With the UK recently ranking fourth in the world for the most unicorns – and those in FinTech making up a large proportion – it’s fair to say the UK can justifiably claim to be among the world’s leading FinTech markets.
Concerns about the country’s wider technology ecosystem are longstanding. High-potential start-ups are frequently snapped up by overseas acquirers before they can take meaningful strides towards ‘FAANG’-style scale and success. A record 130 UK tech businesses were bought by American companies alone last year. Critics have warned of a ‘laissez-faire attitude of allowing our key high-tech businesses to be purchased’.
However, the dynamics are legitimately different for FinTech businesses. The UK accounts for 10% of global FinTech market share, according to data cited in the Kalifa Review. It attracted $11.6bn in FinTech investment last year, nearly half the European total. And Innovate Finance ranked the UK as the second biggest hub for FinTech investment globally, after the US, in H1 2022.
What’s the secret sauce for UK FinTech companies? They benefit from access to the City of London and the UK’s sophisticated financial services industry. British consumers are consistently early adopters of new financial innovations, such as mobile payments and banking. And, in the Financial Conduct Authority, companies can work with a regulator that is best in class at exploring new technologies and working transparently with new entrants seeking to break the mould.
All that makes the UK a fantastic, globally competitive place to not only launch a FinTech business, but to successfully grow it as well. That applies equally to technology providers servicing corporate clients or companies offering consumers new products across categories such as payments, banking, investments or insurance.
The funding markets for FinTech companies have reflected this opportunity. Venture capital firms have focused primarily on a company’s growth potential and scalability, rather than its path to profitability – even more so than across the global technology industry as a whole. ‘Get big fast’, as the famous Amazon mantra goes.
That story rang true – until now. The perfect storm of rising interest rates, inflationary pressures and falling public company valuations – most notably in the tech sector – triggered a reset in thinking.
Changing investor priorities
Now investors in privately owned UK and European FinTech companies are less willing to continue subsidising aggressive growth plans. Instead, they want to see evidence that your product is monetisable, that your margins are sustainable and that your USP is more than just being bigger than your other, equally commodified competitors.
Not all companies can do that. Some of those that don’t still need extra cash to fund themselves. They face the prospect of raising money at substantially reduced valuations.
This shift in thinking was apparent in our conversations with investors around our last two fundraises – a $110m Series C last November and a $50m top-up this June. Coming either side of the market volatility of early 2022, these two fundraises provide a window into how investors’ attitudes towards FinTech businesses have, and continue to, change.
Last year, our customer acquisition rates were front and centre of our pitch to investors. We had reached a million customers two months earlier, just over a year since our launch. We were on our way to two million customers only four months later. We were lining up a US launch in the spring. The potential for further rapid growth in customer numbers was fundamental to achieving a double-unicorn valuation.
This summer, the conversations were significantly different. Investors were more focused on how frequently our existing customers use the product, how long before each payment made by a consumer translates into profit, and how sustainable is the revenue pool that we’re fishing in.
Without the right answers, we would not have been able to buck the industry trend and maintain a stable $2bn valuation. Those questions are, therefore, a useful indicator of what FinTech businesses can now expect investors to focus on.
Customer loyalty
For example, our investors placed a lot of stock in our customers who use Zilch habitually, even daily. That shows the increased attention to customer loyalty and utilisation rates, rather than focusing solely on raw customer growth. Similarly, they ascribed real value to us, having already reached net transaction margin profitability for our most mature customer cohorts, with an aim to emulate this across the entire UK business by next year. That underlines the value of a demonstrable path to profit.
Finally, we were able to lay out the benefits of a platform that combines payments and commerce and thereby generates revenues from retailers’ marketing budgets, which are projected to climb to c.$1 trillion annually within the next two years. This demonstrates that we won’t be fighting over a shrinking pie in the future – unlike, for instance, companies that rely on merchants’ payment processing budgets, which are set to be squeezed further.
Growth, of course, remains critically important. But, for the UK’s FinTech businesses, it is no longer sufficient.
Going forward, the winners in this market will be those who can chart a course that is equal parts high-growth and commercially sustainable.