For us all, 2020 has been a black swan, a hardly ever predictable scenario.
After the second quarter of the year, we have seen the venture capital ecosystem repositioning itself to support a growing innovation ecosystem.
It is an ever more ingrained part of the economic development policies for states. The key attraction in funding innovation is, of course, the ability to create new high skilled jobs. Technology and innovation are at the heart of how we will recover economies across Europe and the world.
In 2020, we saw clear winners in life sciences and healthcare. Investment reaching a record of $51 billion. We observed how e-commerce won the fight with the High Street retail outlet, leaving a big question mark over how we will rebuild what has been completely decimated.
It is no surprise that investment financial services technologies represent an essential part of our ecosystem. In 2020, we saw a contraction of around 13% at a global level of investment that has gone into space.
Across Europe and the US, investment activity has surpassed Asia as the markets are mature and clear winners for specific verticals are starting to be determined.
In the US, we have seen the M&A activity going up by 25% in fintech signalling that the beginning of the market consolidation is upon us.
Over $8 billion were invested in financial services technologies, with London claiming over 60% of all the transactions. It is essential to acknowledge the role of the Capital for Europe and the UK. The big question mark remains: what will happen with our institutions and whether, in the aftermath of Brexit, we will retain a favourable trading relationship with the EU?
Not resolving the situation of passporting right for regulated activities can create delays, complicated conditions, and above all, hinder innovation.
The onus of responsibility shifts now to our regulators and political representatives to obtain a workable deal for innovators and entrepreneurs in this space.
The key winners have been payment companies raising 38% of all the capital in 2020, close to $3bn.
It is hard not to open any newsfeed without some essential news on cryptocurrencies. We may have reasons to worry about the volatility or the speculative activity in the market, yet investments in the infrastructure and crypto solutions will not decelerate. In 2020, we observed an improvement from 2019, with over $300m sustaining the next generation of entrepreneurs.
We have seen a shift in the quantum companies raising. Funding rounds shifting from $2.3m to $4.5mat Seed and from $8.5m to $10.3m at Series A (Data source: Pitchbook).
The number of deals has not increased as more investors are starting to bet on their winners a lot more capital than before. In 2020, we saw a race to the top with fewer rounds across companies' whole life cycle but with rounds larger than ever.
It is important to note that our market matures; there is no need to flock to the US, capitalise in Europe. Even mega-rounds are very much possible. The advent of a new era for fintech is upon us.
MORE FUNDS IN THE MARKET
I assess that across Europe, over 150 funds have mentioned fintech as a core of their strategy. It now represents a critical focus area for many Venture capital investors in 2021 and beyond. It predicts a significant increase in companies at early growth stages, an inflow of capital to sustain existing and new players in this ecosystem.
For this part of the market, the most surprising element has been the Decreasing involvement of corporates which signals that large organisation have an innate inability to respond very quickly to the crisis.
It is this lack of agility that gives Neobanks a clear advantage, gaining traction and market share.
Fintech solutions in Banking are one of the areas attracting over 25% of all the capital invested in 2020. Judging by the funds lining to sustain the next generation, it is hard to imagine a future where disruptors will continue to remain on the fringe.
I take the view that soon, we might be able to see not large banks acquiring late-stage VC backed companies, but perhaps the other way around. To see some of the larger tech providers acquiring smaller banks to bypass regulatory hurdles.
DISRUPTIONS IN 1, 2, 3
In the space of consumer finance, alternative lending disruptors have managed almost to conquer all in record time, leaving immovable Giants in a state of limbo. The choice is really to adapt or to die.
I look at companies like Klarna and realise that they have gone from a handful of shops to virtually every website addressing millennial and younger demographics in the space of one year.
The funding rounds in the space make some people weep, yet I think this is just the beginning of something a lot larger. Just take a pause and reflect on the dimension of consumer finance. When we are thinking about consumer finance, we are thinking about trillions of dollars being spent every year and transacted by organisations that have profits into the tens or hundreds of billions.
I think the world of financial services will look very different in five years, especially in Europe, where traditionally acquisitions from the US have been very common.
I cannot help wonder whether JP Morgan will acquire Revolut? Could RBS or Barclays acquire Starling Bank? Or perhaps Visa will acquire Klarna?