Rising deal activity involving fintechs hit a new record in 2018, jumping 38% year over year to nearly $11 billion.
Efforts to build better connections to bank customer data, trade digital currency and explore artificial intelligence for security and compliance purposes were some of the biggest draws of fundraising for U.S. startups. Other established players, such as Plaid and Coinbase, were among 184 U.S. firms that raised $100 million or more in funding rounds in 2018, according to analysis by PwC and CB insights.
“The reason why fintech is drawing all this attention is because it’s well defined what the rules of the game are,” said Ryan Gilbert, partner at Propel Venture Partners. “Customer acquisitions remains key and the technology has to be proven to make an impact.”
Plaid, which provides application program programming interfaces that enable consumers to link their bank accounts to apps such as Venmo and Robinhood, last month announced a $250 million funding round that reportedly brought its valuation to $2.65 billion. It announced this week it plans to use some of that cash infusion to make a $200 million acquisition of Quovo, a startup that aggregates investment data.
The cryptocurrency exchange Coinbase also secured one of the top fintech investment rounds last quarter, obtaining $300 million in a Series E funding round to bring its valuation to over $8 billion as its seeks to expand globally. The company’s fundraising success was an anomaly of sorts as Gilbert noted a decreasing number of crypto-related pitches at his firm as a result of bitcoin’s decline in value.
“The people that were spending time on those types of projects realized eventually that wasn’t where the action was going to be," he said, adding a number of entrepreneurs were changing focus to other areas in fintech.
Artificial intelligence-focused software companies also were a hit in 2018, highlighting an area banks are seeking to invest more through internal development and third-party partnerships. AI-related companies last year raised $9.3 billion, up 72% from $5.4 billion in 2017. Deal activity actually dipped 13% from 533 deals in 2017 to 466 transactions.
Of particular interest to the industry is Tanium, which is used by 12 of the top 15 banks in the U.S. The firm, which specializes in cybersecurity, captured one of the largest funding rounds in the AI industry last quarter when it raised $200 million to put its valuation at $6.5 billion.
Michael Wholey, an intelligence analyst for industrials at CB Insights, noted that cybersecurity is one of the key drivers for AI-related funding rounds. He also expects more AI startups to enter the market this year.
“We’re also seeing a trend in that the underlying technology in AI and it is easier to adopt from a startup standpoint,” said Wholey. “There are better chips, better processors and a lot of open source software product that enables the development of AI as a tool for a business.”
Overall venture capital funding rose 30% from 2017 to $99.5 billion. The study noted fintech deal activity rose to 627 transactions, up 10% from 571 in 2017. There were 5,536 deals for the year. In the fourth quarter alone, U.S.-based companies raised $25 billion.
Whether the venture capital market continues last year’s pace throughout 2019 could depend on what happens in Washington and if policy decisions have a long-term impact on the economy. The stock market late last month tumbled as the U.S. and China aired their differences over a trade agreement. The new year has seen more stability, but a prolonged government shutdown could further spook investors.
“The political situation was definitely wearing on the psyche of both investors and companies," Gilbert said. “Now that the market is bouncing back, people feel better. But many in the industry were telling their founders to raise as much as you can because you never know if you’re going to need it” later in 2019.
As for fintech funding specifically in 2019, Wholey noted funding in the sector began to “pull back” in the second half of 2018 and said it “may continue to fall” this year.
“However, there are still several deep-pocketed investors like Softbank actively looking to make fintech investments,” he said.
