Why 2022 is the year of the fintech ‘founder factories’

A trend that has been increasingly apparent in 2022 is the ongoing proliferation of new fintech startups despite an ever-worsening economic backdrop. 

While the data on funding for fintech startups is clear - it’s fallen off a cliff compared with last year - thousands of founders have made the bold move to launch new companies. 

Most startups fail and so launching a new one during a recessionary period seems at odds with common sense. However, a rapidly growing reason for this proliferation of new financial startups is the ‘second generation’ effect. 

This is where senior staff at large and successful scale-ups look to replicate the experience with their own companies creating ‘founder factories’.  

New-founders who have seen inside companies that have moved from ‘zero to one’ know what works but also pain points that still exist and therefore present opportunities for new, nimble players.

In addition, they have easier access to funding through both warm introductions to VC investors as well as burgeoning angel networks that have sprung up by their former colleagues. 

Companies such as Wise,Revolut and N26 have seen early employees join up to invest and other colleagues starting their own companies is a popular option.  

For example, Lightyear was founded by Martin Sokk and Mikhel Aamer, both employees at Wise in summer of 2021, launching just a few weeks before the Wise stock market listing. Lightyear initially raised €1.2m at this time in a pre-seed funding round that even included Wise’s co-founder Taavet Hinrikus.

Another example is Pillar, a new credit platform for immigrants, that raised a pre-seed round of £13m this year. The company was founded by CTO Adam Lewis and Ashutosh Bhatt, its CEO, who is also Revolut’s ex-head of lending.

Cheq, which also launched this year with a £2m seed round, was funded by 30 angels including former senior employees at Revolut,Monzo and Tide.

Tranch, a buy now pay later (BNPL) platform for SaaS sellers and professional services providers, raised £3.5m ($4.25m) in pre-seed equity and debt funding. It was founded in 2021 by Philip Kelvin and Beau Allison. The pair were former Cheif Financial Officer and Head of Engineering, respectively, at Trussle.

There are approximately 300 VC-backed unicorns in the EMEA region, of these two-thirds have become 203 have produced more than 1,000 (1,018) new tech startups, with former employees becoming founders, according to data crunched by Dealroom and venture capital firm Accel, which itself has backed the likes of Monzo, Soldo and Lydia. 

Of the c.61 fintech unicorns, approximately 310 new startups have been founded by former employees over the last 14 years, according to the data. 

German neobank N26 has sprouted the most startups (26) founded by its former employees. These include the likes of Penta, Wonder and GoLiving.

BNPL giant Klarna and super app, Revolut are close behind with 23 each. Wise has 19 and Monzo has 16.

Perhaps unsurprisingly, fintech is a popular category for former fintech employees.  15 out of the 23 companies founded by ex-Klarna employees Klarna staffers are in the fintech space. A very similar pattern is also evident at Wise where 58 per cent of the 19 startups created are fintech and at Revolut: where 43 per cent are fintech.

Other Mushrooming fintech ‘founder factories include GoCardless, Wefox, SumUp,Robinhood, Payoneer, Adyen: and Funding Circle.

Why

Another factor is incentives. With valuations falling for a number of high-profile names in the fintech space, or at the very least under pressure, the financial long-term incentive changes. 

Equity packages that once might have looked like one-way bets to life-changing amounts of money have been readjusted in terms of risk/reward in 2022.  

Last year was very different. While there were 34 fintech IPOs for names such as SoFi,  Toast, Robinhood, Marqueta, NuBank and Circle there has been almost none in 2022. 

The reason is relatively simple, plummeting shares prices for this group of companies make the likelihood of a successful IPO unfavourable.  

The data also shows that the apple does not fall far from the tree, geographically speaking. Of those companies founded by former unicorn employees more often than not are done so in the same cities where their former company was founded. More than half (56 per cent) of companies founded by ex-employees were founded in the same city as the unicorn. 

For example, in London, 27 London-founded unicorns saw 168 startups founded by former employees and 69% were founded in London

Talent is the most fundamental ingredient of any successful tech ecosystem. It’s clear that European talent is now at a very different level than in 2000 when Accel opened its London office, said Harry Nelis, Partner at Accel. 

“While founders and their teams are navigating a tough macroeconomic environment, it’s also true that the community is in a much stronger position than during the 2008/9 financial crisis,” he added. 

“There’s now a wealth of strong founders and operators building innovative companies that have experienced the start-up journey before and have the knowledge to create global success stories. We’re looking forward to seeing the next wave of companies,” he said.