At the dawn of 2020, we take stock of French and European fintech trends with our market expert Edouard Bouvet.
Whether in terms of the number of fintechs created, the number of investments or their amounts, the upward trends observed over the last 3 to 5 years in fintech should globally continue in 2020.
This is due, in particular, to an interest rate environment which is still very low and which is pushing investors to look for potentially more dynamic investment vehicles, including venture capital, and more particularly fintech, where the valuation multiples of fundraises are very high and suggest that there may be some fabulous capital gains from secondary operations a few years later.
Nevertheless, the number of fintech exits (divestitures/acquisitions) should remain stable, and therefore ultimately quite low (particularly in France), as was the case in 2019.
Therefore, even if the fintech market continues its theoretical expansion, 2020 could, in fact, be the starting point towards the first signs of a rationalisation of investments and thus of the sector as a whole.
Indeed, the valuation during a fundraise is ultimately in line with the company’s business plan: hypothetical! And in the end, only the actual price of a sale or acquisition matters.
2020 will correspond to the end of a first cycle for French fintechs, as many of them will reach 5 to 7 years of existence. We should see the venture capitalists who invest the earliest (with a few rare exceptions in 2018 and 2019) try to sell their stakes.
However, only those fintechs that will have reached break-even or have sufficiently accelerated their development will be able to be sold at prices allowing a decent internal rate of return for venture capitalists. Such fintechs are rare at the moment.
2020 will therefore provide the necessary hindsight to finally start analysing the performance of fintech investments, which may be disappointing (from a pure risk/return point of view). The lack of liquidity of secondary operations, resulting from often irrational valuations of fundraising, should take its toll.
The main consequence of this first end of the cycle is that venture capitalists will be more and more careful and rational in their choices of fintech investments, looking for healthier companies to fund (closer to profitability), or at lower valuations.
This trend may also materialise in a willingness to secure their tickets more strongly, in particular through preferential liquidation mechanisms at more than 1:1, which we are beginning to see more frequently (guaranteeing or almost guaranteeing profitability to the funds, whatever the exit value of the portfolio companies).
Fund managers have to be imaginative to avoid disappointing their investors: as the valuations are very high, it is difficult for them to find “good exits”, i.e. high returns on investment, perhaps especially on the French market.
In the words of the co-founder of the Refiners, Carlos Diaz, “France is like the Saccorhytus, an ancient animal with a large mouth (vibrant ecosystem) but no anus (exits)”.
The long-term “value for money” (profitability and viability) of our fintechs remains, it seems, more than anywhere else, to be demonstrated in order to whet the appetite of buyers.
To put it simply: fintechs are not profitable and this limits their prospects of being properly sold or remaining independent without external investments.
This lack of attractiveness for buyers therefore keeps the sector in a competitive status quo, with a landscape that is still highly fragmented, subsidised, poorly rationalised and even less consolidated.
It does not seem (with rare exceptions, still to be confirmed in the long term) that there are any clear winners taking over the market.
Rather than acquiring their competitors, fintechs can only hope to cannibalize them by being better, and if not (most of the time) become suppliers or customers of each other, while focusing on their own differentiation.
Synergies and value creation can therefore only be achieved by means of commercial relationships, rather than through M&A operations.
If the fintech wave was initially intended to be a revolution, in the end it looks more like an evolution where more than a few isolated players, it is the ecosystem as a whole that is self-optimizing day after day, because of, or rather thanks to, the reality of the market which cannot indefinitely support independent and disruptive companies that are too far away from profitability.
This situation is therefore a breeding ground for the emergence of Open Banking and Banking-as-a-Service, which create the necessary conditions for the realization of value-added partnerships between market players, opening the way to growth and even profitability for many fintechs.
Ditto Services (France), société par actions simplifiée au capital de 590.000 euros, enregistré au RCS de Nanterre sous le numéro 842 578 320. Banque Travelex, société anonyme au capital de 72 599 428.08 euros, RCS Nanterre 389585233. Banque Travelex est agréé en tant qu’établissement de crédit par l’Autorité de Contrôle Prudentiel et de Résolution.