Why the Series B funding gap threatens the UK’s fintech crown
A fintech funding bottleneck needs unblocking, writes James Codling, managing partner at Volution.
The UK fintech ecosystem has a funding issue.
While the volume of seed and Series A deals has exploded since 2010, much of this good work is in danger of going to waste.
Viable firms looking to grow their operations are struggling to take the next step - successfully source funding at the Series B level.
This gap in the funding cycle - preventing companies from accessing the financial support needed to expand - has been well-publicised.
The numbers speak for themselves. Late-stage funding has declined each quarter since Q2 of 2022 and has fallen 64 per cent year-on-year as global-leading late-stage investors retreated from leading private company financings.
Series B conversion rates specifically have halved from 16 per cent to 8 per cent and are still on a downward trajectory. If fintech firms cannot access the later-stage support they need to scale, then it is not just viable business under threat, but the UK’s standing as a global industry leader too.
Why is this happening?
The wider tech downturn and a challenging economic climate are undoubtedly playing a part. But there are other factors here too.
The fundraising environment for Series A and Series B VCs themselves is getting tougher, with limited partners (LPs) waiting to see how funds perform during this period before they deploy new capital, resulting in fewer funds coming to market.
Another reason it is taking longer for fintech firms to get from Series A to Series B is the siloed nature of the UK’s approach to venture investing. This approach is driven by LP requirements around funding stages, companies hitting certain revenue milestones and performance metrics, and the fact that proving metrics from Series A to B stage requires even more money.
There has to be a better approach to investing in deserving fintech companies. Ultimately, most firms face the same challenges – strategy, partnerships, people, leadership, execution and fundraising.
Why the UK’s fintech ‘crown’ is at stake
At this point, it’s worth pausing to consider where the UK currently ranks among its international fintech rivals. Described for years as “the jewel in the UK’s financial crown”, the last 36 months have only produced one quantifiable fintech IPO, prompting concerns that the sector may have lost its sparkle.
However, despite a more challenging investment landscape in the first half of 2023, London remains the financial capital of the world, which means the UK is still an attractive place to set up a fintech firm.
As well as natural advantages - like the legal and regulatory environment, the availability of skills, the quality of the universities, the language and time zone positioning - the UK also offers accessible routes to public and private capital for early-stage businesses.
Indeed last year, British fintechs attracted more than half of all funding in Europe and many companies founded during the boom of 2016 have now grown up.
However, the current funding bottleneck at Series B means many of these firms risk spilling out or disappearing altogether. The challenge for the fintech sector lies in ensuring these growth-stage companies can access the private capital, advice and mentoring they need to progress beyond the early funding rounds and fulfil their potential.
The fintech growth fund
One strategy aimed at addressing this issue of fintech firms struggling to scale - and deter them from listing overseas - is the Fintech Growth Fund.
Launched in August and backed by some reputable LPs including Mastercard, Barclays and the London Stock Exchange Group, the fund aims to invest between £10m and £100m into UK fintech companies, ranging from consumer-focused challenger banks and payments tech groups to financial infrastructure and regulatory technology.
However, while Peel Hunt - the UK investment bank advising the venture - states that funds will be available to firms from Series B to pre-IPO, the reality is that most of this will be later-stage investments, where there are already existing international capital options available to fintech companies.
With the objective of the growth fund seemingly to get more firms to list, its success will be measured by the proportion of its portfolio companies which ultimately end up doing so.
In truth, while more capital in the fintech space is always welcome, it appears this new fund will do little to ease the Series B funding bottleneck currently stifling the sector's growth.
Next in line
If the UK’s fintech crown is under threat, there are several countries with aspirations of being next in line to the throne.
Japan has a much more holistic view of how businesses work with start-ups, and there is certainly ambition from the government for it to become more of an international fintech hub. However, current levels of consumer demand for fintech mean this is unlikely to happen in the near future.
India’s fintech sector is also experiencing rapid growth, ranking as the third highest international market for capital invested into fintech companies ($5.5bn) in 2022, with 311 deals compared to the UK’s 547.
What can be done?
Solving this domestic funding gap will involve the implementation of funding vehicles which, alongside institutional investors, identify growth-stage fintechs capable of progressing beyond Series A and work with founders to help them to take the next step.
Ultimately, successfully executing a journey from Series A to Series B funding is the toughest challenge a business will face.
It involves 10x-ing a business and transitioning from a great concept and broad customer base to a KPI-focused model with a fully formed customer profile and a clear idea of its place in the market.
In the last ten years, the fintech sector has grown up as companies have gone through the early stages of the investment cycle and matured. If this growth is to be sustained, it's now time for investors to catch up.