Host Joseph Kamyar is joined for this episode of “Fintech Focus” by Susanne Chishti, founder of FINTECH Circle, for a look at the U.K. fintech investment landscape, in particular investment levels and trends and how they’re shaping deal terms in the U.K. They also look at the various fintech verticals and their increased use of AI, among other industry topics.

💡 Meet Your Host 💡

Name: Joseph Kamyar

Title: European Counsel, Corporate at Skadden

Specialty: “Fintech Focus” host and European counsel Joseph Kamyar advises on a wide variety of corporate transactions, including cross-border private mergers and acquisitions, fundraisings, joint ventures, corporate reorganizations and general corporate matters, with a particular focus on the financial services, technology and media sectors.

Connect: LinkedIn | Email

💡 Featured Guest 💡

Name: Susanne Chishti

What she does: Susanne Chishti is the founder and chair of FINTECH Circle and a FTSE board member. As investor and editor of The FINTECH book series, she is a non-executive director of CMC Markets PLC and Crown Agents Bank.

Organization: FINTECH Circle

Words of wisdom: “I say, if you’re an entrepreneur and you want to maximize the capital and the valuation for your fintech company, it is important to have multiple fintech investors aiming to get in, because then you can ensure that you’ve got strong competition, which drives up the valuation, gives you better terms, and also allows you to not be being caught in a late-stage due diligence.”

Connect: LinkedIn 

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Welcome to Fintech Focus, Skadden's podcast for fintech industry professionals. The global regulatory and legal updates you need start now.

Hi there, and welcome to Fintech Focus with me, Joe Kamyar. And today we're very lucky to have Susanne Chishti joining us.

Susanne is chair and founder of FINTECH Circle, co-editor of FINTECH Book, and sits on the board of multiple FTSE listed fintech and financial services firms. So Susanne, thanks very much for coming on the podcast.

Thanks very much for having me, Joe.

So today we're planning on looking at the UK fintech investment landscape, in particular investment levels and trends and how that's shaping deal terms here in the UK. But before we do, Susanne, perhaps you could start with some background on you, your roles in the fintech space, the work you're getting up to at FINTECH Circle at the moment.

Of course. So my background is being an ex-banker, worked at Morgan Stanley, at Lloyds, at Deutsche Bank before launching FINTECH Circle. And at FINTECH Circle we are an investor network and we invest in early stage fintech startups.

And in addition, as you said, I'm a board member at listed and private companies, and also focus in investing personally in fintech companies myself. And I would say overall I'm very interested in the ecosystem. That's why fintech certainly reaches now 1/4 of a million people through our books, through our films, and also as part of our ambition to share knowledge with our global community of entrepreneurs, of investors and financial services professionals.

Fantastic. So as I mentioned, today I'm really hoping to get your thoughts on the UK fintech market at the moment, because I guess when you look at some of the raw data coming through in relation to 2024 investment levels, on the face of it, I guess looking at it at a very high level I can see why some may have at least an initially pessimistic view of the market.

I think I've always thought one of the biggest challenges has been that we've been forever comparing the figures against pretty exceptional and slightly anomalous investment levels around 2021, which by any standard, are going to be hard to surpass.

But I think if you actually take 2019 as the base case, there's been a generally upward trend in investment levels. And anecdotally, at least from my perspective, particularly over the past six months, we've definitely seen an uptick in fundraising activity and interest in capital raising both on the company and investor side.

So Susanne, it'd be great to get your thoughts on the current investment landscape and whether you, like me, have a, I guess, slightly more optimistic view of the market.

So when we look at the data, Joe, we can see that Innovate Finance, they looked at the global fintech investment numbers and they reached $16 billion in the first half of 2024. And when we look at Q2, it was higher than Q1, but still below all quarters of last year.

And so they concluded do not have to reach the bottom yet. And I do believe that's the case because of various reasons. In number one, we've seen a new economy, a new government I guess in the UK in place since July with a very strong growth agenda.

We also have seen a slightly economic recovery helping us with macroeconomic data, and inflation is coming down. We have got 2.2% inflation now. And then we remind ourselves to just two years ago we had 11%, so it was five times the size.

And those numbers are very important for the investors because these provide alternative investment opportunities if inflation is so high, which almost was difficult for investors to compare and really look at a startup scale-up opportunities, because they could just left it on money market deposits, it earned 11%, earned close to that.

So I think considering all of that and looking at the new initiatives about having a national wealth fund at 7.3 billion in the UK, which will invest and will be based on the industrial strategy to invest in priority sectors and which will focus on a more green economy. And also my personal experiences being part of the CMIT reforms, which are the capital market infrastructure reforms taking place now in the UK, I feel much more optimistic.

And just last week for example, we had a conference at the London Stock Exchange where we had lots of CEOs of both private and public companies coming together with all types of investors, from early stage investors such as myself, to VCs to PEs, to large institutional pension funds. And the atmosphere in the room, Joe, was much more positive, much more optimistic for the UK overall and with a strong ambition to really unlock institutional capital to drive more liquidity into the UK markets. This will trickle down and help all stages of investors and help entrepreneurs most importantly to get access to capital which they need to grow their businesses.

So you touched on the Innovate Finance figures a moment ago, and actually they're interesting, because one of the things they also show is that there's been a shift towards earlier stage investments through 2024 with kind of pre-exit Series D, Series E, F rounds representing a smaller proportion of the invested capital compared to previous years. And I'd be curious to get your thoughts on what could be driving that shift.

Yes, you're totally right. So over the last five years we have seen the portion of Series A and C rounds to increase from 30% of the pie to 40% of all investments. And I do think that one of the reasons why that's the case is because when we think about private investment capital, we are looking at vintage years.

And vintage years refers to about when is the best time to deploy your capital into early stage private companies in order to sell them at a good time of the cycle? And I think most people would agree that now we will start having very good vintage years because valuations have come down considerably, and so we expect lots of growth for early stage fintech companies over the next few years.

And I think what we also have seen in the UK, we have seen companies which have started here such as Zopa, Revolut, Monzo, Starling Bank reaching profitability this year. And the fact that fintech companies achieve that at these very high valuations as well provides both confidence to entrepreneurs as having a role models, local role models, but equally to investors that it's not just about growth, but it's really about profitability as well, and it can be achieved and it has been achieved.

And so I believe that there will be more investments in early stage, seed stage, early Series A growth companies, because then you can participate on the upside over the next cycle being fully invested in these early stage companies.

I guess it'd be good to touch on how some of the trends we've just been discussing are actually impacting deal terms and practice and shaping the way fintechs and investors go about fundraising.

And certainly if you'd have asked me a year or so ago, I'd have said that I'd noticed a clear shift towards convertible debt arrangements rather than pure equity investments with new investors, which frankly helped bridge some of the difficult discussions that were going on around valuations between investors and targets.

And I'd have probably also said that back then we were seeing parties agree to increasingly investor-friendly positions. But as I mentioned already, when I look at the opportunities crossing my desk at the moment, fundraising in the traditional sense, so your Series A to C rounds, equity with new investors, that's very much coming back to the fore. And I guess how does that align with your experiences over the past year or so?

I mean, we have seen more convertibles. If speed was of essence, if you didn't have time to agree the valuation, you wanted to get money in quickly, you wanted to make a bridge round before you raise more capital, convertibles are the ideal solution because you get money and you don't have to agree the valuation.

But as you said correctly, we see the same thing that it's now coming back to normal traditional terms, normal term sheets, equity investments, and obviously we will see more of that again.

But I would say still what's very important in order to achieve a good valuation for entrepreneurs is competition among investors. Because that's the key tip. You know, although I'm an investor, but I say if you're an entrepreneur and you want to maximize the capital and the valuation for your fintech company, it is important to have multiple fintech investors aiming to get in, because then you can ensure that you've got strong competition, which drives up the valuation, gives you better terms, and also allows you to not be being caught if late stage due diligence.

For example, identify some weaknesses, some areas of concern, which could, if you only rely on one investor, lead to that the deal falls through or that you now have to agree on a significant discount, but having multiple investors in place in a much stronger position.

So I think that's really important as a guidance recommendation for entrepreneurs, always to make sure that you've got multiple investors with you until you sign the term sheet and until you sign and agree the final deal terms.

Agreed. So looking more specifically at the various fintech verticals, and by that I mean neobanking payments, insurance and so on, what are you seeing the most interesting and where's the activity at the moment and what's getting everyone excited at FINTECH Circle? And I guess how do you see that playing out over the next year?

Yeah. We see AI becoming very much a topic which plays into almost every single conversation. As in November, we've got the second birth of ChatGPT, and I think it changed our lives to some extent. And most fintech companies use AI, some gen AI. And what we see more and more is the AI is now being deployed in fintech verticals, which we have not seen it before in.

So although the business case, the business model might be very similar to what we've seen before, but now we have new technologies helping to solve those problems which have been identified in terms of sectors.

We see strong deal flow in the green fintech sector. So these are all areas dealing with, for example, the ESG disclosure requirements about the next year transition until 2050 and how to actually measure that, how to disclose it. The reason why that's an important topic is because lots of companies need of course to comply to new regulations, more stricter regulations to report on the progress we're all making, but often don't have the tools in place to attest that those updates are actually not greenwashing, but actually taking place. So that's a growth area.

And this also leads to fintech companies applying or supporting other sectors of the industry. So I guess in the past we saw mainly fintech for financial services, but now we can see fintech for the hotel industry for example, or FinTech for other industries, really benefiting all sectors of the economy via payments, via embedded finance solutions. So very interesting space.

And I would say in terms of fintech's opportunity for growth, we are still at the beginning. We are not in terms of a cycle, we are not at the end. We're at the beginning of how financial services will be disrupted and will be amended by fintech solutions. So a very exciting time I think for entrepreneurs and for investors for both.

Oh, good. So there's one last topic I wanted to touch on. And as an M&A lawyer, obviously I'm going to want to talk about exits. And actually, we both crossed paths I think about a year or so ago working on a London listing of a UK-based payments, fintech and licensed bank. And clearly the IPO space is where we've been seeing significant legal change with the new UK listing rules coming into force in July this year.

And to be honest, we should probably do an entire episode just on that topic, but to give listeners a flavor of some of the changes that are coming through, we actually now have a single listing category for equity security commercial companies rather than the old premium and standard listing segments. And the rules for this new category are broadly a simplified version of those previously applying to premium listings.

The era of needing shareholder approval for what were called class one transactions has ended. So significant transactions undertaken by listed groups will now be subject to disclosure requirements where the thresholds are met, but not critically shareholder approval.

And the rules governing dual-class share structures are now more permissive and designed to encourage more founder-led businesses to list in London, which is obviously directly relevant to the shape and structure of lots of the fintechs that we're seeing coming through.

And to be honest, the list of reforms goes on. But it would be interesting to hear your thoughts on how the markets reacted to these reforms and to what extent you think this has altered the way that fintechs are looking at London as an attractive listing venue by comparison to other financial centers in Europe and of course New York.

I would say, Joe, that the listing rules, the reform which we have seen in July of this year has been very, very important but are not yet fully understood by the market because it's still early days, we're just two months after it became public.

I think it will be a huge improvement for the attractiveness of listing at the stock exchanges overall because of the reasons you mentioned it, because it will be easier to list, number one, will allow FinTech entrepreneurs to have dual-class share structures.

But it will also have another benefit, which is for existing companies which are already listed, that they will be faster in doing M&A deals, because it will allow them to acquire, to invest in other companies in a much more faster way than normally, is instead of six months, might just be a few months of requirements, which again helps the whole M&A agenda which you mentioned.

And I think this plays into the consolidation trends, which we also see in the industry, because we have got lots of fintech companies in various verticals, and maybe we've got too many in some cases where consolidation does make sense and where a combination of some companies might create a bigger, a better outcome for both.

So I think we will see that. And I think the more power also larger listed companies have got, the more it will impact the exits of smaller companies. And most smaller companies look at dual-track processes, as you know, of attempting either a trade sale or a listing. And so I think the options will be just easier to compare and more attractive.

And we have seen this type of activity recently, even in the UK where we saw nationwide acquiring Virgin Money for I think more than 2 billion pounds. Another deal I was involved in was another company a few years ago, which now was an acquisition by a Canadian company and then now it has been taken private at more than 6 billion. So I think we will see more public listings, we will see more taking private as well, and we will see more consolidation overall.

So I think what we have seen the last few years in terms of M&A, it was very quiet. There was almost nothing happened. It was a very quiet market for all players in the industry. I think this will change. It will be much more active now, much more exciting, and much more value to be created by strategic combinations of the right companies combined in order to benefit shareholders, the customers, and the whole sector.

And I think this comes down to the quality of our fintech ecosystem in the UK, which I do think is unparalleled globally. And so a very exciting time and location to be in, in London at the moment, Joe.

Agreed. I mean, it would definitely be interesting to see how this all plays out over the next few years, given the maturity of the UK fintech sector at the moment.

But for now, unfortunately, that's all we've got time for. Susanne, it's been a pleasure having you on the podcast. Thanks very much for your time.

Thanks very much for having me.

And of course, thanks again to everyone listening. Bye for now.

Thank you for joining us on Fintech Focus. If you enjoyed this conversation, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.com.