Most companies around the world transitioned to the need for a complete remote work during the last couple of months because of the Covid-19 pandemic and the ongoing crisis also led to a higher demand for stronger digital capabilities within fintech. In this interview, Ben Kolada, Head of US Tech Investment Banking, ICON shares his thoughts on how digital transformation will evolve while dipping into the changes in typical everyday business trends.
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Can you tell us a little about yourself Ben?
I lead the US business for global tech investment bank ICON Corporate Finance. ICON advises enterprise software companies on M&A and raising growth capital. My focus is on data technologies, such as AI, ML, analytics, and data management, and other of our bankers are experts on FinTech. We’re a collaborative firm though and there’s certainly overlap between data and FinTech, so our clients benefit from differing perspectives and experiences.
I’ve been active in the technology industry for over a decade. Initially I was a strategy consultant at a boutique firm and then an analyst at enterprise technology research firm 451 Research, focusing on emerging technologies and corporate development strategies. That background has influenced my corporate finance career. As a banker, I continue to take a very deep, sector-expertise approach to understanding M&A and capital raising opportunities. Startup CEOs, venture capitalists, and general managers at strategic and financial acquirers appreciate the specific perspective I, and the rest of ICON’s bankers, have in our dedicated markets.
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The ongoing Covid-19 pandemic has pushed the urgency for quicker digital transformation across sectors, can you share a few thoughts on how this urgency will impact the FinTech sector?
It has been extraordinary to see how quickly companies adapted their working practices. At the top end, we’ve seen large banks and telcos move ninety thousand staff within a week, getting them laptops, headsets, speakers, scaling the core infrastructure to allow a myriad of remote connections to their platforms. FinTechs, at the other end of the spectrum, were already early adopters of advanced technologies.
Without doubt, the pandemic will only accelerate technological transformation, and FinTechs are well placed to make the most of leveraging digital transformation solutions. Already, we see many FinTechs working with remote software development teams in Ukraine, Singapore, India and Africa, which explains why key enablers of collaborative working such as Slack have been so successful – whether working with global teams, or remotely with your own team, tools like Slack or Microsoft Teams have been a gamechanger. Faced with a global pandemic that challenged established ways of working, it’s no surprise that we saw a huge technological leap in a matter of weeks.
Eventually, I think “digital transformation” will give way to “the AI age,” and financial institutions will continue to be sponsors of new AI technologies.
There are countless examples of digital transformation technologies helping financial institutions evolve throughout the pandemic. AI and machine learning, for example, are being adopted to support data-driven decision making. DataRobot, DataIKU and BigML are among the leaders here. RPA (Robotic Process Automation) is automating low value repetitive tasks that previously would have diminished employee productivity.
Not long ago, regulated industries, such as finance, wouldn’t have thought about migrating to public / private cloud systems, due in part to security concerns. Advances in cloud security, among other things, have mostly solved those concerns and now financial institutions can’t seem to migrate fast enough.
Companies like Juriba and Cloud Direct will continue to be hugely valuable in this regard. Digital transformation is also accelerating analysis. At the forefront of this trend are companies like Mosaic Smart Data, which enables real-time data-driven decision making by analyzing big data. Other companies further down the IT stack, such as Mattillion and StreamSets, are also enabling digital tools to access data in real-time.
What is crystal clear to us is that during these uncertain times, investors seem to have an insatiable appetite for ‘alternative data’. Startups like Huq Industries and 7Park Data are targeting this demand by aggregating and enriching tangible, real world data, thereby enabling investors to make more informed investment decisions.
The list goes on…
What are some of your major M&A predictions for the FinTech segment, for the near-future?
At ICON we believe the digital transformation of the traditional financial services sector will lead FinTech M&A for the foreseeable future. The severity of the Covid-19 pandemic created new opportunities, as well challenges, that are here to stay. The rapid uptake of FinTech solutions in response to the crisis will lead to adoption of technology in sectors that had previously been slow, or unable to move beyond long-established processes. That means we’re likely to see financial institutions partnering with, or investing in, FinTech startups as barriers to entry are lowered and both enterprises and consumers benefit from more competitive and agile financial solutions.
As organizations and teams adjust to the new norms and working style imposed by the Covid-19 pandemic, how do you see this result in a shift in trends and demands (or need) for specific FinTech innovations and features?
As teamwork moves physically further apart, financial institutions – and all businesses – will need new ways of staying close together. In the data space, companies like DataIKU and Mode provide platforms that enable digital collaboration throughout the data science process. This represents a significant change in how large organisations will work in the future. Indeed, we believe the hybrid model of working part home, part office, is here to stay.
In RegTech, companies like Governance.com are key players as they enable banks and asset managers to run mass virtual shareholder meetings during lockdown. In parallel, they create massive efficiencies in daily compliance undertakings. In Insurance, companies like Anorak Life and Bold Penguin are working with the big insurance incumbents to digitize their offerings.
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What is undeniably clear is that nimble, innovative and disruptive FinTech businesses are helping large, historically cumbersome organisations, accelerate tech adoption in ways that few would have thought possible previously. Barriers to change have been blasted away as financial institutions move towards becoming tech led enterprises in response to the increasing threats posed by the big giants like Amazon, Apple, Alibaba and Tencent.
Within the FinTech space, what are some of the bigger growth areas that will be the focus for the next few years?
One of the biggest growth areas has been in digital payments, which has seen a wave of both funding and M&A activity in the past few years – and there’s no sign of this momentum letting up.
Covid-19 and digitalisation have accelerated the move to a cashless society. We believe that consolidation will continue in digital payments in the coming years. For example, ICON has just completed the sale of payments company Beyonic to African payment hub MFS Africa, and payments giant Visa has acquired Silicon Valley start-up Plaid for $5.3bn.
The reason for the huge valuation may be Plaid’s API software, often referred to as the “plumbing” behind FinTech companies, which allows them to connect to users’ bank accounts. Plaid reckon 25% of US bank accounts have connected through an app. The company says it integrates with more than 11,000 banks and connects to more than 200 million consumer accounts. The other justification for the valuation is revenue growth which has been 100% since 2015.
On the funding side, we also saw Silicon Valley payments company Marqeta valuation jump to $4.3bn with new funding of $150m, which brings their funding total to over $500m and their plans include an IPO in 2021; the company is backed by Goldman Sachs, Visa and CommerzVentures. Neobanks such as Revolut benefited too, closing an additional $500m Series D and Chime closed on its $700m Series E, marking it as one of the largest venture rounds, globally, for a neobank.
Elsewhere, there is plenty of activity going on in the payments space including, to name a few, the acquisition of Worldpay by FNIS for £43bn 11x revenues, Fiserv acquiring First Data for $41.2bn for 5x revenues, and Global Payments acquiring Total Systems Services for $26.2bn or 6.4x revenues. Europe also saw its biggest ever Series A for cross border payment API player Checkout.com, with $230m investment from DST and Insight, followed by a Series B of $150m 12 months later.
WealthTech, Lending and Insurance are sectors that have attracted investment rounds as they too sought to gain a share of the FinTech pie – like Goldman Sachs, which had to close its UK digital arm Marcus to new customers as people held off on discretionary spending under lockdown and took the time to reorganise their finances. Robo-advisors, such as Wealthfront and Betterment, have experienced more inflows of monies than outflows, as well as an increase in new investment account sign-ups and Robinhood closed a monster round of $320m at a $8.6bn valuation. IT Spending on asset management solutions is expected to top $7.5bn in 2020. And we also saw the successful IPO of InsurTech Lemonade last month.
According to Pitchbook, after the acquisition of InsurTech Assurance IQ for $3.5 billion in Q4, other large-scale FinTech acquisitions are expected. Two major deals have already been announced in Q1, and we expect similar $1bn+ FinTech M&A transactions to continue.
Before we wrap up, would you like to share specific finance management or business tips for Marketing and Sales or Finance teams struggling through this uncertain time?
The last few months have shown how quickly the world can change, and the shift to digitization is accelerating as a result. Those that don’t move quickly to digitize their customer experience will be faced with higher costs.
So, in a world where chaos demands solutions – you need to continue focusing on how your solution solves companies’ headaches.
Budgets may be tight right now, but businesses today are facing challenges like they’ve never seen before. They need help. If you are in the midst of fundraising, remember, you need to extend your cash runway, so cut costs where you can; we’ve seen founders taking unprecedented steps ranging from 20% pay cuts, to not taking salaries at all, all to keep their sales team pumping.
Industrywide, we see many VCs putting the brakes on their dealmaking. With more DD upfront on Zoom, the investment bar is higher. However, a handful of investors have taken a different tack as some FinTech sectors have benefitted from macroeconomic forces which have led investors to deploy more capital. Now may be a good time to fundraise as investors have effectively missed a quarter and need to deploy funds or risk handing it back to their LPs. There is also a wall of money that private equity is sitting on that needs a home, and the dam will break soon.
So, if you have a fundraise or an exit event looming, position your company in a sector where the multiples are highest. Speak investor language, sell the financial return story if you are pitching to financial investors; they’ll want to see revenue quality, recurring revenue streams, good gross margins, compelling unit economics and growth metrics. For the Corporate Venture Capital funds, you also need to align the strategic rationale. Always remember, you need to be the bear fishing in the right river to catch the salmon, and it’s exactly the same for tech companies right now.
Tech-focused investment bank ICON Corporate Finance specialises in M&A and fundraising internationally, working closely with the global M&A, Venture Capital, Private Equity and CVCs communities.
With offices in San Francisco, London, and Bristol, and multilingual staff from England, the US, France, Germany, Australia, India, Belgium, Zimbabwe and Hong Kong, ICON acts as an independent advisor to companies globally, leveraging maximum value through venture capital and growth capital funding and exits. Among its many deals, ICON has acted on the sale of Focus Group Europe to Accenture, Beyonic to MFS Africa, Paragon to Aptean, Optimum Contact to IQVIA, Wealthify to Aviva, Applicable to NTT, Parmenion to Standard Life Aberdeen, and Nativ to Telstra, and completed fundraising with JP Morgan, Synova, BGF, Guinness Asset Management, Mobeus and CommerzVentures. Sector expertise includes FinTech/InsurTech, Cyber, HealthTech, Digital Media, EnablingTech, Enterprise Software and IT Services.
San Francisco-based Ben Kolada is Head of US Tech Investment Banking at technology-focused ICON Corporate Finance. A former industry analyst at US research house 451 Research, Kolada has a rare depth of knowledge and understanding of the US and West Coast tech markets. An expert on the Data Technologies (DataTech) sector, Kolada advises DataTech and enterprise software companies on US and international M&A and capital raising transactions, preparing businesses for acquisition and fundraising to enable expansion. Prior to joining ICON, Ben was a Vice President at a San Francisco-based technology investment bank. He has over a decade of experience in tech investment banking and industry analysis.
