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- The share of European late-stage fintech deals with at least one US investor increased to 23% in 2020, from 19% in 2019, according to a new report from Silicon Valley Bank.
- Europe has a strong pipeline of fintech startups and is an obvious market for US investors to diversify into, according to Rosh Wijayarathna, managing director at Silicon Valley Bank
- COVID-19 has exaggerated an existing trend towards fewer, bigger-ticket rounds as investors “fly to quality,” said Wijayarathna.
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American investors are flooding into Europe’s burgeoning fintech upstarts, drawn by unicorns such as $5.5 billion neo-bank Revolut and money-transfer startup TransferWise.
The share of European late-stage fintech deals with at least one US investor increased to 23% in 2020, up from 19% in 2019, according to the latest State of the Markets report from Silicon Valley Bank.
“VC Investment as a whole coming into the UK and Europe is growing significantly and, as a percentage, it’s growing faster than any other region globally in terms of US investment,” according to Rosh Wijayarathna, managing director at Silicon Valley Bank.
“US investors are looking for investment outside of the US and the most comparable market to that is Europe.”
There are a lot of macro factors driving US investors towards European fintech, including a strong market for financial services, a ready pool of talent, and a “relatively friendly” regulatory environment, said Wijayarathna.
In 2020 there have already been seven fintech funding rounds at $100 million or more, involving a number of US investors.
London-based neobank Revolut bagged $500 million in Series D funding in February from Silicon Valley-based growth fund TCV, while payments processor Checkout.com tripled its valuation to $5.5 billion in June with a $150 million raise from tech-focused hedge fund Coatue.
Startups like Revolut that offer a unique proposal and serve a high-value market are attracting the most money from US investors, said Wijayarathna.
As the fintech ecosystem in Europe has matured, it’s established a strong pipeline of fast-growing fintech startups, making it a natural market for US investors to diversify in, he added.
Europe’s late-stage fintech ecosystem is also taking a larger share of investment deals — 27% in Q2 2020, compared with 19% in Q4 2019 — according to the report.
This is despite a fall in the volume of deals over the past year, says Wijayarathna, as big-name investors like Accel increase the ticket size of rounds.
“I think that almost gets exaggerated in a high-stress environment like COVID where you fly to quality,” says Wijayarathna, adding that the market could see more startups skipping straight to later-stage funding rounds as a result.
Business Insider reported in April that the pandemic could speed up a market shakeout in fintech which, as Silicon Valley Bank’s data indicates, is looking increasingly bubbly. The number of competitors in payments, neo-banking, and other areas could shrink through 2020 as bigger players snap up smaller firms which don’t have the cash runway to continue.
The volume of cash reserves held by VC firms — also known as dry powder — has also increased in the first half of 2020 across the US and Europe, most notably in the UK where it has grown 23% to $11.5 billion.
“As the market starts to normalize, I expect to see more M&A as private equity firms that have now stopped focusing so much on triaging their existing portfolio now waiting in the wings with this sheer volume of dry powder that’s ready to deploy,” said Wijayarathna.
He adds: “The easiest way to innovate is to acquire. I would expect to see more exit type scenarios either through strategic investment, strategic sales, or IPOs.”