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Double, Double Toil & Trouble; Private Valuations & Fintech Bubble

Double, Double Toil & Trouble; Private Valuations & Fintech Bubble

Every couple of months an article or two regarding the ‘fintech bubble’ floats onto the pages of online and print media.

“Are we in a bubble? Will it burst?” fret the writers of such articles. “Are valuations based on real worth or mere chatter? Could fintech be the next Dot-Com?”

Reading these, it can seem a little like the sector is just waiting for a disaster to happen. Like all the hype is a brave face belying a fragile body.

However, questions like these should come as little surprise. Despite a sizzling market, it’s smart to stay a little wary and acknowledge that just because entrepreneurs and investors are excited doesn’t mean everything is smooth sailing. After all, startups fail. That’s a thing that happens. And with the massive explosion of new businesses, it’s indubitable many – if not most – will fail.

Does this mean there’s a bubble?

Let’s have a look.

Screen Shot 2016-01-11 at 23.55.56

2015 was a big year for the tech sector. Huge even. According to the capital’s promotional company London & Partners, a record $3.65bn (£2.5bn) was invested in private UK tech companies in 2015, equating to around a 70% rise in funding for startups compared to 2014. Around a quarter of this funding went to the financial services sector. This escorted a coming of age for fintech as it entered mainstream consciousness through new mobile payment options, the rise of companies like Transferwise, and some headline grabbing statistics as unicorn after unicorn raised their highly valued horns.

But Q4 also saw the beginning of something of a slow down in tech investment. After hitting dot-com funding levels in Q3, things began cooling off.

According to research from CB Insights, venture capital funding fell by 30% during the second half of 2015, with far fewer ‘mega-rounds’ of investment in Q4 in particular.

To make the situation sound even more dubious, the unicorns are beginning to look a lot like horses dowsed in glitter – at least if the latest tech IPOs are anything to go by. Square (and Match) received a decidedly chilly welcome as their shares sold for under the projected offering range, suggesting retail investors are more sceptical than expected when it comes to private tech valuations.

Cue: mild concern followed by sensational headlines about bubbles and what happens when one bursts.

However, take a step back and a deep breath and it’s fairly clear beyond the fluff pieces and general buzz of big ideas there’s some actual substance. There’s a different kind of cycle happening in financial technology compared to just ‘bubble and burst’.

For one, whilst the ‘coming-of-age’ may have been the growth cycle of the last two years, fintech has been around for a lot longer than that. As Bruce Wallace pointed out in Finextra:

What’s different now? The new fintech technology startups are now mostly selling their solutions directly to consumers and businesses instead of selling to the traditional FI channel. The increased efficiencies are changing customer expectations and shaping the future of financial services.

This shift is important. It’s a maturation of an established industry. Indicative of the changing mentality within the larger financial sector.

Furthermore, it conveys why disruptors have had such success in the last two years and why now there might be a cooling as money begins to flow into ‘enablers’ instead. Fintech has largely revealed the potential – or indeed the necessity – of its products. Payments companies and alternative lenders like Zopa, Funding Circle, and WorldRemit comprise the majority of the 35 unicorns in the sector. And part of the reason for this is because the landscape they are entering has remained stagnant for so long that a real need exists to innovate. By innovating they’re taking part of the market share away from the incumbents. By innovating they’re reforming.

As Chris Skinner said, “That’s why there’s no Fintech bubble bursting.  Just a re-architecting of finance through technology that, until it finishes, will see us moving through waves of innovation and change.”

This is why banks are ‘getting serious’ about fintech as well. Why they are pouring in their own money to digitise, to gamify, to tap into all the things that disruptors have emphasised and monetised in the last few years.

Of course, acknowledging a change in mentality doesn’t alter the fact that there has been a drop in deals.

But to play devil’s advocate, according to research by Erin Griffith’s for Fortune there’s also a distinction to be made between late-stage investors and early-stage investors regarding the slowdown reported by CB Insights.

According to the late-stage investors, there is a new element of caution. ‘Market dynamics are setting the bar much higher’ than before. They don’t want to keep funding businesses reliant on private money without turning a profit. On the other hand, early-stage investors are pretty much continuing the same as ever.

Why the disparity?

In part it’s because the prices are simply too high to tempt many professional VCs. They’re willing to wait to see the weaker business models shaken out by failures and takeovers. However, it also seems to relate to investors simply not wanting to feel the burn of another popped tech bubble and acute awareness of the swathe of ‘down-rounds’ where fintech companies have IPOed. Essentially, early stage investors have been paying too high prices and need to adjust expectation, which can be done with future investments. Everyone is thus left thinking maybe they should be wary, maybe they should keep on the side of realism instead of being succored in by mythical beasts, maybe they should stick to the usual methods of valuing a company like cash flow and profit.

At the end of the day it’s not being negative to accept that many of our startups will die. And it’s not foolish to consider that just maybe there is “too much money chasing too few assets” as Damien Lane, partner at Episode 1, told The Times. It’s simply pragmatic. And what’s falling in London’s favour is that VCs have largely maintained their pragmatism in the face of a booming sector. Especially when compared to New York and Silicon Valley.

There is no doubt that 2016 will be a pivotal year for fintech. As recent and upcoming exits play out we’ll really begin to see which business are worthy of the hype and which are not. But as yet the bubble is as close to unreal as many billion-dollar valuations.

 

Fintech: A Startup By Any Other Name

Fintech is crazy hot right now. Just ask Oscar Williams-Grut. Or Anna Irrerra.

With London Technology Week behind us, and the UK’s first fintech unicorns (companies valued at over £1bn) announced, fintech’s popularity is scorching headlines. In fact, it’s burning through the business world.

However, you might also have noticed the latest fintech startups becoming more and more creative with their branding. In particular: brand names that now range from the artfully misspelt to the completely baffling.

This creativity seems to stem from the desire to stand out in an increasingly crowded market. It’s beginning to resemble the rush hour train from London to Aylesbury with everyone crammed into a single sweltering, economy carriage. And they all want the much-coveted upgrade to Business Class.

So then what’s in a name? Does creative naming help or hinder a fintech startup? Can it help you get the golden ticket?

 

Finding the right name for a product, or even for the small business that makes it, is notoriously tricky.

The general understanding is that there are different ‘genres’ of fintech startup – banking fintech, consumer finance fintech, wealth management fintech, payments fintech, investor or incubator fintech. However, like any other set of definitions, there is a great deal of overlap – ie. between consumer finance and payments.

This presents a unique challenge.

How to make something meaningful and memorable whilst working within the relatively narrow parameters laid out by trailblazers and recognised by the target audience? An audience, I might add, that is more digitally and financially aware than ever before.

In a recent article in City A.M., they looked at five tech startups seeking to disrupt the financial industry that have caught the eye of some of the world’s leading firms in the sector.

All winners of a search for startups creating new technology by RBS, Lloyds and American Express, and the Department for Business (amongst others), include a savings app, a company using visual cryptography to create secure passwords and a money laundering detection service.

But if you look at this list of the five winning names, can you pick out which three I’ve described? Here are your options:

Swave. Tento. Bubbal. Squirrel. Mentat.

As it turned out, when I first read the article, I was surprised at how little I understood what they did.

The only name I instantly connected with was Squirrel, which turned out to be what I expected: a platform to help you ‘squirrel away’ some savings.  Bubbal too I figured out eventually (it connects people to small local retailers via an app). Mainly because it reminded me of ProtectMyBubble.com.

The others, however, left me stumped.

Let’s consider Swave:

Is it a misspelled ‘suave’, chosen for the domain name? An allusion to a Secondary Wave because fintech 2.0 is like the follow-up to an earthquake? Perhaps simply a twist on ‘swathe’? Or maybe they snapped it up from Urban Dictionary, where it’s defined as a phrase coined by Brooklyn rappers H Squared to mean ‘a level above swag or swagger’?

Do any of these tell me what it does though?

Not really.

Turns out though that Swave is a personal savings platform. Winning the consumer financial literacy category, the app monitors spending and encourages users to save.  Looking again, the name suddenly makes more sense. Take out the ‘w’ and it’s ‘save’, put in the ‘w’ and it alludes to a plethora of different ideas. It’s clever. It’s unexpectedly dynamic.

Swave PHA

‘Image courtesy of Frankielion on Flickr

Yet when I asked the office the question: ‘what do you think a fintech app called Swave’ does, the replies varied between ‘an app to help people find suave clothes’ to ‘a surfing guide’.

For a young company with even younger technology, the initial ambiguity could be problematic. It is, perhaps, too clever for its own good.

Moreover, whilst it has won an award for its innovation and been lauded for its ability to provide great user experience, it’s possible to see why some investors might be deterred as early as the brand name.

The same could be said of Mentat – which, incidentally, my phone continually autocorrects but which is apparently a reference to the fictional Dune universe. Like Swave, it’s a clever name. The platform provides amazing innovation. In context, it’s easy to see why it’s a winner in the eyes of some big players… but without googling, can you really see what either is for?

 

Compare them to TransferWiseLendInvestFunding Circle. These are brands with simple, obvious names and also three of our UK fintech unicorns.

That’s not to say that none of the more creative names haven’t taken off. Seedrs works brilliantly. TrillionFund includes a fantastic story about how much it will cost to undo environmental damage. Cake, the new restaurant payment app, has garnered great attention because it ‘lets you pay with Cake’, makes paying ‘a piece of cake’, gives users a ‘taste of the sweet life’ etc. Sometimes the humour in the story or in the name can work.

 

City A.M.’s article admittedly does not go into great detail on the brands in their article, nor their creators. Indubitably, a huge amount of thought went into them.

Having asked what startup investors and venture capitalists think is important,  perhaps these top tips might help:

  1. It’s great to have a name that means something, not just something that sounds quirky.
  2. There needs to be a link between name and the activity or product. Or alternatively, a really strong story behind the name that is memorable, amusing or informative.
  3. The name needs to appeal to the audience – not just to geeks.
  4. Avoid the all-too-common trend to name it something with -ly, -me, or -fy. And without dropping vowels because that’s also a thing. It’s not original anymore.
  5. And it really needs to be original enough not to compete with other, better-established brands.  Do your research beforehand.

Investors think it’s best to avoid names that need a lot of explanation or marketing to remember. It’s important to not be too clever by half. And even more imperative that the name not disappear beneath the waves of someone else’s mojo.

For many fintech startups wanting to be the next billion-dollar unicorn, it’s vital to disrupt – not just slightly wobble – the boat. The need to stand out is paramount.

So whilst the hope is to do this with a stellar product, why start at a disadvantage with a weak name, or a name so clever no one understands it?

It’s the first sticky point, the first idea that customer engage with.

Perhaps those fintech roses really could smell sweeter.