Investor caution to shed fintech dead weight

Convergence of investor reluctance and hyper-valuation to test fintechs

By David Beach | 24 January 2019

A market strategist has warned this year will see a cull of the fintech startup market, as hyper-valuation in the tech sector get reined in while investors respond more cautiously to a turbulent 2019.

“The saying goes, a rising tide lifts all boats but, when the tide goes out, you’ll see who’s swimming without their bathing suits,” says David Jones, chief market strategist at Capital.com, the trading platform.

“When times get tough - and if a company doesn’t have a really solid business case - or is active and innovative, then investors will shy away. Now could be the time that some companies who were riding that wave five years ago, could start to fail," he says.

A variety of factors make 2019 a particularly challenging year for markets in general, and fintech startups especially. The trade war continues to rage between the US and Canada on the one hand, and China on the other, while the threat of recession grows in Germany and Italy with Brexit the proverbial “icing on the cake”, according to Jones.

While Brexit negotiations remain unclear, and with 73% of investors agreeing that an economic downturn is likely in the next two years, Jones thinks that investors will be put off risky investments, particularly in fintech startups with no easy exit.

But he believes the real problem that could affect growth prospects of emerging fintechs, and thus competition and innovation in the sector, is down to a trend of over-valuation within the tech sector.

“The bigger problem is what happens with the stock market,” says Jones. “And particularly the tech sector where we’ve seen rising markets for the last ten years, particularly in the US.

“We’ve had 10 years of booming valuations and there comes a point where it has to stop. From a traditional stock market point of view, this rally is quite long in the tooth and perhaps those ambitious valuations have overflowed into private, not listed companies. Firms will be asking themselves if their own valuations have gone too high and if they’ve gone as far as they can in the medium term,” says Jones.

According to the Silicon Valley Business Journal, in December there were 32 private fintech companies in the Bay Area valued above $1bn but Liz Lumley, a director at VC Innovations, a fintech network and accelerator, believes this may be setting a precedent that is too much, and too fast for future fintechs.

“High valuations make me a bit nervous,” she says. “We’ve heard for years how London can’t command the same sort of valuations as Silicon Valley startups. My answer is always that too much of that goes on in the Valley and it destroys startups too soon.

“If you value a startup more than it’s worth, investors are going to want a return on that investment and they’re going to want startups to scale quicker than it naturally can,” says Lumley. 

Lumley believes that the venture capital model in particular is not compatible with fintech and is especially disastrous when hyper-valuation is thrown into the mix.

“In many ways fintech isn’t suited to the VC market. I’ve spoken to startups who’ve been invested in that are based in Stockholm and have a nice market in the Nordics and all of a sudden investors want them to expand into southern and central Europe even if the startup isn’t quite there yet; the investors push them to scale up too quickly and it almost ends in disaster,” she says.

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