VENTURE CAPITAL IS (STILL) IN LOVE WITH THE FINTECH INDUSTRY
Even with significantly lower valuations than the market, venture investors continue to focus on fintech.
You will be hard pressed to find a large venture capital fund, no matter in the world or in Bulgaria, that is not interested in financial technology companies. Interest is actually an understatement – over the past decade, many funds have put fintech companies at the very center of their strategies and poured in generous investments at generous valuations. This has led to a glut in the market in some respects – for example, the sheer number of portfolios that are likely to go through a consolidation phase or simply bankrupt many of them.
Venture capital interest in fintech companies is still there, but it is much more specialised. Investment is still generous because promising companies need significant financial resources to enter the industry. Valuations, on the other hand, have experienced a dramatic correction, in many cases down more than 50%. Now a correction is expected because the market has driven down the value of almost all companies by equal weight, without taking into account that some are simply better and more valuable than others.
All these features are important given the two different situations for venture capital funds around the world and in Bulgaria. While globally the most important news for funds is central banks raising interest rates – the end of so-called free money, in Bulgaria venture capital is mostly backed by public funds, and many have little time to invest their remaining money under mandate. This does not mean that Bulgarian funds are not interested in what is happening in international markets, but it does mean that they have less fear about whether there will be more money to invest after the end of their current mandates.
“Fintech in general is an industry with a big market because it was created by previous players like banks and insurers. The market is already there, it’s huge and what fintech companies are doing is disrupting or improving models”
The reason for the interest in the fintech industry
“Fintech is still one of the verticals that has the highest volume of investments and the most advanced readiness for underwriting,” says Alexander Terziyski, partner at venture capital fund NV3 (the third NEVEQ fund). According to him, there are several reasons for venture capital interest in fintech. The first and most important factor is that companies in the sector are automatically in a long-established market of enormous size.
“Fintech in general is an industry with a large market because it was created by previous players like banks and insurers. The market is already there, it’s huge and what fintech companies are doing is disrupting or improving models. They enter it much more easily because they are simply attacking existing markets. Nobody is creating something new, but they are providing an innovative solution to an existing problem,” says Terziiski.
This foundation leads to the logical corollary – fintech companies can grow extremely fast because they don’t have to create a market out of nothing. According to Terziiski, many companies grow even just because the overall market grows, i.e. the wave lifts all boats. “Given the point we are at, it makes a lot of sense to pour money into fintech companies,” he adds.
Another reason for funds’ interest in the fintech industry is that it is full of good founders and teams, many of whom come from the traditional financial sector and have seen up close what can be optimized. For funds, teams are a particularly important part of their decision whether to invest in a company, and when it comes to idea-level startups, the team is basically the entire company.
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