The FinTech landscape remains highly dynamic and exciting despite a somewhat turbulent funding cycle and macro backdrop over the last several years. Venture capital (VC) and Private Equity (PE) are crucial in driving innovation and growth within this sector. This article provides insights into current VC/PE trends and strategies in the FinTech sector, leveraging the expertise of Jamie Cole, CEO at EC1 Partners, and Kevin Bhatt, Managing Partner at Long Ridge.
Current Trends in FinTech Investment
One of the most significant trends in FinTech investment is the megatrend of generative AI. According to Kevin Bhatt, “Generative AI is impacting all aspects of FinTech – from risk and compliance to customer service to analytics – which has driven significant investment activity over the last 18 months. While a large number of VCs have raised and deployed funds exclusively focused on the software and language models underpinning generative AI, Long Ridge has been more focused on backing already-profitable services businesses that can be transformed with AI tools during our hold period.” This technology is revolutionising the way financial services are delivered, creating new opportunities for innovation and efficiency.
Another critical trend is embedded finance. Kevin notes, “We’re also seeing other important trends play out a bit further under the radar, such as with embedded finance, which involves turnkey solutions for non-fintechs to offer payments and banking services to end customers. As customer acquisition costs have risen in recent years, companies are looking for creative ways to better monetise their existing relationships.”
In response to increasing regulations, there is also a growing focus on purpose-built GRC applications. Kevin highlights, “Purpose-built GRC uses case-specific governance, risk, and compliance applications to respond to increasing regulations (e.g., KYC/AML, IT security, data privacy, compliant comms.).” These specialised solutions help companies navigate the complex regulatory landscape while maintaining compliance and security.
Additionally, digital payments continue to evolve, driven by consumer demand for faster, more flexible checkout alternatives. Kevin mentions, “The enablement of card, mobile wallet, and real-time payments acceptance is accelerating as consumers continue to expect faster, more flexible checkout alternatives.”
Jamie Cole observes, “Consumer demand for speed and flexibility is driving rapid change in the payments landscape. As Kevin highlights, we’re seeing a surge in card, mobile wallet, and real-time payment adoption. These businesses are at the epicentre of this revolution, redefining how we pay. It’s an exciting time to be in the payments industry. The possibilities are endless.”
Finally, an overarching trend is the adoption of modern software and tech-enabled services, transforming workflow automation and outsourcing. Jamie observes, “For FinTech companies, there’s a vast market opportunity for their automation solutions. These solutions aren’t just limited to Financial Services but are applicable across various industries. Companies seeking to reduce costs and increase efficiency will increasingly find these tools indispensable.
While some companies are building their automation tools internally, FinTech firms often have a competitive advantage. Their agility and efficiency allow them to stay ahead of the curve and offer the most innovative technological solutions.”
Kevin agrees, “From SMBs to the largest financial institutions, there is a growing adoption of modern software and tech-enabled services to replace internal processes performed manually or with legacy in-house systems. We continue to be surprised by the number of mission-critical applications banks still run on 1990s-era software. Newer fintech solutions that increase operational efficiency, stability, and scalability can generate a very compelling ROI for these institutions.”
Impact of Macroeconomic Factors on Investment Strategy
Jamie Cole explains, “The FinTech sector’s resilience amid economic volatility is a testament to its innovative spirit. Despite the challenges, FinTech companies continue to adapt and thrive, leveraging new technologies and agile business models to navigate uncertainty and drive growth. The recovery we’re seeing in 2024 highlights the sector’s potential for continued innovation and expansion.”
The current macroeconomic backdrop has significantly impacted investment strategies. Kevin comments, “We are clearly still in a volatile environment (both economic and otherwise!), shaped by fluctuating interest/inflation rates, geopolitical changes, and technological disruption. While deal activity slowed significantly in 2022-23 due to many of these factors, we’ve seen an emerging recovery in 2024 across both capital raises and recapitalisations.”
“Against this backdrop, we’ve remained disciplined and highly selective in our investments, focusing on market-leading companies with unique and sustainable differentiation led by growth-minded operators. We’ve also focused on investing behind secular trends in the specific subsectors where we have deep expertise and relevant networks of industry experts.”
This disciplined investment approach, which targets companies with strong fundamentals and alignment with broader market movements, is essential for navigating the complexities of the current economic landscape. By concentrating on market leaders and companies with sustainable differentiation, investors can mitigate risks and capitalise on emerging opportunities.
Despite the challenges, the availability of capital for investment remains high. Kevin notes, “While we’ve seen PE/VC dry powder reach record levels in recent years, a specialised approach to creating value in growth-stage financial and business technology companies has continued to resonate with a compelling group of founders and management teams.”
Jamie Cole adds, “The abundance of dry powder in the market is a significant opportunity for FinTech companies. With the right strategic focus, these companies can secure the investment needed to scale their operations, innovate, and capture larger market shares. Our role is to help them position themselves effectively to tap into this available capital.”
Evaluating Growth-Stage FinTech Companies
When evaluating growth-stage FinTech companies, several critical factors come into play. Kevin outlines, “On the surface, we’re looking for a fairly typical set of indicators – a compelling market opportunity, differentiated product, a world-class management team, strong unit economics, commercial traction, and proven capital efficiency.”
Beyond these indicators, investors seek unique opportunities to leverage their expertise. Kevin elaborates, “We’re also looking for unique opportunities to leverage our deep experience in FinTech to help inflect a company’s growth. This could be unlocking additional revenue streams through payments or embedded FinTech monetisation, sector-specific M&A, pricing and product strategy, go-to-market optimisation, team augmentation, or a range of other growth levers specific to the company and its market.”
Success Stories; Drawbridge Case Study
A notable success story in FinTech investment is Long Ridge’s work with Drawbridge. Kevin shares, “We are proud of our work with Drawbridge, the leading cyber and IT program management solutions provider for hedge funds, private equity firms, and asset allocators. We first invested in Drawbridge in 2021, partnering with Founder and CEO Jason Elmer as his first institutional investor.”
Kevin explains, “As we’ve seen at other high-growth, bootstrapped companies, Jason Elmer was wearing many hats – product, sales, marketing, general operations – which worked incredibly well in the early days but was proving difficult to scale during a period of hyper-growth.”
To address these challenges, Long Ridge introduced an experienced executive to the team. Kevin notes, “To provide support, we introduced Scott DePetris, a seasoned FinTech executive who had successfully helped two prior Long Ridge companies scale effectively. Scott joined Drawbridge as COO and President, working closely with Jason to professionalise the organisation and capture the significant and growing market opportunity.”
The collaboration led to significant growth and success. Kevin concludes, “This team upgrade, coupled with enhancements to Drawbridge’s market-leading product and sales strategy, proved successful, with Drawbridge nearly tripling revenue in 18 months while maintaining profitability.”
Conclusion
The FinTech sector continues to evolve, driven by trends such as generative AI, embedded finance, purpose-built GRC, digital payments, and workflow automation. Despite a volatile macroeconomic environment, disciplined and selective investment strategies focused on market-leading companies with sustainable differentiation are proving effective.
Looking ahead, continued innovation and strategic investment in FinTech are essential. The sector holds immense potential for growth and transformation, driven by technological advancements and evolving consumer demands.
Jamie Cole concludes, “I would like to extend my heartfelt thanks to Long Ridge for their invaluable relationship and Kevin Bhatt for his input and collaboration on this thought leadership piece. We look forward to continuing our successful relationship and driving further innovation and growth in the FinTech sector together.”
For further insights into the FinTech investment landscape and to explore collaboration possibilities, please contact us at info@ec1partners.com. Let’s work together to drive the future of FinTech innovation.
