December 12, 2015
As the density of FinTech unicorns club grows over years with amazingly innovative solutions being democratized, there is a legitimate question raising – who is next? Or maybe what is next? It should not be a question, as there is a path that takes Fintech startups through the rapid growth to become unicorns one day (aside from truly disruptive solution or idea).
Recognized leaders in FinTech across sectors share same hubs, first investors, adopters and approach. We have granulated the success path to see what bought tickets to the unicorns club to once small and unknown companies. Let’s start with the leaders.
Who is in the club?
Below are some of the FinTech unicorn club members across sectors. In coming years, the club will grow as there are at least 30 more companies with valuations close to $1 billion, such as Wealthfront, Betterment, Rong360, Wonga, Q2, WorldRemit, Taulia, Radius, Oportun, Circle Internet Finance, AnJuke and others.
The next step would be the understanding of the sweet spots within FinTech. Clearly, the density of the sectors varies, which creates different opportunities for entrants.
What is the right sector?
As specific as FinTech sector may seem, it is a broad term for a wide range of technologies powering everything related to money. According to Finovate, a set of conferences and events for FinTech startups to showcase their solutions, there is a clear skew in the FinTech unicorns club towards companies innovating in Lending and Payments.
List of Q2 2015 FinTech unicorns and semi-unicorns by sectors indicated that 29% of them are from the Lending sector and 27% are from Payments. The next biggest, interestingly, are Real Estate with 8% and Other with 8%. Insurance and Investing focused FinTech startups represent 6% of unicorns and semi-unicorns each.
It is hard to say whether Lending and Payments are overheated and FinTech startups aiming to enter the unicorns club should be targeting other sectors. We have been following an Insurance sector and it definitely represents a great potential. Insurance is asking for innovations and endless opportunities lay in the industry that hasn’t been fundamentally transformed in decades. Insurance technology in the nearest future will see rise of interest and innovation applied. There are great challenges in the insurance industry to overcome and opportunities to explore.
Where is the right place?
It is no secret, that innovation momentum is not spread equally around the world. There are certainly well-known hubs where innovative solutions are being born the most and find their way up. For FinTech startups and bright entrepreneurs thinking on taking their products and ideas to the next level, there is a limited choice of the world's` hubs.
We have been assessing the concept of borderless innovation before. Barriers to innovation across the world are coming down. Some of the reasons for that are related to the nature of technological innovation itself, which is quickly adoptable. APIs offered by FinTechs can allow businesses to jump to another level of efficiency and experience relatively easily. Moreover, since technological advancements allow companies to operate globally even while being physically located in one country, it increases competition for local companies that did not achieve that stage of technological improvement.
However, the concept is true for a startup that has already reached a certain level and has resources and network to go borderless. For those who seek to fly or fail quickly, there are certain places in the world that will foster the process.
Not being a surprise for anyone, Silicon Valley in California, USA, is one of those hubs. Many FinTech unicorns came out from the Silicon Valley and there are more hot FinTech startups to look out for. Affirm, Stripe, Lending Club, Prosper, SoFi, Square and many more formed a Silicon Valley unicorns club. A great momentum Silicon Valley provides is related to the vibrancy of the place, innovation culture, established network of companies that can speed up processes. Silicon Valley is a unique place where innovative solutions are getting tested. Consumers are spoiled with technologies as they get to try everything first. However, there is a catch. What becomes successful in Silicon Valley, doesn’t necessarily have the same chance to become successful in other places. Empire Startups FinTech conference will take place in San Francisco and New York next year to gather FinTech professionals and showcase Silicon Valley and Alley FinTech at their best. Worth also mentioning that 7 out of 10 best startups accelerators in the US are in California.
New York is the next hot hub where innovation is nurtured. New York was the city to issue first comprehensive guidelines related to bitcoin and to adopt bitcoin for parking tickets payments. New York is a base for notable investors and companies that are hunting for innovative FinTech startups. Among those are Bain Capital Ventures Managing Partner Matt Harris, who is actively looking for investment opportunities in lending, asset management, trading systems, insurance, etc.
JPMorgan Chase Executive Director of Strategic Investments, Pete Casella is also looking to invest in FinTech startups that are aligned with JPMorgan strategy. Market structure, enterprise software, infrastructure technologies and asset management focused entrepreneurs are of a particular interest.
Maria Gotsch, president and CEO at the Partnership Fund for New York City is also a head of the initiates of the Fund such as FinTech Innovation Lab, New York Digital Health Accelerator, NYCSeed. Over $100 million raised by the fund are ready to fuel innovative solutions. Value Stream Labs, FinTech Startups and a variety of other spaces to source FinTech unicorns are based in New York.
London is the European hub for the FinTech. Unicorns like Klarna, iZettle, Adyen, Funding Circle, TransferWise, POWA Technologies came from Europe as a proof of a strong standing of the market on a global arena. According to Bloomberg, Tech Crunch and Huffington Post, South East of England is outpacing California on the number of jobs in FinTech along with rapidly growing funds and deals in FinTech industry. Moreover, Tech Crunch reported that European startups have raised more than $2.8 billion from VCs in Q2 2014, the highest quarterly total since that iconic dot com bust year of 2001. Clearly, European FinTech is creating a significant wave of competition for Silicon Valley and New York.
Would be almost a crime not to mention Asian region as emerging at outstanding speed innovation hub. One97 and Lufax are the unicorns from Asia. India, Singapore, Hong Kong are fueling Asian FinTech and emerging a significant competition globally. DBS, the leading financial services group in Asia with over 280 branches across 18 markets, will invest $7.1 million in initiatives that will support the development of the startup ecosystem in Singapore over the next five years. The LTP team analyzed over 70 promising FinTech startups across sectors from India to find the hottest ones. Japanese Internet giant Rakuten recently launched its $100-million global FinTech fund to focus on investments in disruptive early to mid-stage FinTech startups. US and Europe will be the primary geographic focus of the fund with particular attention to FinTech in London, San Francisco, New York and Berlin. However, as stated in the press release, the Rakuten FinTech Fund plans to expand operations globally.
Mentioned funds and companies are definitely not completing the list of opportunities across hubs. They represent great examples of the activities aimed to discover and nurture next generation of FinTech unicorns.
Who are the right investors to target?
The right investors can take a startup long way. Many startups take an exhaustive path of pitching an idea or a product at as many places as possible in hope to attract some investors. Instead, FinTech startups should really seek for a particular club of investors that have a history of nurturing unicorns. An expertise, vision and experience make those investors profound in indicating promising opportunities. So who should be your target?
After assessing 40+ FinTech unicorns and 30+ companies on their way to the club with valuations slightly less than a billion, we have noticed particularly active investors that have been financially involved with those startups. Let's look at the backers of the FinTech mammoths.
Sequoia Capital (Klarna, TransferWise, Stripe, Prosper, Square), Andreessen Horowitz (TransferWise, Stripe), Khosla Ventures (Stripe, Oscar), Accel Partners (Funding Circle), First Round Capital (Square), Draper Fisher Jurvetson (Prosper; 23 unicorns exited with the fund), SV Angel (Credit Karma, Zenefits, TransferWise), Y Combinator, Lowercase Capital, Benchmark Capital, Citi Ventures (Square, Betterment), Felicis Ventures (Adyen, Credit Karma, FundersClub), Index Ventures (Adyen), General Atlantic (Klarna, Adyen, Avant), Institutional Venture Partners (Klarna, Zenefits, SoFi), A16Z (Stripe, Zenefits), Wellington Management (Sofi, POWA Technologies), Bain Capital Ventures.
The list, of course, is not limited to these investors. Skyrocketing valuations of FinTech companies with growing interest across industries brought a wide range of VCs to the race for the most promising ones. The LTP team performed a tremendous work putting together VCs every FinTech startup and entrepreneur should approach.
Which are the right accelerators/incubators?
If there is a question whether to join accelerator/incubator or not, the answer would be – definitely. Success stories in FinTech are backed by early believers that took those startups under the wing to accelerate the innovation and grow a unicorn.
As global FinTech investments will more than double by 2018, the number of accelerator programs, FinTech labs and incubators has also been increasing. Those platforms are aimed to provide the right resources to promising startups and bright entrepreneurs. There are always specific timeframes, requirement to be a committed member, mentors, and, in some cases, even capital & development efforts, making the startup concept ready for the market. Accelerators with their programs have different formats and conditions. Some of them will require equity some won`t. Each startup has to learn about conditions carefully.
We have mentioned before couple accelerators that graduate particularly successful startups with high valuations and significant funding.
One of those accelerators is Plug and Play. The Silicon Valley business accelerator is a global innovation platform that started as an incubator in Mountain View, CA. The program has accelerated more than 250 + portfolio companies like PayPal, Dropbox, Lending Club, CreditSesame, Mobibucks, Zoosk, Trulioo and many others.
At the FinTech Innovation Lab, early and growth-stage companies are given the platform they need to develop, trial and prove their proposition alongside the world’s leading banks. This 12-week mentorship program runs in New York as well as in London and Hong Kong. BillGuard and Kasisto are some of the companies graduated from the program.
Since its establishment in 2005, Y-Combinator has funded over 800 startups and is one of the most successful accelerators. It’s a community of 1,600 founders, which provides seed funding for startups. Y Combinator has an approach to seed funding of funding startups in batches. There are two each year, one from January through March and one from June through August. Multiple startups are funded during each cycle. LendUp and GoCardless are notable startups backed by Y Combinator. Y Combinator startups have a total valuation of $30 billion.
The Seed Accelerator Ranking Project in the US outlines the top accelerators for the fourth year already. Following accelerators are among the best ones:
While recognized by SARP accelerators without a doubt provide outstanding opportunities, FinTech startups should focus their attention on those, specifically skilled to deal with FinTech and experienced in graduating successful ones.
Following accelerators are among the best ones worldwide focusing particularly on FinTech.
There are also challenges aimed to select best of the FinTech. Those challenges sometimes serve as gateways to accelerators or even partnerships with reputed companies. Here are some of the challenges FinTech startups should consider: