Fintech Startups Shatter VC Funding Records in 2021

Fintech Venture Capital Surges to Record Highs in Q1 2021

Initial indications suggested a strong first quarter for venture capital investment in fintech startups, and the complete data confirms those expectations. Previous analysis by The Exchange highlighted the rapid pace of large venture rounds within the fintech space.

However, mega-rounds represent only a portion of the overall fintech investment landscape. A more comprehensive understanding of the sector’s performance was needed, and the latest data provides that deeper insight.

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Q1 2021: A Landmark Period for Fintech Investment

According to a CB Insights compilation of Q1 2021 global fintech venture capital data, the first three months of the year marked the most substantial period for fintech investing to date. Remarkably, this quarter surpassed even the second quarter of 2018, a period heavily influenced by Ant Group’s $14 billion funding round.

The sheer scale of investment was significant. A total of 614 fintech deals were tracked in Q1, representing a combined value of $22.8 billion. This established a new all-time high, demonstrating robust growth independent of outlier events like the Ant Group raise.

The increase in funding activity was notable. CB Insights reports a 15% rise in fintech VC deal volume compared to the same quarter last year, while the total dollar amount invested in the sector increased by an impressive 98% over the same period.

Global Reach and Sector Focus

This surge in funding wasn't limited to a single region; it was a global phenomenon. We will explore the geographical distribution of investment shortly.

Furthermore, we will analyze the specific subsectors within fintech that are attracting the most venture capital, identifying areas of concentrated activity and shifts in VC attention and capital allocation.

Expert Perspectives on the Fintech Landscape

To understand the driving forces behind these trends, The Exchange consulted with venture capitalists from three continents actively involved in fintech investments. These include Jesse Wedler, a partner at CapitalG (North America); Kola Aina, a general partner at Ventures Platform (Africa); and Shiyan Koh, a general partner at Hustle Fund (Asia).

We will now delve into key fintech metrics and then dissect venture results by geographical region and investment focus.

The analysis will incorporate data and insights from these experts to provide a comprehensive overview of the current fintech venture capital market.

Significant Investments and Numerous Exits in Fintech

While our focus extends to a broader view of the fintech venture capital landscape, the impact of substantial investments cannot be overlooked. What key trends emerged from the mega-round funding category – those exceeding nine figures – in the first quarter? A total of 57 such rounds were secured by fintech startups globally, averaging approximately 4.5 per week.

This figure represents a considerable increase from the 30 mega-rounds raised in Q4 2020, and the 21 recorded in Q1 2020. The sheer scale of these investments is noteworthy.

These impressive results shouldn’t come as a surprise, according to CapitalG’s Wedler, who noted in correspondence with TechCrunch that “fintech has consistently been a thriving sector for several years.” What factors are contributing to the accelerated pace of capital deployment into financial technology companies? Wedler suggests a confluence of elements, including “the widespread adoption of smartphones and the modern internet, the evolution of contemporary cloud technologies, and progress in APIs and modular services.”

A cooling of investment activity isn’t anticipated in the near future. The growth-stage investor conveyed to The Exchange that “fintech funding tends to follow cyclical patterns as innovations unlock new business models or reach new customer bases.” The market, they added, “is currently entering a phase characterized by substantial innovation within established infrastructure.”

Investment volumes weren’t the only records broken during the quarter. Data regarding exits, as detailed in the same report, reveals that Q1 2021 established new peaks in exit activity, both overall and specifically concerning initial public offerings (IPOs). CB Insights data indicates 67 fintech exits occurred during the quarter, with 11 of those being sector IPOs.

It’s important to acknowledge the role of Tiger Global, a private equity and venture capital firm, which is currently injecting significant capital into private markets, reminiscent of the peak activity of SoftBank’s initial Vision Fund.

Tiger Global’s involvement is both a consequence and a driver of the fintech data we are examining. Their increased participation in deals – rising from just two fintech rounds in Q1 2020 to 16 in Q1 2021 – is significant due to their capacity to provide large investments. In fact, 14 of Tiger’s 16 deals during the quarter qualified as mega-rounds.

What is fueling these rapid investments? We believe it’s the robust late-stage exit market. Confidence in securing a successful exit for a potential portfolio company reduces the perceived risk associated with funding, allowing for quicker and larger investments.

Overall, the fintech venture capital market experienced exceptional growth at the beginning of 2021, raising more than half of its 2020 total within the first three months alone. Remarkably, the total fintech funding in Q1 2021 was comparable to the full-year totals recorded in both 2016 and 2017.

However, it’s crucial to remember that venture capital isn’t always solely driven by financial considerations. Therefore, where exactly is this capital being allocated? Let’s investigate.

Geographic Distribution of Fintech Investment

Among all continents experiencing fintech startup activity, Africa was the sole region to exhibit a decrease in deal volume from one quarter to the next. While the number of African fintech deals decreased from 27 in the fourth quarter of 2020 to 21 in the first quarter of 2021, this latest figure nearly doubled the amount recorded in the first quarter of 2020.

Generally, all continents demonstrated positive performance during the quarter. However, the differences in outcomes were significant. North America, benefiting from its strong U.S. venture capital ecosystem, witnessed 264 fintech funding rounds in the first quarter of 2021.

Asia and Europe collectively secured approximately 300 deals, effectively sharing the lead with around 150 rounds each during that period.

South America, Africa, and Australia together accounted for roughly 50 deals:

Despite these varying results, there are reasons for optimism. According to Kola Aina of Ventures Platform, based in Nigeria, his firm has observed “a noticeable rise in interest from both domestic and international investors” concerning African fintech startups.

This increased interest, he believes, is fueled by “the surge in digital adoption prompted by COVID-19 – with fintech playing a crucial role in enabling numerous digital applications – as well as growing confidence stemming from successful liquidity events, such as Paystack, and increased valuations like that of Flutterwave.”

Aina noted that the “level of competition and the speed of capital deployment” for African fintech startups are on the rise. He concluded that founders will “ultimately benefit from this trend.”

Turning to Asia, while North America has experienced consistent growth and Africa a fluctuating increase in fintech investment, what conclusions can be drawn about this key startup continent? Shiyan Koh from Hustle Fund explained to The Exchange that, particularly in Southeast Asia, “investor demand for fintech remains strong, especially as the infrastructure is still under development from an open banking standpoint.”

What factors contribute to the region’s appeal for venture capital? Koh stated that a combination of a “low percentage of the population with bank accounts and a younger demographic” is driving investor interest. She referenced deals like Ajaib’s $65 million Series A, previously covered by TechCrunch, and the Endowus deal also mentioned by TechCrunch, as examples.

Shifting focus from geography, let's now examine fintech startups categorized by their specific areas of operation.

Fintech Sector Overview

CB Insights categorizes the fintech landscape into eight distinct segments. It’s important to note that the firm includes insurtech within the broader fintech definition. Considering the numerous subcategories within insurtech itself, the overall fintech market demonstrates considerable breadth. However, this understanding shouldn’t impede our analysis.

Let's examine investment trends across fintech's various sub-sectors in the first quarter.

Payments Surge in Q1 2021

Payments emerged as a leading fintech category in Q1 2021, exhibiting impressive growth. Deal volume increased by 188% compared to Q4 2020. This growth wasn’t solely driven by large funding rounds; deal count also rose by 50%, benefiting both B2B and B2C companies.

However, in Southeast Asia, B2C companies face heightened competition from venture capitalists, as noted by industry experts. This is attributed to the region’s consumer-driven technology adoption rate.

Digital Lending Shows Recovery

Digital lending is another sector experiencing upward momentum, though not as dramatically as payments. It demonstrates a clear recovery following a decline in Q4 2020.

This vertical holds significant potential in emerging markets, with marketplaces enhancing credit access in countries like Brazil and India for both individuals and businesses.

Cryptocurrency Gains Traction

Cryptocurrency is becoming increasingly mainstream and globally accepted. Coinbase’s direct listing served as a powerful indicator of crypto’s legitimacy as an asset class, according to Passion Capital partner Eileen Burbidge.

Coinbase addressed the demand for a simplified platform for buying and selling cryptocurrencies. Decentralized finance (DeFi) also presents solutions to local challenges in emerging markets, attracting close attention from industry observers.

DeFi offers potential benefits for “financially underserved markets” and appeals to countries with unstable political environments, with Singapore establishing itself as a prominent crypto hub.

Wealth Management Fueled by Mega-Rounds

The wealth management sector experienced a strong first quarter, characterized by substantial late-stage funding rounds. Global deals totaled $5.4 billion, representing a 560% increase compared to Q4 2020.

However, eight deals accounted for 83% of the total funding, illustrating a broader trend observed within the venture capital landscape.

Insurtech: A More Measured Pace

In contrast to the robust performance of other fintech categories, insurtech demonstrated more moderate results. CB Insights reported a 5% decrease in deal activity alongside a 12% increase in funding.

What accounts for this difference? While optimistic about Next Insurance, an investor noted that innovation and growth in the insurtech space generally appear less accelerated compared to other fintech sectors.

The inherent challenges of underwriting risk – a core function of insurance – contribute to this disparity. However, there is growing interest in neoinsurance providers targeting underserved populations and startups assisting traditional insurers with digital transformation.

Further opportunities for insurtech may emerge in markets with historically limited capital availability, such as Africa, where it is viewed as a promising area for startup development.

Fintech Investment and Exit Landscape

Current indications suggest that private global investment in the fintech sector is poised to achieve record highs for the year. Consequently, consistent monitoring of exits within this space is particularly important.

Following the successful direct listing of Coinbase, the anticipated IPO of Robinhood is drawing significant attention.

Public Market Activity

Despite some initial challenges with insurtech companies entering the public market, the planned SPAC combination involving Hippo provides a noteworthy event to observe.

These forthcoming fintech exits through public offerings will be instrumental in assisting both private and public investors in accurately assessing the value of other companies operating within the sector.

Venture Capital and Exit Momentum

The robust venture capital activity demonstrated in the first quarter’s results raises the question of whether this momentum can be sustained.

A key indicator will be the strength of fintech exit performance moving forward.

Continued strong exit results will validate the current levels of venture enthusiasm.

• Fintech investment is expected to reach all-time highs.
• Exits, such as IPOs and SPACs, are crucial for valuation.
• The performance of Coinbase, Robinhood, and Hippo will be closely watched.