venture capital

Key Trends in Q2 Fintech M&A activity – Payments lead the way

Fintech deal activity hit a peak in Q4 2015, and as discussed in a previous post, steadily went down through most of last year. However, this year after a good start in Q1, there was a strong rebound in Q2 2017, and recent news have been pointing to some big ticket deals happening within the payments space.

As per KPMG’s quarterly report, globally Fintech investments hit a healthy $8.4 Billion across 293 deals. Rebounds were particularly noticeable in both Europe and UK. Fintechs in Europe managed to attract $2 Billion (in investments) in Q2, which is more than double the Q1 number ($880 Million).

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Some of the key trends from the report,

  • Corporate Venture Capital continue to increase their involvement in Fintech deals
  • Asia sees a dip in Q2 investments due to low China deal activity
  • Regtech deals could create a record year 2017. At the current pace its likely to surpass 2015 and 2016 activity (in size and count)
  • Focus moves from B2C (customer experience) to B2B (mid and back office efficiencies)

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Apart from the VC activity, Private Equity firms have turned their attention to Payments, as the deal sizes within payments start to increase. In the last eight weeks we have had some M&As and private equity deals announced within payments.

  • Igenico acquires Bambora for $1.5 Billion. This happened after Ingenico tried a hostile takeover of WorldPay assets
  • Worldpay merged with Vantiv with a £9.1 Billion deal. The new firm will be jointly led by Vantiv’s Charles Drucker and Worldpay’s Philip Jansen.
  • Worldline acquires Digital River World Payments and First Data Baltics, giving them operational positions in the Nordics and in the Baltics.
  • Visa invested in Klarna – how much they invested and at what Valuation is not disclosed.
  • Blackstone and CVC announce acquisition of Paysafe for £2.9 Billion

These are some of the top stories, but the key takeaway is that money is flowing the Fintech way, again!! Both in the VC and the PE space!!

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Silicon Valley VCs rush to Brazil Fintech- Millennial Nubank and Neon share spotlight

For a country that’s been struggling with political and economic turmoil for the last 4 years, Brazil has found some hope with Fintech. Brazil has the most number of Fintech startups in Latin America, closely followed by Mexico. Fintech investments in LATAM rose by 31% in 2016 and it was the most popular sector within technology investments. With top Silicon Valley VCs making their first investments in LATAM, firms like Nubank and Neon have made great strides in the last couple of years.

Brazil is the largest Latin American economy with a GDP of $1.8 Trillion. The country has been in recession and political turmoil since 2014. The central bank interest rate was at one point 14.25% and with the economy recovering it has come down to 11.25%. While the economy is just about recovering from recession, Fintech is already thriving in Brazil. There are about 230 startups in Brazil cutting across various clusters of Fintech.

Why is Fintech Brazil special? Well, Nubank and Neon have managed to address a genuine gap in the market in a very millennial way, however, its not just their use case or execution that sets them apart. Its the context in which they operate.

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In a recent Goldman Sachs report, Brazil’s banking system was described as susceptible to Fintech primarily because of an “Oligopolistic Market Structure”. Brazil’s top 5 banks held about 84% of loans and 90% of branches. In the US these numbers are around the 20% and in India about 30%. Fintech’s growth could mean that these banks that currently charge high fees and interests from their customers, will need to make their offering more competitive. The concentrated market is a huge opportunity for Fintechs to go after.

The other factor that makes these startups special is just that, they have thrived through a recession. While the VC/PE investment in LATAM has been falling overall, Fintech has been the beacon of hope amidst the doom and gloom, with investments in the sector showing a consistent rise over the last two years.

Nubank was founded in Sao Paulo in 2013, and launched a mobile controlled credit card service in September 2014. Due to the quality of the offering Nubank have managed to reach 3 Million users. Nubank customers can block and unblock their credit cards, change their credit limits, pay their bills and have access to all their purchases in real time all through a mobile app. They provide 24/7 customer support through digital channels and clear and simple communication. All of this was unheard of in Brazil, and has seen an extremely positive reaction from customers. With investors like Goldman Sachs, Peter Thiel and Sequoia, Nubank is certainly one of the best Fintech stories from LATAM.nubank

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Nubank was the first LATAM company to win the “Marketers that Matter” award in 2016. The previous winners of the award include Google, Visa and Netflix. A look at Nubank’s Instagram feed shows how good an approach they have to win over millennials. In Dec 2016, Nubank raised $80 Million from Moscow based VC firm DST Global. DST’s other investments include Alibaba, Slack, Twitter, Facebook and Spotify. Nubank are DST’s first LATAM investment. They have raised about $235 Million in about three and a half years, with many rounds being the first for top Silicon Valley VCs in LATAM.

Neon is the first 100% digital bank in Brazil. Neon take customer experience quite seriously as they have been the first LATAM bank to use facial recognition through Selfies to authenticate users. They have recently partnered with Visa to leverage their facial bio-metrics technology to confirm identities for online purchases. During the process of opening a bank account customers would provide a numeric password, finger print identification and a selfie. At the time of making a transaction the customer is asked for a selfie. Once the selfie is taken and submitted, it is matched to the selfie taken during the opening of the account to approve the transaction.

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In November 2016, Gemalto the world’s leader in digital security partnered with Neon to come up with a one-of-a-kind Visa Quick Read design debit card. The Visa Quick Read design provides essential purchasing information conveniently on the front of the card.

In a recent interview Monzo’s Tom Bloomfield mentioned that he was particularly pleased with innovation coming out of two challenger banks, N26 in Germany and Neon from Brazil. Neon have managed to onboard 1.5 million customers in less than two years. Most customer acquisitions have come from word of mouth and referrals with very little spent on marketing.

Innovation when taken out of context can sometimes look ordinary. While both Nubank and Neon have similar use cases to their peer Fintechs in the UK and the US, the ecosystem in which they operate and excel makes them super special.

Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

The VC business is finally being disrupted

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VCs love to invest in technology and business models that disrupt the old established way of doing things. The irony that VC is now an old established way of doing things has not been lost on many people and the disruption of VC has been much forecast for many years (and as cynics will point out, this has not yet happened). This post explores the thesis that this is finally about to happen thanks to the confluence of investor demand, technology and tax change.

 ”Your fat margin is my opportunity” (Jeff Bezos). 2% AUM fee on a $1bn fund is $20m a year. That is not a lean, mean operation – that is a fat margin. That is before delivering any result to Limited Partners (LPs). That is $20m out of investors pockets before they see a dime from the profit share. That is incentive to raise a big fund and research shows that big fund size is a contrary indicator to fund performance. Who cares about profit share when you can earn $20m a year without earning any profit for your investors? Of course that cannot last and that is why change is coming to the VC business, enabled by the technology innovations that VCs funded in the past.

Investing in startup funds is as risky as investing in any other startup

Two data points from that Ivey report will make investors pick up that Vanguard brochure selling low cost Index Funds:

•For two-thirds of the VC firms, the first fund is their last fund.

•Only 10% of the VC Firms Launch More Than Four Funds.

You cannot invest in those 10% of top tier Funds, unless you happen to be lucky/smart enough to invest in their first fund and have the right to invest in future funds. Yes, it is like the old Groucho Marx joke: “I don’t want to belong to any club that will accept people like me as a member”.

VC Has become part of the asset management business

It did not use to be like this. Finding a young and unproven team and backing them all the way with everything (money and contacts and advice) is still done by a few real Innovation Capitalists but a lot of what we call VC has become Momentum Capital, chasing hot deals.

The preferences that some VC load onto deals make it almost a debt instrument and create fundamental misalignment with entrepreneurs.

Late stage deals are like investing in public companies.

The 2 and 20 model is at risk across the whole private equity business. VC may simply be the canary in the coal mine.

From gather then invest to invest then gather

If you wanted to be a VC GP (General Partner), you first approached investors (Limited Partners  or “LPs”) and persuaded them to invest for about 10 years while you as the GP invested in and exited from the next Facebook. This model is flawed for both LPs and GPs:

  • LPs have to invest in a startup fund and like most startups, it is possible that the startup fund will become the next Sequoia Capital, but read that Ivey Report to see why this is statistically unlikely.
  • GPs have to spend a lot of time gathering assets (which gets harder as the data points described here get commonly accepted) when they could be investing in startups or doing something else more lucrative.

From 2 and 20 to 0 and 40.

Investors are quite happy paying 20% as a profit share compensation (called “carry” in VC land). Heck, they will pay 30% or even 40% (particularly if it is 40% over some nominal risk free hurdle such as US Treasuries) if the GP will drop that 2% AUM fee.

The job of finding and nurturing tiny, young companies that turn into great big mature companies is hard. The people who know how to do it should be well rewarded. Most business are usually happy to share a big % of the profits on something if the other party takes a big risk as well. Paying 2% of AUM is zero risk to the GP and total risk to the LP. If you took away that zero risk 2%, most investors would be willing to increase the carry/profit share % from 20% to 30% or 40%.

If we stayed in the mode of gather assets then invest, the 2% fee will stay – it is the only game in town and it is a game that rewards skills in asset gathering more than skills in investing. However, the new crowdfunding services using syndicates such as Angel List and Syndicate Room change this dynamic to invest then gather assets. This post on Angel List describes how this works.

This matters more now than ever now that software is eating the world

Many investors have studied that Ivey Report and simply decided to stay away from VC as an asset class. Instead they focus on companies that have already reached maturity. The problem is that if software really is eating the world, this “safe strategy” is increasingly risky because it is more of a zero sum game than the venture business likes to talk about. If AirBnB scales, it does so at the expense of the traditional Hotel business. If Fintech ventures scale, they does so at the expense of the traditional Financial Services business. If Cleantech ventures scale, they does so at the expense of the traditional carbon fuel business – and so on. Investors looking to the long term – such as Family Offices and Foundations – need to invest on the right side of this disruption.

Many VC will follow Hedge Funds to become Family Offices 

Masters of the Universe don’t die, they just fade from the headlines. VCs that already made $ billions don’t need AUM fees. They can simply invest their own money, without the hassle of managing somebody else’s money. Many Hedge Funds have already done this. The tax law in America that taxes carry as if it is risk capital (i.e at the lower capital gains tax rate) not fee income has a high likelihood of changing no matter who becomes President. These VC turned Family Office can then invest in Syndicates who invest first and then gather assets. This is where the confluence of technology, business drivers and tax law change creates the tipping point.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.