Brexit blow: 34% drop in UK fintech VC investment in 2016
A survey by Innovate Finance, a British non-profitmaking financial technology institution, has revealed that UK financial technology (fintech) venture capital fundraising fell 33.7% year on year (y-o-y) in 2016. This contrasts with the 10.9% rise in international financial technology venture capital fundraising.
The uncertain outlook after the Brexit vote, and the vulnerability of the status quo, most notably the possible loss of the EU banking passport, are unquestionably undermining the appetite for investment to a considerable extent.
Loss of the EU banking passport to hit settlement start-ups hard
There was an overall total of 1,436 relevant deals in 2016, attracting total funding of US$17.4 billion for fintech venture capital businesses. Of these, 173 were into the UK, procuring funds of US$783 million. This represents a one third decrease from the $1.2 billion in the previous year.
There is no denying the major discrepancy against the US$7.7 billion raised in China, the largest investment destination, and the US$6.2 billion raised in the US. The survey did not report the number of deals in the US, but there was a large number of smaller deals, rather than major financings.
There was a slight recovery in the third quarter, in comparison to the second quarter which was impacted directly by the result of the Brexit referendum, but the momentum did not return it to its original level.
The three biggest relevant financings in the UK in 2016 were mobile banking provider Starling Bank (US$101 billion),fundraiser iwoca Ltd. (US$57 billion) and online investment house Nutmeg (US$52.2 billion). The fintech subsectors raising the most funds were alternative banking (27%), small business funding (13%) and money transfers (13%).
It is worrying that 12 of the top 20 UK deals are from before the Brexit referendum. Among relevant fundraising in the UK in the third quarter, only 33% came from overseas investors, a 7 percentage point drop on the same quarter in the previous year. In addition, new investment only reached 36%.
To help preserve the status of the financial sector in London, the UK government has been deliberate in showing its support for businesses including start-ups, culminating in an international fintech conference that is to be held in April.
Lawrence Wintermeyer, the CEO of Innovate Finance, admits that fintech companies, particularly settlement startups, will be hit by the loss of the EU banking passport but remains positive that it could be offset by a strengthening of the competitiveness of the UK fintech sector.