Business of Fintech, Future of Investing

The Tradestreaming guide to investing in fintech

  • $19.1 billion was invested in private fintech companies in 2015.
  • Investors have new opportunities to participate.

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The Tradestreaming guide to investing in fintech
Most articles about fintech begin with something like the following formula: (Insert sloppy, over-excited adjective) fintech in (insert any of the past 3 years) raised (insert number <20, KPMG pegged 2015 at $19.1) billions of dollars. That's great and it's certainly one way to measure the impact innovative technologies and entrepreneurs are having on the business of money. But, as an investor, you have to wonder: if fintech is such a lucrative investment, how do I get in on the game? We've done some of the work for you, interviewing the most successful fintech investors on the planet o our podcast (yep, hyperbole works in these parts). We also track quarterly fintech investment trends. Here are various ways both individuals and professional investors can invest in fintech.

Investing in public fintech companies

New fintech ETF Keefe Bruyette and Woods launched the KBW Nasdaq Financial Technology Index this week, listed under the ticker $KFTX. The 49 fintech companies listed in the index include publicly-traded payments firms, niche research, data, and analytics providers, portfolio management technologies, and stock exchanges. It's not the first time around the fintech block for KBW, which is owned by midwestern brokerage and asset manager, Stifel. The firm has a family of indices that track the financial industry, including a global bank index ($GBKX), capital markets index ($KSX), and a P&C insurance index ($KPX). According to KBW, the constituents of the fintech index represent 18% of the investable domestic financial universe and nearly 4% of the investable domestic equity universe, which accounts for approximately $785 billion in total market cap. “The KFTX provides a relevant benchmark within the fintech space, which will be valuable to the increasing number of investors closely watching this area,” said Fred Cannon, Global Director of Research at KBW. Invest directly Investors who want more direct exposure than an index can provide can merely peel open the KFTX to get a better view of the 49 companies included in the index. Once they do, they'll be able to drill-down on names like ACI Worldwide ($ACIW), Cardtronics ($CATM), Envestnet ($ENV), Green Dot ($GDOT), IHS Markit (INFO), Nasdaq ($NDAQ), PayPal (PYPL), and Square ($SQ). Using an index gives an investor broader exposure to the fintech theme in general, while investing in a single name or a handful of names is more of a bet on these specific companies outperforming.

Investing in private fintech companies

Venture capital Large check writers (say, $5 million) may want to consider putting their monies in the stewardship of large venture capital funds that are active in fintech. Most funds that are active in fintech aren't dedicated to the space, so if you were to invest in Sequoia Capital, per se, you would be get exposure to portfolio companies like Prosper and Nubank, but you'd also get exposure to the rest of the fund's holdings. Spark Capital, Bessemer Venture Partners, Kleiner Perkins, and Norwest Venture Partners are also active in other fields. There are a handful of funds which are highly-exposed to fintech. Firms like Anthemis and Route 66 that are comprised of specialists in financial services and focus their investing entirely on the sector. For investors who like to get into private companies early, 500 Startups recently announced it was launching a $25m fund. Over the past 6 years, the microfund/accelerator group founded by PayPal mafioso, Dave McClure, has made 80 investments in fintech, including in firms like CreditKarma and Simple. FinTech Collective is another early stage venture fund completely focused on fintech and has made investments in payments and banking, as well as across capital markets, wealth and asset management, lending, and insurance. Of course, there are a lot of corporate venture capital (CVC) funds, like Google Ventures and BBVA-affiliate, Propel Ventures, but they don't typically take outside money. Fintech specialists like QED Investors and SennaHill Partners also only manage their GPs' money. Angel investing If you like to handpick your own private investments or don't appreciate the 2-20 model of fund management, you're probably be most comfortable being an angel investor in fintech. Angel investing in fintech is interesting — some of the same technology angels are investing in has made angel investing even more accessible to most investor. My list of 40 epic resources for angel investors is a great place to start learning the ropes or continuing to hone your craft. Equity crowdfunding gives investors the ability to invest in fintech startups from the comfort of their own living rooms. In increments as small as $1000, fintech enthusiasts can identify top startups in fundraising mode, research their investability, see who else is also investing in a current round, and pull the trigger and invest alongside other investors. Companies raising via equity crowdfunding then aggregate all these small investors from around the world. Typically, these investments are made through a funding vehicle, so that fintech startups don't have hundreds of surly angel investors on their cap tables. AngelList is a DIY investor's dream. There are over 12,000 companies listed in the financial vertical — not all of them are currently raising money, but it's worth checking out. AngelList also has syndicates where an investor can piggyback on another investor leading a round to get access to a particular deal. There are other equity crowdfunding firms, like OurCrowd (disclosure: I was its previous CMO and am a general partner there), which take some of the investment selection burden off the investor by doing their own due diligence. So, unlike AngelList, which is an open marketplace, these types of equity crowdfunding platforms are selective, typically only listing a small percentage of companies that apply for funding. Investors can read platform-supplied research, attend pitch events, and interact lightly with the founders. Investing in fintech may be a rising tide that floats all boats, but it's also been an opportunity for more sources of capital and more investors to access the space.

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