The information being circulated about the level of investment in unlisted UK FinTech companies is misleading – it materially underestimates the amount of money that was invested in the space last year.
The numbers are significantly wrong
According to information released last month by Innovate Finance (IF), $783m was invested in 173 UK FinTech deals in 2016, which was supposedly a fall of 33% (sic) in the total amount invested compared to the previous year. This is simply incorrect. The association has been supplied with numbers that do not, in our opinion (FinTech Global), give a true reflection of what’s actually happening.
There are two problems with the figures used. Firstly, they were provided in US dollars. Anyone notice a Brexit vote last year? Lots of people have expressed their opinions on how Brexit will affect FinTech but virtually everyone who reported on these figures forgot to mention that sterling dropped by around 20% against the dollar after the Brexit vote on the 23rd June. Given that capital investment in UK FinTech companies was broadly similar in the first and second halves of 2016, that’s a 9-10% error across the figures for the whole year. That is an exchange-rate effect, not a decline in aggregate invested capital.
The second problem is that a considerable number of UK companies haven’t been included. Figures from US-based databases tend to overlook what’s happening outside the US. FinTech is global – there are plenty of companies in the UK and in the rest of the world that don’t get registered on US radar screens. Surprises may be in store for some of the investors and companies that are too reliant on US data and aren’t aware of international developments or potential competition from the rest of the world.
KPMG used the same data source for their The Pulse of FinTech Q4 2016 report, but came up with a figure of $609m invested in 96 deals in the UK in 2016. Their definition of ‘FinTech venture activity in the UK’ must certainly be different to IF’s definition of ‘UK FinTech VC Investment’ but it’s not obvious how KPMG pulled out 77 fewer transactions and $174m less in capital invested from the same database. To be fair, the accounting firm does appear to be consistent with its definitions over time, since they claim total invested capital declined by 36% from 2015, which is not too far from the 33% drop referred to by IF. Nonetheless, they appear to have been susceptible to the same oversights.
At FinTech Global, we conducted the analysis from the ground up, and in constant currency, to determine that invested capital in UK FinTech fell by only 15.4% in 2016. That’s less than half the fall being quoted by everyone else, and it paints a significantly different picture of what’s happening in the UK FinTech space. We discovered that £941m was invested in 178 deals in 2016.
Capital invested in private UK FinTech companies actually increased for small and mid-size deals
Headline figures, even when corrected, can still give a superficial impression. So we dug a little deeper and conducted an interval analysis on the data. This revealed that for every single interval defined by an investment size below £40m, the capital invested actually increased in 2016. Of course it’s important that big deals continue to get executed and their decline is indicative of a level of caution among larger investors, but it should be remembered that the activity profile of larger deals against time, in any sector, is ‘lumpier’ than for smaller deals. Sometimes the health of a business ecosystem can be better defined by what’s happening with early-stage companies.
In 2016, investments of quantum size £0-5m increased by 31% to a total of £157m, £5-10m increased by 41% to £127m, £10-20m increased by 7% to £168m and deals in the £20-40m range went up by 54% to £211m.
Four sectors attracted over 80% of total capital invested in UK FinTech companies in 2016
A breakdown of UK FinTech investments for 2016 shows four sectors attracted over 80% of the total capital. Marketplace Lending companies, which accounted for nearly a third of the total, took £308m. The next three most successful sectors in terms of capital raised were: Infrastructure & Enterprise Software, Payments & Remittances, and WealthTech. Each of these made up around 16% of the total.
Why bother getting more accurate information?
Why make a big deal out of it? Well the impact of FinTech and the decisions being made are too important for the data to be inaccurate. It gives a misleading impression of what’s happening in the industry, and it allows superficial headlines to be written about the demise of the UK FinTech sector, when in fact most parts of it are doing very well.
Given that people can ‘slice and dice’ the same data in different ways, striving for perfect data obviously delivers rapidly diminishing returns. However, many investment firms and financial institutions that are active in the FinTech space require better information to make better investment and business decisions. Using poor data for big decisions is potentially catastrophic. That’s the reason why we built the FinTech Global intelligence and analytics platform with support and input from a network of around 100 FinTech investors and financial institutions. We’re far from perfect (yet) but we’re uncovering information and fuelling insights that can make a huge difference to our clients.
© 2017 FinTech Global & Investor Networks Ltd