Investor debate from the frontlines: Are we experiencing a FinTech bubble?

By Eric Minnick, Edison Ventures Associate

Recent outsized exits in financial services technology, such as the Vantiv-Mercury Payment Systems deal, are serving as a catalyst for more entrepreneurs entering the space.  This influx of talent and innovation makes it an exciting time to be investing in FinTech, but at the same time, raises the question, “Are we experiencing a FinTech bubble in today’s marketplace?”

Last week, the New Jersey Tech Council (NJTC) held its annual FinTech Conference, and there was a notable panel of an impressive cast of leading FinTech investors, moderated by Andy Gilbert, partner at DLA Piper:

Michael Kopelman, general partner, Edison Ventures

Mitchell Hollin, partner, LLR Partners

Amir Goldman, managing director, Susquehanna Growth Equity

Marc Lederman, co-founder and general partner, NewSpring Capital

 

This question of a FinTech bubble sparked great debate among the panel. The dynamics and perspectives at play can be summarized into four key points:

1. Per Kopelman and Hollin, the market is cyclical, but certain sectors are demanding higher valuations than others, due in part to improved public market conditions. Public markets are used to value many FinTech deals and are driving value up.
2. A “west coast mentality” seems to be creeping into east coast investing, meaning more money is chasing deals causing higher valuations.
3. Regulations are making certain market segments more attractive right now for investors.  Most specifically, compliance is a hot area to which companies are flocking.
4. Goldman asserted that the big guys (namely Google, Apple and Amazon) are looking for mobile payments companies and their presence will drive high valuations for VCs in those markets, and represent the opportunity for an extremely out-sized return.  Most of the panel pushed back on this assertion (“west coast mentality,” anyone?), as the reality is most of companies getting high valuations won’t be purchased by those big companies. The viewpoint expressed in opposition was one of more tempered expectations in that segment and hope for lower valuations and expectations.

While this panel has been investing far longer than I have, they shared perspectives and ideas consistent with what I’ve been hearing from entrepreneurs.  FinTech CEOs have high expectations for their companies’ direction and their exit potential.  The excitement is contagious, but makes it challenging to keep goals in perspective.  As the panel noted, the influence of players, such as Google and Apple, with plenty of cash and the propensity to spend is having a major impact on certain segments.  It will be fascinating to watch how their influence may impact future deals.

This FinTech bubble question is very relevant one with a couple of huge exits and outsized valuations.  There are a number of different explanations for why that is the case, from the improvement in the public sector through different buyers changing the landscape.  However, there is a lack of consensus as to whether this is a new status quo or just a market cycle.

Let me know what you think about the current trends in the FinTech market. Did the panel miss any key market dynamics?

 

FinTech Entrepreneurs: The bright spot in the storm

by Mike Cichowski, Principal
(originally posted on 12-11-2011)

The global Financial Services landscape is undergoing transformative change. It’s hard to turn on the news and not hear about the European debt crisis, Occupy Wall Street and the growing divide between Wall Street and the rest of the country. Banks are letting go thousands of employees in the wake of decreased revenue and profitability and regulatory changes, but there is a bright spot in these storm clouds — and that’s entrepreneurs. There’s incredible innovation coming from startups targeting Financial Services; helping these entrepreneurs disrupt the status quo is a big part of what we do at Edison.

In November, we held our 7th annual Financial Technology (FinTech) roundtable at the Harvard Club in NYC. This year’s theme was how to build and achieve premium value. Edison has invested over $200M across 37 companies in Fintech spanning payments, banking, real estate, capital markets and consumer finance so the audience was broad.
We first held a panel discussion titled “Strategic Buyer Insights: How to Create Value Beyond Financials” and had corporate development executives Scott Cutler, Executive Vice President at NYSE Euronext, Paul Seamon, VP Corporate Development at Fiserv and Richard Wendell, VP Global Strategy and Business Development, Global Payment Options at American Express. All three have been active acquirers and investors. Here were my top takeaways:

1. Business units almost always drive acquisitions. It’s not the M&A and deal teams.
2. 1 + 1 = 3. The point being is that leverage is key. Will your product drive cross-sell opportunities and can the buyer leverage their sales/marketing distribution?
3. Many acquisitions are driven by product gaps. So get know to your potential buyers and their pain points.
4. The best way to start a relationship with an acquirer is a partnership. It’s like dating before a marriage. Prove that the relationship can work.
5. Everyone talks about “strategic” multiples (a.k.a. paying up), but most transactions are based on financial metrics such as revenue, EBITDA and cashflow. Achieving a strategic multiple is very rare so don’t bank on it.

We next had two short market updates from investment bankers Brendan Ryan, SVP at Raymond James and Joel Kallet, Managing Director at Clearsight Advisors. These firms specialize in Securities and Capital Markets, Payments and Banking sectors, and highlighted several recent Fintech transactions. You can see their slides here and here so I won’t fully recap, but several areas attracting investors and acquirers include:

• Convergence of social media, gaming and mobile payments
• Regulatory compliance and risk management
• Cloud computing adoption in everything from market data to trading to banking
• Proliferation of electronic trading across all asset classes
• Automation of the “front / middle / back” office
• Big data and analytics

We thank all of our portfolio companies and executives who participated in the event’s success. Overall, it continues to be an exciting time in the space so if you are a Fintech entrepreneur we want to hear from you.