Last week, we published our first original content in an article titled, “What is FinTech?”. Our goal was to shed some light on how we define the FinTech ecosystem and shape the conversation around FinTech at Wharton and beyond. Over the next few weeks, we’re going to dive deeper into different industry verticals and competencies beginning with a focused look at investing in FinTech. At first glance, this might seem like a more nuanced area of focus reserved only for venture capitalists (VCs). However, since online lending and crowd-funding platforms have opened up opportunities for non-bank and non-VCs to lend to companies, coupled with the recent announcement that Lending Club has filed for an initial public offering (IPO), the investment horizon for the FinTech industry is poised to grow and change in previously unimaginable ways.
Historically, investing in public companies by buying and selling shares of a firm on a stock market has been relatively easy, at least in the US. However, private companies have often had to resort to other funding sources including VCs, angel investors or friends and family because no public marketplaces existed for them to raise capital. A private transaction would have to be agreed upon by the buyer and seller, which presumes some familiarity with the financial viability of the company. However, with the proliferation of the internet, there is now a wealth of financial information for public and private companies alike and an opportunity for retail investors exists like never before.
Crowdfunding emerged in the early 2000s as a novel way to source capital and invest in ideas using the internet. A Brief History of Crowdfunding cites ArtistShare (a website that allowed artists to seek donations in exchange for their digital music) as the first crowdfunding platform with its first user raising nearly $130,000 for an album that later went on to win a Grammy Award in 2005. The relatively quick adoption and success in the crowdfunding space made room for innovation in other forms of online lending. Lending Club and Prosper are often credited with beginning the modern peer-to-peer (P2P) lending movement in the United States and since its formation in 2006 Prosper has issued more than $1B of loans between more than 2 million people, transforming the way that people invest.
A closer look at the Lending Club IPO might suggest a windfall for the FinTech Industry. According to their website, Lending club has financed over $5B worth of loans as of the end of 2Q 2014, with nearly 85% used to refinance existing loans (60.95%) or pay off credit cards (22.47%), as reported by borrowers. In its well-circulated white paper “A Trillion Dollar Market By the People, For the People”, Foundation Capital, a Silicon Valley VC firm with FinTech portfolio companies that include: Lending Club, Motif Investing, and OnDeck estimate that “banks, credit cards and other lending institutions generate $870B+ each year in fees and interest from over $3.2T in lending activity.” To put those numbers into context, the white paper claims that marketplace lending could be bigger than the automobile and airline industries, combined.
But it’s not all about marketplace lending to peers or small businesses, and it’s not all happening in Silicon Valley. In their weekly recap of FinTech funding and investments, Finovate noted that in the first week of September 2014 “19 fintech firms attracted $269 million in new funding”, which included an equity trading platform (IEX), a Chinese technology platform for underwriting (Wecash), and technology for distributing shareholder information (Mediant Communications). In a recent report entitled “The Boom in Global Fintech Investment”, Accenture indicates that “global investment in financial technology ventures has more than tripled” from 2008 to 2013 to nearly $3B and between the UK and Ireland the “five-year compound growth rate for fintech financing was twice the global average and twice that of Silicon Valley.” Furthermore, Accenture analyzes the growth rate in investments and deal flow between New York City and Silicon Valley in “The Rise of Fintech - New York's Opportunity for Tech Leadership”. Since 2008, NYC has seen a 45% compounded growth rate in investments and a 31% increase in deal flow compared to 23% and 13%, respectively, in Silicon Valley. Accenture estimates that if current trends in financial regulation, consumer demand and innovation continue, investments in global FinTech could reach $8B by 2018.
If past performance is any predictor of future success, then the near and long-term future of the FinTech industry appears extraordinarily promising. The Wharton FinTech Club is excited to be a part of this movement and we will continue to share and promote ideas for innovation and investment in the FinTech space.