving financial stability from their equity in an exit before going on to found and scale their own companies, so I am hopeful the funnel will continue to grow. We also need to ensure companies have access to as many markets as possible in as frictionless, and — where necessary — well-regulated a way as possible; internationalisation is key to growing the largest companies.

Q: Does the fetish for unicorns ever distract from company building?

Mr Zubairi: I don’t believe so, at least not in our case. Our strategic focus as a hub is to evolve financial services for the better. Solutions are our key performance indicators, be they for consumer or business issues, rather than scale of funding rounds. Unicorns are more a focus for the media and investors. We do have to be a little wary about inflated valuations; VC funds are becoming larger, the expected returns/multiples required on each investment are therefore becoming larger, so there is an incentive for valuations at each round to be high to give everyone their piece of the pie.

Ms Winwood: The goal to become a unicorn is only a negative thing when a ‘growth at all costs’ mentality is employed. However, we have recently seen companies being punished for this in the public markets, showing that this strategy is not good for founders or investors in the long run. When founders and investors are aligned in building a large transformational company quickly, with strong underlying fundamentals and unit economics at scale, then the goal to become a unicorn is a great one. 

The goal to become a unicorn is only a negative thing when a ‘growth at all costs’ mentality is employed

Sophie Winwood

Mr Bussey: There is absolutely a common distraction where companies seek high valuations at any cost that can be unhelpful, and this is the case throughout a lifecycle, whether they are a unicorn or nowhere near that yet. We are increasingly seeing companies with complex capital structures and investor rights which have been structured to make a higher headline valuation work economically for investors. And once you have opened that can of worms, it is almost impossible to walk back from it in future rounds.

Ms Hirt: It’s ultimately great to see so many UK fintechs reach unicorn status, as it spotlights the strengths of our ecosystem and our ability to produce impactful, big businesses with global ambitions. A strong unicorn success rate reflects the fact that in the UK we have many of the ideal conditions required for companies to scale and grow. That includes a proactive regulatory environment, a supportive government, a diverse and skilled talent pool, and a strong investment landscape.

However, it’s important to remember that unicorn status is only one way of measuring growth and you should never reach a conclusion based on a single data point. The investment data we published in January shows that, in 2021, funds in the UK were spread across 713 deals. This indicates that investment is widely spread across both major unicorn deals and smaller firms on their growth journey, which is another testament to the strength of our ecosystem in the UK.

Ms Williams-Gardener: As an emerging cluster, we have yet to join the unicorn race. That said, we are watching Sonnovate with great interest and feel confident there will be more. We are focused on growth at all levels and fostering partnerships between the established financial institutions and the emerging and scaling ventures. It’s great to see Hodge Bank, still a family-run concern, supporting and investing in Sero Groups and Yoello, as an example. Investment is critical and here at FinTech Wales we are proud to promote the investment opportunities that are here.

Q: What responsibility does a ‘hub’ have to attract a diverse and broad founder base?

Ms Hirt: For our fintech sector to succeed in the long term, we need to ensure we’re attracting and supporting a more diverse range of founders. Change starts at the top, and the whole ecosystem needs to work to create an inclusive sector where diverse talent thrives, so it can in turn drive innovation and growth. 

For example, our 2021 investment landscape report found that only 10% of VC funding goes to female-driven fintechs in the UK — a figure that has stagnated for nearly four years. This is particularly frustrating when you look at the strong track record female founders have in building resilient businesses: in the face of the Covid-19 pandemic, 78% of female-founded fintechs had more than 18 months of cash reserves, compared to 50% of their male counterparts. We need to see investors commit to supporting more underrepresented founders. We also need to do more to promote greater diversity — gender, ethnic, racial, socioeconomic, LGBTQ+ and more — across company leadership, and across workforces at all levels of seniority. 

Mr Zubairi: I believe that championing diversity is a fundamental responsibility. Financial services as a whole requires more work in this area, and the fintech subsector is possibly the worst combination — the ‘tech’ is dominated by men as is the ‘fin’. At LHoFT, we look to inspire more diversity and inclusivity through education, opportunities and role models. Our latest gender inclusivity campaign kicked off on International Women’s Day, not as a one-off, but a continuing initiative. We are fortunate that our finance minister, Yuriko Backes, who is also chair of LHoFT, is such an inspiring role model.

Ms Winwood: I think it’s extremely important that hubs, and all players within those hubs, place a large amount of time and resource attracting a diverse and broad founder base. There are countless studies that suggest a diverse workplace is a better and more profitable one. Within the UK, there are some great initiatives in fintech (such as Innovate Finance’s Women in Fintech and the FinTech Charter for All) and VC (such as Diversity VC and Included VC), but there is always more we can do.

Mr Bussey: This is a shared responsibility from everyone in the industry, from policy-makers to investors and everyone in between. The wider and more diverse the talent pool we start with, the wider and more diverse the founder universe will be that comes out of that. By making the UK an open and attractive place to work for all, we can collectively make a difference. Everybody needs to take responsibility for doing their bit. At HSBC, we are proud to support initiatives like Included VC to increase diversity within the industry.

Ms Williams-Gardener: In Wales, as a cluster, we are proud to be supporting an already diverse base of leaders and founders. We are proud that the following members are run by women with more on their boards: Confused.com, Admiral Groups, Admiral Pioneer, Principality Building Society and the Royal Mint. We have Wealthify being led by Michelle Pearce-Burke. In our fintech start-up alumni, Mayo Twala is founder of Stock-Up; and Shabnam Nida Wazed is the founder of AGAM International in our current cohort, currently in London looking to relocate as a result of the collaborative ecosystem, which includes universities and funding options, such as the Development Bank of Wales.

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