By Abhimanyu Toor, Managing Director at Royal Park Partners
UK fintech investment hit a staggering $37.3 billion in 2021, up sevenfold from $5.2 billion in 2020. Globally, growth followed suit with worldwide investment representing $210 billion (US) across a record 5,684 deals – up from $125 billion across 3,674 deals in 2020.
It’s an exciting time for the global fintech space. Growth is accelerating and longstanding fintech funding bottlenecks are loosening. Landmark debut investments from major VCs are happening on a regular basis. We experienced this first-hand last year when Dragoneer made its debut African investment with Yoco, a funding round we coordinated. However, there is still work to be done if emerging market fintech is to occupy a level playing field with their developed market counterparts, in the eyes of investors.
To do this, emerging markets must continue to break down the structural barriers that have previously inhibited investor activity, to unlock further funding and see growth continue. There are three main roadblocks to achieving this.
Location no longer king
Although fintech is a global game, the weight of proximity has been heavy for many seeking investments over the years. Most major investors do not occupy space in emerging markets. As a result, direct engagement between fintech’s and VCs is restricted. Historically, venture capitalists have preferred companies to be close by, with the “20-minute rule” in play, meaning if a start-up company is not within a 20-minute drive of the venture firm’s offices, it is less likely to attract funding. Various factors have contributed to the slow downfall of this rule, not least of which is the Covid-19 pandemic.
The issue of proximity stems from the investors’ desire to feel personally engaged, especially during the initial phases. The recent adaptation of business communication in the form of reduced in-person meetings off the back of the Covid-19 has helped to reduce the detriment of proximity in emerging markets.
Regardless of change, it has not alleviated the need for emerging markets to be proactive and seek out investor attention. The basic rules of the game still apply. In order to further alleviate the burden of distance, the strongest deal possible must be put on the table. Fintechs in emerging markets no longer have to fight for attention – they are being watched, they’re being discussed, and they’re attracting more investment than ever before. The challenge is now positioning yourself as a worthy investment.
Fintech can be contradictory. On the one hand, the nature of the space is challenging, innovating and adapting. However, instinctually, investors still opt to invest in what they understand. A safe bet is still a good bet. Naturally, this has skewed output towards the developed markets they live, study and work in – which just so happen to be the ones with the largest pool of data.
Cast your mind back five years. Fintech funding in emerging markets made a small fraction of total VC spend. In 2017, the combined funding into India, LATAM and Africa attracted $2.4billion – less than 10% of global total. In 2021, African fintech alone secured $2.1 billion.
Opinions and perceptions have changed. Crucially, we are seeing relative parity, and in certain cases significant outperformance, between emerging market and developed market fintech stocks. Confidence in public markets, and their ability to provide a viable exit, translates to confidence in private markets, as perceived risk is reduced. As investors wake up to the opportunity in emerging markets, they are treating them as a focus, driving investment into these regions.
Demonstrating risk and reward
Data is critical. At surface level, investors look for vision. However, at a deeper level, guidelines and a map for success are crucial to securing investment. Risks are best mitigated through an understanding, and demonstrable evolution, of KPIs. In order to do this, rigorous data reporting standards and actionable scalability plans must be convincing.
If an investor is to be convinced that this vision can become a profitable reality, companies need to show solid, reliable fundamentals that allay potential unknowns and risk. Lack of parity between emerging and developing markets, in terms of an existing fintech ecosystem is a little way off, but it is the job of fintech’s and their financial advisors to plug this gap in the most convincing way possible.
Many of the barriers to unlocking funding for companies within the emerging markets remain structural, but equally they are based on long standing attitudes and perceptions held by investors, that are fundamentally being broken down.
The strong performance of emerging market fintech darlings is compelling, showing that these firms are not a fad, and not as much of a risk as some would’ve thought a decade ago. As they move towards parity with developed market firms, expect this growth to be just the beginning, with huge rewards for the pioneering investors who prioritize understanding these markets.