is fintech’s series a market hot, or just overhyped?

Recent industry analyses demonstrate a significant recovery in venture capital activity following a temporary decline in March, coinciding with the implementation of widespread stay-at-home directives.

From our perspective as investors specializing in seed-stage fintech companies, this observation aligns with our own experiences: particularly promising investment opportunities are being financed at an accelerated pace, and we are witnessing greater participation from substantial, multi-stage, international investment firms seeking initial involvement with these businesses. Nevertheless, based on our observations and discussions with fellow early-stage investors, this level of enthusiasm has not yet extended to the Series A funding round.

This has led us to question whether the Series A market within the fintech sector is genuinely as robust as reported. As investors focused on the pre-seed and seed stages, we recognize the vital importance of a strong Series A market to the overall health of the startup ecosystem.

In early October 2020, Financial Venture Studio conducted a concise survey of the Series A market in fintech, distributing it to over 100 investors with whom we maintain close relationships. While overall statistics suggest a stable market, our findings reveal a situation that is still evolving, with potentially substantial consequences for founders in the early stages of development.

Why Series A is so interesting

While the seed and pre-seed fintech sector continues to garner significant attention from both founders and investors, it’s also arguably one of the simpler stages to secure funding for. The investment amounts are generally lower, the pace of new opportunities is rapid, and although the potential for high returns exists, information about these companies is often limited. Surprisingly, the limited data available – typically consisting of a business plan, the founding team, and perhaps some initial positive feedback – can actually facilitate investment decisions when those elements appear promising. There simply isn’t always extensive information to analyze.

Likewise, by the time a company seeks Series B funding, they usually possess concrete evidence of their concept’s viability. These companies are generally producing income, initial teams have expanded and refined their operational methods, and crucially, the company’s governance structures have (ideally) started to develop. The presence of a board member with a financial stake inherently reduces some of the fundamental risks associated with the very earliest stages of a business.

Conversely, securing Series A funding from an institutional investor represents a significant achievement for any startup. Beyond the capital injection – frequently two to three times the total funding raised to date – this endorsement provides credibility, aiding the company in attracting employees, securing customers, and, often, obtaining further substantial investment.

Therefore, the continued activity of Series A investors is essential; without it, many promising young companies may falter due to insufficient funding, even if they’ve shown initial success in the market. The Series A funding round is a particularly – and perhaps the most – vital stage in the innovation landscape, serving as a crucial link between initial, resourceful innovation and large-scale commercial deployment.

Consequently, the total dollar value invested may not be the most reliable indicator of the ecosystem’s overall health. The true measure lies in the number of companies receiving funding and the diversity of the strategies they are employing.

The post-COVID Series A

After the initial disruption caused by the pandemic subsided, venture capital firms resumed their investment activities. This proved more challenging for funds focusing on investments of $10 million or more, as they typically prefer building personal relationships with founders. Nevertheless, Series A investors actively communicated their continued willingness to fund new ventures.

As investors adapted to the changed circumstances, they became increasingly receptive to conducting due diligence remotely. Our survey revealed that only 15% of firms had not finalized a Series A investment while operating under COVID-19 related restrictions. Among the firms that *did* complete a Series A investment during this period (approximately 85%), roughly half invested in companies led by founders with whom they had little to no prior connection before lockdown measures were implemented.

The move to a virtual investment landscape has underscored the importance of a well-defined process. Many investors have emphasized a renewed commitment to structured methods for identifying and evaluating potential investments. While personal rapport remains a factor in finalizing deals, investor assessments now heavily prioritize customer feedback, recommendations from reputable seed-stage investors, and a thorough examination of key performance indicators.

A “K-shaped” market

In our survey, close to half of the investors characterized the current market as exceptionally active, describing it as “hot,” “crazy,” or similar. This creates significant competition to secure what are considered the most promising investment opportunities, potentially shortening the time between seed funding and a Series A round (and even from Series A to Series B). This competitive landscape appears to be driving a preference for high-quality ventures and a distinct separation among early-stage fintech businesses.

To avoid missing out on potentially successful companies, some investors are willing to accept increased valuations or take on greater risks—related to areas like product development and market entry—for the same investment amount. We define this approach as “selecting the winners,” meaning concentrating capital on the most promising opportunities with the expectation of building businesses capable of quickly securing further funding for growth.

Conversely, companies unable to quickly attract investment at a higher valuation may need to prioritize stability by carefully managing their expenses and strengthening their core product and key performance indicators.

This trend is supported by our data: Roughly 60% of the funds surveyed indicated that a company within their seed-stage portfolio completed a bridge or extension round instead of proceeding directly to a Series A. This aligns with reports we’ve received of investors advising their portfolio companies to lower spending, reduce customer attrition, and postpone their Series A fundraising efforts.

Despite substantial interest in certain deals, several large, globally recognized investment firms reported completing no new Series A fintech investments since the beginning of the pandemic. One large, multistage fund specifically mentioned thoroughly evaluating and declining 15 fintech companies that subsequently secured their Series A funding from other sources. These larger investors have also indicated a preference for collaborating with a smaller number of companies at earlier stages, aiming to maintain their involvement as those companies prepare for a Series A raise.

It’s important to recognize that the current imbalance in the market may be influenced by the shared perspectives of prominent investors, including Angela Strange of Andreessen Horowitz, Matt Harris of Bain Capital, and Frank Rotman of QED. These individuals have publicly articulated similar views on the potential for innovation within the industry. Specifically, startups focused on fintech infrastructure and Banking-as-a-Service (BaaS) solutions have experienced strong investor demand, while other areas, such as student lending and direct-to-consumer offerings, appear to be affected by regulatory challenges or market saturation. Naturally, new ventures that generate a sense of urgency will likely receive a significant, short-term valuation boost, but the long-term implications of this trend remain to be seen.

What founders are saying

In addition to gathering insights from investors, we also consulted with a number of founders who successfully completed a Series A funding round within the last six months. Their experiences largely mirrored the observations shared by investors regarding the current market conditions. One founder described receiving a term sheet quickly, initiating a streamlined process, and ultimately choosing the investor with whom their team felt the strongest rapport. Crucially, this founder didn't feel compelled to compromise on valuation and secured alignment with a reputable, high-caliber investor.

Several other founders undertook more extensive fundraising efforts, with one engaging in conversations with over 70 potential investors. Notably, founders indicated that more than half of the investors they contacted were new connections, meaning the initial meeting occurred in a virtual setting. Fintech investors appear to possess a slight edge compared to generalist funds, demonstrating a quicker understanding of the business model and accelerating the path to closing a deal. One founder advised fintech companies seeking Series A funding to prioritize two weeks of pitching to fintech-focused investors before expanding their outreach to the broader generalist investor market.

All founders readily acknowledged the unique difficulties of remote pitching. One founder specifically suggested practicing with simulated virtual presentations and including multiple team members on screen to adapt to presenting without the benefit of observing in-person body language cues.

Despite positive signs of activity in early-stage fintech and the industry’s progress toward stabilization, securing Series A funding for fintech startups remains a significant challenge for most founders. We advise our portfolio companies to maintain a conservative approach to cash management and to proactively cultivate relationships with potential Series A investors well before initiating a fundraising round. Founders can greatly benefit from leveraging their existing investor network to facilitate these connections.

As investors, our focus has always been on supporting our founders as they navigate the intricacies of the U.S. financial system, regulatory landscape, media relations, and investor interactions. However, we have also observed an increased need to manage relationships with co-investors since the onset of the pandemic. We encourage founders to actively engage their current investors in similar relationship-building efforts.

The Series A survey was conducted by Venture Studio, Inc. in October 2020. It represents the findings of a landscape survey distributed to 100 venture capital investors to assess the environment for Series A investments, with a specific focus on the fintech sector.