AI, software security and B2B hold the greatest prospects in a crowded FinTech space

Radboud Vlaar, partner at Orange Growth Capital, explains how the firm has become more selective with B2C deals as it looks to invest in new opportunities across subsectors and regions, in a research interview with FinTech Global.

A slew of new FinTech opportunities in dynamic tech sectors is seeing firms like Orange Growth Capital increasingly look beyond the B2C space for investment options, partner Radboud Vlaar has told FinTech Global. Nascent and blooming segments including AI, software security and support technologies are all areas the firm has in its sights – a significant change from the bevy of insurance market deals it has completed in the past few years.

Investments in InsurTech have been declining globally since the first quarter of last year according to FinTech Global data, going from $630m across 63 deals to just $178.5m across 53 in Q1 2017, which Vlaar said is explainable as a lot of new initiatives started in Insurance.  WealthTech, in comparison, which covers a range of companies across the B2B and B2C sectors, has seen a boost in invested capital over the same period, going from $371m across 44 deals to $427m in 65 deals.

Vlaar said, “For many B2C investments all the funding goes straight into marketing spend on the Googles and Facebooks of this world, with less virality than people expected. For FinTech B2C companies it takes a long time and a lot of capital to build trust and win customers, which I think is more complex and a lot more time consuming than people actually expect. As a result, we are selective in B2C and focus only on these companies with smart marketing strategies – for example, we just invested into Trussle at the beginning of this year, which is a B2C company. Next to consumer, small businesses in financial technology can still be very big, because it’s such a big part of the market.”

“On the other hand, there are lots of opportunities in B2B. If you look at the whole financial technology market, financial services centre around trying to build up a percent of GDP, depending on how you define it, and it is also the biggest buyer of software in the world with around £800bn spent a year on software alone. B2B takes longer but is more predictable and less marketing intense.

“If you go to the little, less sexy parts of financial technology such as security, back and mid office, there are a lot of areas where there is less focus from the mainstream investments. Next to that, it also has complexity and characteristics such as data protection, partnership, complex procurement processes, making it quite an attractive area,” he added.

Areas like artificial intelligence are widely seen as appetising parts of the market at the moment, but OGC said it also sees a lot of potential in areas such as customer services and insights, believing that making platforms smarter and more practical could become more prominent in the future. But expanding into burgeoning sectors is not the only new area OGC has in its sights, Vlaar said, with different geographies slowly beginning to emerge as relative leaders in specific FinTech areas.

Taking a regional view

The firm’s debut fund had a bigger focus on the DACH region, the UK, the Netherlands and the Nordics, he said, but its latest vehicle is looking towards France, Spain and Ireland, where OGC sees good opportunities and markets. Spain has seen a huge increase in the number of FinTech companies in recent years, FinTech Global data reveals, growing from about 165 in 2014 to 234 at the start of this year. France had around 254 FinTech companies as 2017 began, with around 15.7 per cent of all the companies being WealthTech, making it the second largest subsector.

Despite the burgeoning numbers of companies in the market, investment activity is still yet to catch up across the board. Marketplace lending businesses currently make up 8.3 per cent of total FinTech companies, for example, but have received more than 35 per cent of investment capital since 2014. Vlaar said that certain countries have begun to show a greater focus on specific areas of the market, with Germany doing a lot of work in the InsurTech sector and Spain more into data and engineering types of solutions.

“We will see more niches, so we see the Netherlands as a trading payments hub, Scandinavia has very much been an e-commerce security type of play and Israel/France are very good at data and analytical tech driven solutions. In south east Asia it is much more domestic solutions and much more moving in financial services to SMEs or its consumers, rather than the hardcore technology plays to support and sell into financial services – with exception of course the region of Hong Kong and Singapore,” he added.

The near future of FinTech

Vlaar said, “We expect quite some shakeout, I think that a lot of companies are looking to funding on the back of the hype. They will run out, at some point, of money and need to raise other funding, so we will see more consolidation, but also better quality of companies starting up now. The regulator is, in some areas, becoming a bit clearer on areas that will be regulated and in some point we will see very big successes.

“Companies like Adyen in the Netherlands, also some of the lending companies like Klarna in Sweden and Zopa in the UK are doing very well. But also in Italy you see companies like Octo, which is a big telematics [business] and is going to be a very big insurance exit or IPO. You will see some successes, but you will see some shakeouts and we expect a lot of equity hirers for acquisitions of companies by financial institutions to get talent in-house – but of course, for very big amounts.”

© 2017 FinTech Global & Investor Networks Ltd

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