A leading venture capitalist says that investment in RegTech tends to go against typical trends in Software-as-a-Service during an economic recession.
Steve Berg, partner at Lytical Ventures, told the SaaS lounge – co-hosted by Flashpoint VC and Clausematch – that in such an environment “it’s natural to reassess the risks companies take”.
However he added: “We are experiencing a natural slowdown, but you can’t invest less in compliance. You don’t have a choice.”
Fellow leaders from Flashpoint VC, the Sony Innovation Fund and Talis Capital assured audience members during the online discussion that investment in regulatory technology is not losing attractiveness to venture capital funds, despite crises around the world.
“The RegTech space has witnessed a huge boost in new tech solutions since the previous crisis of 2008. I believe that the current economic crisis will be no different,” said Donatella Callegaris, managing partner, Flashpoint Venture Debt.
“Compliance is eating the world and sooner every business will have to take care of it. This represents a tremendous opportunity for all the existing and new businesses operating in the space.”
As it stands now, the global RegTech market is expected to reach $10.1 billion in size by the end of 2022, according to a recent Future Market Insights report, which is an increase compared to 2021.
That compares to a significant devaluation in some FinTechs, especially neobanks and buy-now-pay-later firms. Klarna, for example, closed a recent funding haul at a $6.7bn valuation, a share drop from $46bn it reached in June 2021.
Costantino Mariella, Senior Venture Capital investment manager at Sony Innovation Fund, said: “B2B SaaS is currently suffering a drop in valuation. This is reflecting in the target market as well.
“However, RegTech has been under the radar compared to the biggest sectors suffering less valuation increase. RegTech has suffered less hype and will suffer less drop in valuation accordingly.”
Evgeny Likhoded, CEO and founder of Clausematch – No.1 on BusinessCloud’s recent RegTech 50 ranking – noted: “It’s been interesting to watch and speak to investors recently.
“We have never had so much demand in a round of investment than we have now because, in the macroeconomic slowdown, compliance is not optional.”
After an unprecedented 10-year investment and capital-generating cycle, the push to consolidate some RegTech companies is inevitable. Just this year, GRC software management solutions developer Ideagen agreed to a $1.3 billion offer from private equity firm Hg Pooled Management.
“On the one hand, there is this push to go for one company that can manage five products. There are so many solutions to make it easier, faster, and cheaper. So eventually there is undeniable consolidation coming,” said Vasile Foca, co-founder and managing partner at Talis Capital.
“And on the other hand, RegTech is not immune to the Amazon effect. For instance, onboarding Revolut takes three minutes. People are used to onboarding fast and are very well connected with smartphones. It means that compliance also needs to be fast to ensure this speed.”
The industry continues to see breakneck advances coming to the marketplace by a variety of companies, including Clausematch. Yan Shtefanets, VP of Product, remarked with thousands of complex regulations published every year, connecting data through AI has proved beneficial.
“AI could start helping us by transforming unstructured data into a more consumable format so we can easily identify relations and connections in compliance content,” said Shtefanets. “We can digitise compliance content and connect the dots with AI.”