Mature fintechs, not startups, get bulk of funding and acquisition deals: Deloitte report

While financial technology startups may get more attention, mature companies are getting more financing, according to a new report from Deloitte Center for Financial Services.

Investments in what Deloitte calls “invest-tech,” or fintech companies that provide investment solutions or data insights for retail and institutional clients, continue to be strong, hitting a record $2.8 billion in 2018. Though numbers through September 30 show 2019 lagging behind due to a slow second quarter and flurry of initial public offerings, the third quarter of 2019 saw an uptick. Invest-tech firms received $600 million in the third quarter of 2019, compared to $513 million a year earlier.

However, the number of new invest-tech companies launching has steadily declined since peaking at 81 in 2014. Only four new companies launched in 2018 despite the record amount of funding. Only one company launched over the first three quarters of 2019.

The bulk of the funding surge is going towards companies that have been on the market for at least five years. Late-stage deals jumped 58% in 2018, and 75% of all invest-tech funding between 2008 and 2018 went to companies founded before 2014, Deloitte’s analysis found.

Private equity investors appear willing to pay a premium for fintech companies that have a proven business model, solid revenue generation capabilities and strong client pool, wrote Deloitte research manager and report author Sean Collins.

Not only are mature fintech firms receiving more funding, they are also more attractive acquisition targets by traditional financial services firms.

“70 percent of acquired invest-techs having reached that milestone,” Mr. Collins wrote in the report. “In fact, the average age of acquired invest-techs has remained above five years since 2014.”

The data is anecdotally supported by recent M&A news in the adviser fintech world. Visa paid $5.3 billion earlier in Janurary to acquire Plaid, a financial data aggregation firm that launched in 2013. A year earlier, Plaid acquired Quovo, another data aggregation firm launched in 2009 that specialized in wealth management, for $200 million.

And when asked about rumors swirling that TA Associates were looking to sell Orion Advisor Services for nearly $2 billion, Orion CEO Eric Clarke chalked it up to the five-year timeline of his company’s relationship with TA.

Mr. Collins attributed the steep drop in new invest-tech launches to a hyper-competitive pricing climate as well as actions taken by traditional financial services firms to combat new competition from startups.

Specifically, many firms either acquired a digital advice platform or built their own to compete with the rise of startups like Betterment and Wealthfront. Even though many of these platforms didn’t generate meaningful profits, they helped keep current clients from leaving, Mr. Collins wrote in the report.

“These assets were secured for little incremental cost, much to the chagrin of some direct-to-customer (D2C) pure-play robo-advisers,” he wrote, adding that this also opened the opportunity for companies to embrace a business-to-business strategy. With the notable exception of Wealthfront, nearly every digital advice company now makes its platform available to financial advisers.

For consumers, competitive products from traditional firms reduced the incentive to switch, putting pressure on the strategy of targeting younger investors with fewer investable assets.

“A pureplay robo-adviser charging the average fee of 0.25 percent on account assets requires $20,000 in a client account to generate $50 in revenue per year,” Mr. Collins said. “In a very heated competition for assets, pure-play robo-advisers were often unable to raise fees and were faced with a minimum of five years to a decade-long journey just to break even on a client.”

There is still opportunity for new startups and early-stage companies, especially as traditional financial institutions look to acquire additional digital capabilities and technology talent. The trend of “acqui-hiring” is likely to continue to help firms modernize their corporate culture, Mr. Collins wrote.

“From the incumbents’ point of view, partnering with invest-tech firms early on can not only offer a talent acquisition opportunity, but also help to develop an innovation incubation center,” he added.

[More: Ladenburg partnering advisers with startups to accelerate tech innovation]

But late-stage funding is expected to continue accounting for the largest share of invest-tech funding. Technologies are remaining private longer as access to private capital remains strong and financial institutions look for partnerships rather than ownership.