The end of the second quarter of 2016 is upon us and it’s time to review the portfolio moves of some of the top venture capital investors in fintech.
By following the money flow, we can find insight into trends and perhaps get a view into what types of companies are being financed with growth capital for the future.
We looked at 40 VCs that, in aggregate, made $1.3 billion worth of fintech investments in over the past three months, and identified a few trends that we feel are the most important.
Trend #1: Non-U.S. investments
Of the VC’s surveyed, 35% invested a total of $500M into companies outside the U.S., including Europe, Asia, South America, and the Middle East.
Portfolio companies of note include:
- TransferWise: International transparent money transfers ($26M Series D)
- Nubank: Digital financial services company in Brazil ($25M in debt)
- Capital Float: Digital finance company targeting SMB’s in India $25M Series B )
Investments in foreign countries shouldn’t surprise most people; most of the world’s GDP resides outside the U.S. now. However, looking into the data, Latin America piques our interest. Most of the investments made in Latin America this quarter were in early stage firms, a sign that the startup market is gaining momentum there.
“We looked at financial services in Latin America, particularly Brazil, and saw not only the right market conditions but also a great wave of entrepreneurs emerging,”
Caribou Honig, co-founder of QED Investors, wrote via email regarding his firm’s investment in Nubank.
This isn’t an indication that VC firms are going to be investing in Latin America and other emerging regions like drunken sailors. Instead, expect VCs to continue to evaluate how they can help foreign fintech companies and find market segments ready for improvement, especially in light of the competitive conditions in the US that have pushed valuations higher.
Trend #2: Investing in B2C businesses
Another trend worth acknowledging was investment in B2C fintech companies. Over 65% of VC’s invested a total of $944M in B2C fintech companies. Companies receiving investments included:
- Circle: International online payments ($60M Series D)
- Digit: service that checks spending habits and automatically sweeps money into savings when possible ($22.5M Series B)
- Better Mortgage: helping consumers get better mortgages online ($30M Series A)
After a general refocusing on B2B fintech investing during early 2016, the emergence of B2C may be coming from two places. First is the millennial desire for better relationships with financial providers (an idea we touched on in a previous article about transparency). There is still room for upstart financial institutions to win over core services from an audience hungry for new options, however hard and expensive it would be to build.
As a former senior executive at Capital One, QED’s Honig has seen the power of a B2C product, through the impact Capital One had on the credit card industry.
“B2C investments are interesting because there’s the opportunity to transform entire industries, and the results can be fantastic when you’re on the side of driving that transformation,” he said.
The second, and subtler, are the years of B2B investment in fintech. The unbundling of financial services has made it easier to build a consumer financial app by mashing up APIs. With the technical hurdle lowered, it's become cheaper and faster to build new consumer-facing financial apps
. New banking startups can piggyback on existing technologies to create innovative financial solutions.
Trend #3: Investing in insurtech
The last trend worth looking at is insurance technology. Although not as significant as the previous trends, funding in insurance startups should be taken seriously. Some notable companies include:
- Clover Health: Low cost healthcare provider ($160M Series C)
- Jetty: Property and casualty insurance targeting millennials ($4M Seed)
- Bright Health: Affordable health insurance plans ($80M Series A)
Insurance has been a topic of discussion for some time now, ranging from the expensive and complication of health insurance in the U.S. to waning demand for life insurance among millennials.
Issues in the insurance sector have tempted entrepreneurs to try and find holistic solutions. Early stage investors are looking for entrepreneurs who view insurance as a marketable product, not just a service.
“I’m most excited by the companies that treat marketing, product, and underwriting as flip sides of the same coin and create something new in the [insurance] market,” Honig explained.
Although we are still in the early stages of insurtech, it’s worth monitoring the progress of how and where insurance tech evolves.
Takeaways for Q2 2016 venture capital investment trends
These trends not only give us a glimpse into what may be a few years from now, but also the areas of opportunity for entrepreneurs and investors alike.
Foreign investments, especially into emerging regions like Latin America, are a good example of the geographies
risk capital feels are most ready for change. Clustered investments in a geography inevitably lead to the development of a fintech ecosystem, with startups, funding sources, accelerators, universities and local financial institutions all participating.
Fintech firms building B2C models are reaping the rewards from the billions of dollars that recently flowed into B2B startups; as more investments are made in B2B infrastructure, B2C fintech companies can focus more on marketing and UX than on building out banking pipes.
Insurtech is still young, but worth following. The smart money is betting there’s an opportunity for the right companies to come in and become future leaders of the insurance industry.
