Here’s Why Investors Have a Big Appetite for Funding Fintech Companies
Through the last quarter of 2020 and the first quarter of 2021, investors have been making massive bets on financial technology companies. From tiny startups to established, billion-dollar businesses, fintech companies have been raking in cash when it comes to fundraising. Clearly, investors and institutions see something valuable in these companies, both today and in the future. But, what exactly is it that’s piquing their interest?
Fintech and The Future
The main reason that hedge funds and VCs are big on fintech right now is that they aren’t thinking about “right now.” Rather, they’ve set their eyes on what fintech startups will become four, five, and ten years from now. Think about it: if a hedge fund had put $1M into Stripe during their Series A back in 2012 (a 1% stake according to their valuation that year), that single investment would now be worth $950 million. That kind of return is nearly impossible to achieve in any other industry; this is one of the main reasons why fintech is so exciting for VCs, hedge funds, and entrepreneurs alike.
Obviously, Stripe represents an off-the-charts success story for a fintech company, or any startup for that matter. It does, though, help us understand why investors are so bullish on fintech startups. When a financial tech company succeeds, they have a lasting positive impact on the finance sector, providing solutions to problems that were once considered unsolvable and sometimes invisible — and at times making billions in the process.
Fintech as a subset of the larger financial and technology industries began in earnest with PayPal in 1998 (a company whose stock has quintupled since it went public for the second time in 2015). Since then, hundreds of fintech companies have sprung up. While many don’t last more than a few years, the ones that do rise tend to do so dramatically. Many of the smaller startups that don’t “make it” are bought up by and/or merged into more established companies.
The evidence is largely supportive of the belief that a good idea in the fintech world will almost always pay off — the only question is how large that payoff will be. Perhaps this is why VCs and hedge funds are so keen to get in on the fintech game; if the ideas and innovations behind a startup are solid, investing in fintech has the potential to be low risk and high reward. Sure, fintech can be risky — if a startup goes under, there is little to be done to recover invested funds. But, when a company is a “hit”? It’s often a big one.
Why Does a Financial Tech Firm Succeed?
Many fintech companies exist to make things simpler, faster, or more secure. There are payment processors, working to make credit card transactions faster and safer such as Stripe; there are also companies like Robinhood and Acorns that make investing in stocks easier for medium and low-earning individuals. Many large investing platforms now offer “robo-advising” — automated portfolios that help reduce risk for clients and overhead for the platform.
Some successful fintech companies seek to improve the financial services industry by making it more efficient or secure. Others, however, succeed by disrupting the status quo for the better. It’s this disruptive nature that helped Yieldstreet land a $62M investment from Edison Partners, as well as a recent $100M in funding. Yieldstreet aims to democratize the world of alternative investments — offerings that are outside the stock market and historically off the table for the average investor.
Companies like Yieldstreet are helping turn the investment world on its head by giving everyday investors access to opportunities and offerings that were, until now, restricted to high net-worth investors and hedge funds. Since launching in 2015, over $1.5B has been invested on Yieldstreet’s platform; funding from Edison Partners and other backers helps them continue their push to develop new products and offerings in alternative investments for their clients.
Disruption is a result of innovations that go against common thinking and ways of doing things; these companies often experience a greater degree of success because they address problems that few people even knew existed.
So, why are fund managers and investors betting big on fintech? It’s partly because of the way the world is trending, and partly because fintech is one industry where big ideas are rewarded in a big way. Whether it’s investment, banking security, or fast and easy payment processing, fintech helps the world economy move faster, more efficiently. And it benefits everyone from the smallest investors to global corporations. In 2020, more than $40B was invested in fintech by VCs alone; 2021 is poised to top that number. Who knows what’s next?