When it comes to fintech M&A and fundraising there is no better person to talk to than Steve McLaughlin. McLaughlin is the CEO and founder of FT Partners, the leading investment bank in fintech globally. Yesterday we kicked off LendIt Fintech Digital with Peter Renton, co-founder of LendIt Fintech interviewing Steve McLaughlin to discuss the current fundraising and M&A environment. Below are our main takeaways from the discussion.
While the coronavirus crisis has severely impacted the fundraising environment, good companies still have the possibility to raise money right now. McLaughlin noted positive movement in recent weeks but generally valuations remain flat. Though companies are able to raise, CEOs are not being as realistic as they should be when it comes to valuation given how the world and their business has changed. McLaughlin also expects many bottom feeding deals, giving banks a once in a lifetime opportunity to purchase fintech companies. One of the challenges over the last decade for banks considering fintech M&A has been the valuations of many fintech firms and the amount of capital willing to fund them at ever increasing valuations. Now is the time for banks to beef up their technical prowess through acquisitions.
One thing that has changed significantly is the way deals get done. Two months ago VCs believed that they would never fund a company without a meeting in person. Today they find themselves doing all of their deals virtually with meetings happening over Skype, Zoom etc. However, one of the concerns is the security layer on top of these platforms as these conversations are highly confidential. Sequoia has done 10 deals via video conference and other VCs such Matt Harris from Bain Capital Ventures has started doing deals virtually. McLaughlin shared that there will be some deals coming soon and also discussed some of the recent deals that closed such as the SoFi/Galileo deal. SoFi also acquired 8 Securities, marking their first move out of the US.
Different areas of fintech are experiencing different challenges with the lenders being the hardest hit. Those businesses that just offer personal loans are likely to struggle. The companies that have wider offerings such as Upgrade, Chime and SoFi will fare much better through this crisis. Lenders across the board tightened credit criteria significantly and are focused on managing their current portfolio and cutting costs if necessary. The reality is that today lenders can’t rely on FICO. This is emphasizing the value of open banking platforms like Plaid, where lenders can get insight into recent transactions. Some investors have also shut down their credit lines to lenders, with Jefferies being one example.
While some fintechs are unfortunately struggling there are also companies that are on hiring sprees as business has increased dramatically. Marqeta is one example that is seeing increasing traction during these times due to relationships with companies like DoorDash and Instacart.
One interesting point from McLaughlin was that previously fintech talent was highly fragmented. Since anyone could get money to start their own business, they often did. If more fintechs begin to fail we will see some previous founders taking their talent to more established fintech companies who will stand to benefit.
It was fascinating to get McLaughlin’s perspective on the current environment. While M&A deals will be down in 2020 it is good to hear that deals are still happening. McLaughlin still expects FT Partners to do well this year and we look forward to hearing more about some of the deals in the works as they are announced.
If you’re interested in learning more about the current fintech environment be sure to check out LendIt Fintech Digital, our new online community for financial services innovators.